Successful Rental properties?

Question

Hello All,

What do we consider a successful "buy and hold" rental property. As I was reading, I keep asking these questions to myself

1) Is it as easy as buying a property which is easy to be put up on rent and gives out positive cash flow?

2) But then again, what is positive cash flow? Is it just ok to even cover just mortgage from tenants or should the plan always be to get more out (positive cash flow) out of property?

3) Even if we are not getting more , does it make sense in property which is just covering your monthly mortgage?

4) If its just covering your monthly mortgage, isnt it just giving everything away to bank? Isnt this a bad deal as we will not be able to get anything out of it for future properties?

I simple couldnt ans these myself. Simply may be because I have not done any rental properties yet. But are these valid questions? Am I missing anything which should be part of bigger picture here?

Robb Almy · Answer

I think cash flow can be a fickle mistress when it comes to determining what a successful buy and hold investment looks like.  Of course I think we always need to be aware of what our cash flow is...however, I can always buy more cash flow by putting more money down.  The more money I put down the greater my cash flow will be.

In addition to cash flow projections I also like to look at my cash on cash return as a more accurate measure of the quality of the buy and hold deal.  Mark Ferguson who is a BP contributor has a great cash flow and cash on cash return calculator over on his site at

http://investfourmore.com/.  And, I believe BP has some useful calculators as well depending on your level of membership. Hope that helps!

Mark Ferguson · Answer

Thanks Robb for the mention!

I think cash flow is important because if something goes wrong or the market turns you still make money. I also think cash on cash is very important because that is the actual return you are getting on your money. As Robb said if you put $100,000 down and your cash flow is $100 a month, that is a pretty crappy return even though it cash flows.

My idea rental is $80,000 to $130,000 needs $10k in work and rents for $1,300 to $1,500. My taxes are low (less than $1,000 a year) which helped my cash flow. I also buy 20% below market or more. A lot of this is based on my market and every market is different.

Franklin Romine · Answer

My ideal property would be a single family home, have a purchase price of 36k, need 3k in repairs, 1 bed 1 bath, rented to a single old lady that only calls to wish me birthday and to talk about the most recent vhs movie she watched, pay rent on time and have a monthly cashflow of $300.

Frank R

Flavio Zanetti · Answer

Excellent points @Jon Holdman

Flavio

Jon Holdman · Answer

If the rent is "just covering the mortgage" you're really cash flow negative.  You WILL have expenses besides taxes and insurance.  Assuming you don't WILL make you fail.  That number, rent - PITI, is what I call "phoney cash flow".   Often assumed to be what you're going to get by new investors.  And all too often quoted by sellers and their agents.  If you're investing at a distance and using a PM, a much better estimate of cash flow is (rent * 50%) - P&I payment.  If you're managing your properties yourself, you can use 64% instead of 50%, because you will be earning the PM's cut.

A cash flow break even, or even negative, property may be OK.  Your tenant is paying down your mortgage.  Thirty years from now you'll own a nice asset.   If its negative, you need to be sure you can cover that shortage, which often comes in big lumps.

There is also a speculation play with real estate.  Prices may rise in the future, and your property may be worth more than it is now.  So, you might buy a $100K property, hold it 30 years until its paid off and have an asset worth $240K.  That sounds like an impressive increase, but its only a 3% annual increase.  Who knows what the future will bring, and lots of people got hurt very bad assuming prices would always rise.  But its not a bad assumption over the long term.

Ali Boone · Answer

Being in NJ, there are definitely areas there that can put way more cash flow in your pocket than just covering the mortgage. Trenton is one. No reason you have to settle for only getting the mortgage covered.

Harpreet Walia · Answer

Thanks for your inputs and time Ali. I need to crunch more on numbers here. I know the area is tenant friendly but its way different perspective being a tenant here than being a landlord here.

Thanks again.

Harpreet Walia · Answer

Thanks for your inputs James. I understand that I need to get more involved with terms of calculation of this property here. I dont want to make a decision in a hurry and will check further on details.

The reason we are interested in this region is because we have lived here for around 4 yrs (before we moved) and we know that its tenant friendly. I will get more details

Ali Boone · Answer

1) Is it as easy as buying a property which is easy to be put up on rent and gives out positive cash flow?

That's the basic theory, and that's the goal...but there are a lot of details that go into making that reality on a property. Nothing crazy intensive, but definitely things to know.

2)  But then again, what is positive cash flow? Is it just ok to even cover  just mortgage from tenants or should the plan always be to get more out  (positive cash flow) out of property?

Try to get more because you want those extra margins so they cover unexpected expenses. Plus only covering a mortgage doesn't cover other expenses- vacancies, repairs, etc. But if you are buying in a highly appreciating market, sometimes maybe breaking even is an option.

3) Even if we are not getting more , does it make sense in property which is just covering your monthly mortgage?

Only if appreciation is imminent. Otherwise you'll still be losing money on it.

4)  If its just covering your monthly mortgage, isnt it just giving  everything away to bank? Isnt this a bad deal as we will not be able to  get anything out of it for future properties?

Correct.

James Klafehn · Answer

You want your investment pay for itself and earning you money. If it doesnt, why bother investing in it?

What is your area like? Do homes in your area appreciate quickly? What are rents like? Whats your local vacancy rate?

Ideally you want the rental income to cover all of your expenses AND give you a some extra to make it worth your while. If you buy a house and the rent only covers the mortgage payments you are getting yourself into a bad situation!!! You need to factor in EVERYTHING. ie mortgage payments, property tax payments, management fees, home insurance, utility costs, maintenance/repairs etc. If you dont include all of those in your calculations you are lying to yourself and you will get yourself into major trouble financially.

The only exception, and I hesitate to even call it an exception, is this. IF you live in an area that has a VERY strong rental income, has very high and fast appreciation, AND a low vacancy rate, you could consider buying a loser with the anticipation that it will get better with time. I want to caution you though, nothing is guaranteed!!! Just because the market is strong now and has been for the last 20 years, does not mean it will be next year, 2 years or 50 years. Buying a loser is risky but it would work if the house appreciates in value, the apartments stay rented all the time with zero gaps, and if rents always go up every year.

If it were easy everyone would be doing it.

Successful Rental properties?

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