Evaluating cash flow

[Jacob Phillips]

Hello BP,

I’ve got a new guy question that I just want to check my mindset on.

Obviously the name of the game in buy and hold is cash flow. So, when I’m evaluating deals, especially my first few, how much emphasis do you put on cash flow? Let me expand.

If I've taken into account ALL the expenses—mortgage, taxes, CapEx, vacancy (I'm sure I'm forgetting some), and I've also accounted for 10% of monthly income for reserves—is the deal bad if there's no remaining cash flow? It seems like a silly question, and ideally for myself I'd want to take some of that income and save it not just for cash reserves but also towards a future deal. But if I've covered ALL my expenses including cap ex AND budgeted for cash reserves, my rookie sense just makes me think it can't be that bad a deal.

Obviously if I only cover expenses and start running out of income before I've covered CapEx then there's a problem.

I guess my mindset is if I don't pocket any money on the first few deals I'm okay as long as I cover all expenses, CapEx, and I build some cash reserves for the business. If there's no "take home" in it for me in the first several years that's totally fine because properties are being paid off and before long it will be cash flowing for me to reap the rewards a little more directly.

If it’s my first deal, and in my hometown rural market, what are your thoughts on that scenario? (There’s no such deal, this is hypothetical while I start to comb through deals)

[Pat G.]

@Jacob Phillips CASH FLOW IS KING!!  It is the reason we are in this business. I am assuming you are buying over 5 units which would be commercial. The bank is not going to let you purchase a property that doesn't cash flow. Second when you run you numbers Expenses should be at 50% of Gross Potential Income, Cash on Cash should be at 11% or greater, Debt coverage ratio at 1.25 or higher. With those basic, lets say Rules of Thumb (ROT) if it has a negative cash flow - run away. 

Good Luck