New Investor: If a deal is not making $200/unit is it worth it?

[Kim Hud]

First time investor. My goal is cash flow.

In Brandon Turners real estate book he said we should aim for deals that are 80% of asking and making a minimum of $200 per unit in cash flow after all expenses.

In the inspection phase of a deal on a fourplex and the estimated renovations are getting closer to $200k (will do another post on that). The increase renovations cost could potentially take my cash flow down to $150.

If I’m no longer making $200 per unit is that a bad deal?

[Marcus Auerbach]

Asking price should generally be considered a random number, a better base line is fair market value. If you can buy a property at 80% FMV (in other words, the seller is gifting you 20% equity) you are definitly doing fantastic!

The issue I see with cashflow calculations is that your projected cash flow is only as good as your assumptions. If you tweak a few variables just slightly combined they will change the entire calculation. You can take a good deal and show that it is negative cash flow and vice versa. This is the part where experience comes in.

$200 per door net cash flow has been a solid bench mark here in Milwaukee. You could do much better, but usually at the expense of future capex, a classic rooky mistake.

While positive cash flow is the most important source of income for an investor, it is also the smallest. Wealth is not created with cash flow, but with equity, principal pay down and with appreciation, both forced and natural.

When you weigh different investments, after cash flow, always consider the equity potential next. Cashflow will improve over time; many of my early investments have turned from small cash flow to cash cows as rents have been increasing over time. 

When you look for an investment that is cash flow heavy, you usually sacrifice on the equity potential and the other way around. So in the end it depends on your current goals how you rrate an investment.