What % Cash Flow Should I Consider Reasonable?

Question

I commonly see people mention cashflow in dollar amount i.e $500 a month as a measure of how successful the property is as a producer.

What I am looking for, is more clarification on what % cash flow relative to total purchase I should be after. Or, is there a more intelligent number should I tie this to?

In summary, I am looking for a good cashflow % formula I can use to calculate if a properties cashflow gives me enough margin of safety + ROI in order to more properly calculate if the property is a dog or not

Ken Vingua · Answer

I think cash on cash returns allows you to best compare invested returns.  The 1% or 2% rules can tell drastically different stories based on the initial purchase price of the property.  A $500 per month ($6,000 per year) cash flow can be great but what if that required you to invest $20,000 (30% CoC), $60,000 (10% CoC), or $100,000 (6% CoC).  What if you only made $200 per month in cash flow but you were able to accomplish that with $0 down or you BRRRR'ed all of your invested capital out of the deal.

Make sure that you are properly accounting for maintenance, CapEx, vacancy, and management.  Subtract out all the expenses and the debt service and compare your cash flow against what your all-in invested capital is.  Don't forget to factor in closing costs, legal fees or any other expenses to secure the deal.  This will allow you to compare each investment with other investments across investment classes.

Casey Rondinella · Answer

Very useful @ken thank you.

Casey Rondinella · Answer

Thanks for the solid answer @celena