Is SFR Cashflow a Myth?

[Dan Hertler]

As I build up my SFR portfolio I am starting to ask myself: "Is the idea of SFR cashflow simply a spreadsheet myth?"

The common "goal" for SFR investing is $200+/month in cashflow, i.e. cash leftover after PITI and all expenses/reserves. This sounds great on paper, and when you get paid out by your property manager each month all is right and good in the world.

In reality, each of these houses have several "time bombs" just waiting to go off, namely roof & HVAC replacement. Build up enough SFR's in your portfolio and you're destined to be replacing one or more of these components each year. It is a mathematical certainty, as these components age out over different timelines across the portfolio. In 2 years, I have bought 7 houses, 8 doors total- and have now unexpectedly had to replace 2 HVAC units.

So for arguments sake, let’s say I’m making $200/month in spreadsheet cashflow on a given house after expenses/reserves, and reserving $75 each month for capex expense. I get a call from my property manager saying the HVAC died and it’ll be $6,000 to replace it. I bought the house 1 year ago, so best case scenario I have $900 saved for this time bomb.

Assuming $200/month “cashflow”, it would take 2+ years to make up for the difference, meaning this house is cashflow negative for the next 2+ years.

Now, I have cashflow and capex reserves from the other houses in my portfolio that can theoretically cover this expense. But when analyzing my portfolio, I have to assess each house independently to identity outperformers/laggards.

But since this will continue to happen - time bombs knocking out cashflow for 2+ years at a time, I’m questioning whether my portfolio is cashflow positive at all at this point. And will it ever be in the future?

Is all this “cashflow” showing on my spreadsheets simply a figment of my imagination?

[Bill B.]

You need to switch to properties that are…

Less than 20-30 years old

Have stucco siding and tile roofs

Don’t have tornadoes, hurricanes, snow storms, earthquakes

Have very low property taxes

Don’t have state income taxes

Have very cheap insurance

I have an average repair budget of under 2% of rent, average vacancy of less than 2%, insurance is 3%, property tax is 5%, capex is less than 1%. Income tax is of course 0%. If you can keep all your expenses under 15% of rent it’s a lot easier. I don’t see how you do that with an 80 year old home, with high taxes and insurance in tornado alley or on the hurricane coast. 

But to really answer your question. When I started I didn’t care that they cashflowed $100-$200. Because if you need that cashflow you went ready to invest in real estate yet. As you pointed out with your ac example, which could be a roof if you have shingles, or siding if you don’t have stucco. But 20 years later costs have risen 40-50% while rents have way more than doubled. Now $1,000/door is more common and still with just 5% yearly appreciation that’s worth hundreds of thousand more than the cashflow, per property. 

Don't use todays numbers, use 5-10 years from now number. Can you imagine investing your first years contributions to an ira and seeing you earned $155 and saying "I'm not doing that any more, it just isn't worth it." Ps. If you treat them like a retirement plan instead of immediate income you lead in to the "your ira doesn't cashflow and yet you invest in it argument." And you could easily argue real estate has better tax advantages than an IRA.

Just keep at it. There is truly no easier way for the average American to get ahead.