How does positive cash flow theory works?

Question

so i have read this on many websites that your property should be cash flow positive..now lets say i buy a house for 250k,i put 20% down and take mortgage loan on the other 80%.My monthly rent would be about 1800$ but my monthly expenses with mortgage,maintance,taxes,insuance etc would be 1900$ so that means i am making a negative cash flow of 100$...now instead of 20% ,i put 30% down which reduces my mortgage payment and thus reduces my expenses..lets say to 1750$...so now i am making 50$ positive cash flow....so how exactly do you determine if a property is cash flow positive..it seems like the more down payment you put the more cashflow you can get from the property...i am confused..?

Jeff Greenberg · Answer

Robert Kiyosaki always writes about positive cash flow, and it is important factor.  Callum said it well that there are other things to consider.  I know an investor who bought an apartment complex with positive cashflow and a 1% cash on cash return.  So instead of putting her money in a CD where she could beat the return, she took on the headaches of an apartment.

What is your end game?  Do you plan on holding until the mortgage is paid off?  There are many reasons to buy a property and you need to decide what yours is.

Callum K. · Answer

Vaishal Patel It depends on how you look at it.  Most people on BP (including myself) will use the same rule a bank would... only incorporate 75% of your income and then deduct operating and financing costs.  Under this assumption, your losing money on either scenario.  Several discuss a 2% rule that would dictate a $5000 monthly rent on a $250k property... I think this is completely unrealistic and is more likely to apply to lower value properties ($15k-$50k properties).

There are several things you have to consider when investing in a property and cashflow is ONE of them.  You also have to consider your rate of return and your cash on cash return is a key figure.  Based on your statement, to build a cashflow, what if you pay for the house outright?  then you would be pulling in $1800 per month.  not too shabby from a cash flow perspective, but your gross profit (excluding insurance, taxes, HOA, repairs, etc.. aka non-financing costs) would reduce this to less than an 8.6% CoC return.  Not as good.  The question is can you allocate your money elsewhere and provide a better return with equal to lower risk?  To me, its all about perspective and you have to invest with multiple perspectives.  Cash flow is only one of them.  CoC is another.

Good luck!