Cash Flow & Deal Analysis: where do you take reserves from?

[Steven G.]

Hi all, I'm just getting started in my REI journey and one of the main ideas I'm trying to sort out is where people generally take their reserves from. By reserves, I mean cap ex/maintenance/PM/vacancy. I understand each of these are slightly different (a PM is a monthly expense whereas a vacancy may only happen once in a blue moon), but to conservatively analyze a property, it seems like the safe bet is to subtract 35% of the gross rental income to save for the reserve costs.

However, it seems most people analyze their deals ignoring the expenses that are not from PITI, which makes understanding how something "cash flows" puzzling.

The clarity from the BP calculator is nice: it subtracts reserves out of the Gross Rental Income, as I understand it. 

If the property cash flows $200/month (a number I see often), I would have to assume this is after the reserves are taken out. But as I read around, this seems like it may not be the case, making many properties negative cash flows.

A specific example I heard from someone who owns a property in NY:
$2500 gross rental from 3 family 
$1500 PITI
$1000 "cash flow" (tenants pay gas and heat, but this number does not include the 35% for cap ex/maintenance/PM/vacancy, not to mention trash/electric/water etc)
$12K per year! Amazing!

But if I factor in the 35%:
35% of $2500=$875; 1000-875=$125, so there is...
$125 of actual cash flow
$1,500/year... what??

If my above scenario is correct, how does this make owning a property worth it? How could $1,500/year be worth the amount of work it would take to get this off the ground? Add in the time it would take dealing with managing the PM, dealing with vacancies... how does this make sense?

I'm playing devil's advocate, because I *know* it is worth it... This particular person who owns this property owns 3 others, and at the end of the year they make a total of $28K, and this 3 family is their best property. But when I look at the numbers like this, it just makes no sense! 

Could someone help me out here... what am i missing?