Cash Flow at 5% or 20%?

Question

Hi! Youngster in the RE world and working on how to analyze initial numbers for cash flow. I've done an overwhelming amount of research and am not coming up with a solid reasoning to this "per door rule of thumb" for cash flow. (I know there are other factors like location, CAPEX, intangibles, major future repairs, etc., but putting those aside for the moment.)

So here's where I'm confused: I've seen plenty of disagreements here on BP about what is and what isn't good per door cash flow (e.g. "You only go for $100/door? I don't even bother looking for properties that cash flow less than $400/door!")

For our sake, let's use $200/door. That's the min. $ my husband and I want to cash flow per door. We have opportunity to buy multi-family at 5% down (Owner Oc), but when running our numbers, the per door cash flow on practically every property nearby (Twin Cities, MN) seems pretty tight (~$175/door), not meeting our $200/door minimum. However, say we did 20% down (which may be more akin to a property investor's DP?), that's a difference of a couple hundred dollars! All of a sudden, those same properties that didn't seem to cash flow for us look a lot more desirable.

My question is this: When you consider your per door rule of thumb, *what is the down payment that is paired with your rule of thumb*?

Hypothetically, if all variables are exactly the same, is a MF with 5% and $~175/door comparable to a MF with 20% and ~$375/door?

Thanks!

(Per door cash flow is just part of our initial criteria, and we understand there is a lot more that goes into evaluating if the property is actually a good value.)

Bruce Runn · Answer

@Macayla FrycYou've hit upon a key attribute of running financials. Part of that discussion was included in a post about a week ago. Is a 4.5% return good or bad? The answer is often, based on what? One of the first things you should know is after you have house hacked and may move onto properties you may be just an investor, the down payments become 25 or 30% (non owner occupied) depending on how many properties you have if they remain residential. Many of us can cheat the system by taking out construction loans with 20% down payment with a conversion to fixed rate w/o putting in more $ except for the renovation costs to get forced appreciation. So if I buy 2-4 unit multifamily properties, I now have to put down 30% because of Fannie Mae requirements. I also need 6 months reserves available so essentially the more properties you buy, the threshold becomes tougher post 2007/2008 melt down as you have to set aside and have more money up front.Your question of how much cash return should you target/door is absolutely based on your down payment but also your variable contingencies. For new investors, these are more unknown so you look online or read books that give you a general idea which is a good place to start. The biggest 3 variables that people include/don't include are vacancy rate, Property management, and Capex/repair contingency. Everyone runs a different profit formula to determine if/how much they can pay for a property. 30 or 40 people may look at the same duplex in Uptown and have wildly different results based on what their parameters are. In Minneapolis, the market for appealing multifamily properties has a lot of competition. Because of this, over inflating your contingencies will leave you out in the cold as you will never be able to make the numbers work to meet your goals. By being too aggressive, you can get yourself in trouble by not being able to cover the costs correctly and might only end up breaking even with a lot of work and no $ results.The best advice is to continue to learn. be inquisitive, and ask other people how they analyze properties or ask someone who has bought a place that you just can't figure out how/why they bid what they bid, what they saw in the project that caused them to buy it. The answers will often surprise you. Experienced people have a lot more tools to work with and I've found when people have asked how I got a property or how I could have paid what I did, I sometimes share the reasons and it opens up a new understanding for the person or it can cause them to not believe someone is doing what their doing. Either way you find new things to apply so you can be successful.

Will Fraser · Answer

HI @Macayla Fryc! Welcome to the BIggerPockets forums! You're off to a great start with this question.There's not going to a "one-size-fits-all" answer for how much cash flow is good versus how much is bad. A far more useful metric in my opinion is cash on cash return. That is to say, how much profit are you achieving off the cash you are deploying? If you took $175/door/month * 4 (for a fourplex) and got $700/month in cashflow ($8,400 annually) is that good or bad? Well, if it took you $1,000,000 to purchase then that sucks, but if it took you $8,400 to purchase then that's a 100% return on your cash every.single.year. For this reason we use ConC return goals to inform much of our investing. If we're putting more cash in, we'd like to be getting more cash out unless another factor can contribute disproportionally. I hope this proves helpful!

Kiera Underwood · Answer

@Macayla Fryc the investors I talk to are typically referencing cash flowing $200/month after paying the debt service to a 20% down, 30-year conventional loan.

Noah Chappell · Answer

@Adam Tafel right on, couldn't have said it better. @Macayla Fryc I think it really depends on your goals. As Adam said, (everything else being equal) higher DP more cash flow but worse return on your money, & conversely higher DP better return but lower cash flow. Are you looking to spread your capital out as thinly as possible while ramping up your portfolio? Do you want to have 5 well chosen free & clear properties with high cash flow & then retire? Neither is wrong but depends on your objectives. Your answers will help inform your path going forward.

Adam Tafel · Answer

Your cash-on-cash return diminishes as your down payment increases. I would rather see $200/door at 5% down than $400/door at 20% down, as my return in the latter scenario is 50% of the first. That's obviously a dumbed down example, and there are plenty of other factors to consider. I would rather see $150/door on a property with brand new mechanicals than $250/door on a property with ancient heating/electrical systems. I would rather see $150/door in a class A neighborhood than $250/door in a C- neighborhood. I want to be able to self-manage locally, so anything further than 45 minutes from my home would need impressive cashflow. It's great to quantify your criteria for an investment, but don't get too caught up in your dollar-per-door goal. I'm personally not looking for anything under $250/door, many of our deals are being found in C-B class Twin Cities neighborhoods. Cashflow is your cushion against loss, always keep that in the forefront of your mind. It's not guaranteed income, buying and holding real estate is a long-term path to wealth. We routinely find deals between $200-$300/door, mostly 2-4 unit MF.

Taylor L. · Answer

This is where percentages come in handy. What percent return are you getting on your capital at each downpayment level? Do your cash flow numbers adequately account for repairs and larger capital expenditures? Do those numbers assume you're living in one unit and thus one of the doors is cash flowing zero?

Guifre Mora · Answer

Don't waste your time trying to embrace the concept Call it -$x per door, ROI, COCR, ROI, CROI ... it's all the same. How does the property perform as a whole? With your hypothetical question -its loaded questions and you will get 100 answers- I have SFR that performs better than these numbers.

Todd Rasmussen · Answer

@Macayla FrycOne size doesn't fit all, Less cash flow for higher cash on cash returns is a strategy often for more aggressive and or investors growing their portfolio where higher cash flow and lower cash on cash returns might be found in the portfolio of a more mature and/or conservative portfolio.