What Is True Positive Cash Flow?

Question

I see people post properties all the time and say things like " This property has over $350 Positive cash flow per month " but when I take all the information they provided and run it in my system it really only comes up to about $170 in monthly positive cash flow. So the question is, how do you define this. Some would say that you just take the rent and minus the mortgage and there is you positive cash flow. But what about the management fee or the vacancy or mtnce. repair allowance?
Now this is just me, but when I present a property to a client, I will show them a formula that IF the home rents for the average of the rent range and minus all the fees you will get the True cash flow. For example :
$900 monthly rent
-$72 ( 8% mgnt fee )
-$125( monthly taxes )
-$45 ( vacancy allowance )
-$18 ( repair allowance )
$450 ( mortgage note )
------------
$190 True cash flow after all expenses.

Now some people would say that the cash flow would be $450 per month. This is where you separate the honest wholesale investors from the fluff and puff ones. So please, if your going to give a monthly cash flow prediction, at least make sure you take all the figures into acount. This is just me but I would rather someone tell me the home is going to cash flow $190 per month and it actually cash flow $190 then someone tell me it will be $450 and only come in at $190.

Michael Rossi · Answer

Buying more properties does nothing to generate cash flow.  Buying at a huge discount to market and accounting for all the real world expenses is what generates cash flow.  Every property you buy should cash flow individually and from day one, if you want your business to succeed.

Good Luck,

Mike

N.A N.A. · Answer

Do most bankers take 25% off the top? What if you are management, maint. man, advertiser & do all of your own hard labor for repairs (minus CH&A)? How could you convince him to reduce the %?
I have one account that generates a "pool" of funds for maintance & vacancies. I did this until we generate enough to cash flow as we purchase more. After the initial improvements, I thought we would be in good standing for a couple of years.

Michael R. · Answer

I also think the repair costs are estimated to low. I know I estimate 10% of rents also. At 18$ a month or $216 a year you are going to be paying out of pocket for repairs. Also keep in mind you will have big ticket items in addition to normal maintenance and repairs such as a new roof or furnace.

Lynn Z · Answer

Your banker will deduct 25% from your rents in addition to taxes and insurance as a standard practice.  Probably good to consider what a lender's view of your real take is.

Michael Rossi · Answer

You might want to re-read your post.  You didn't say PITI and moreover you subtracted monthly taxes as an individual item, which certainly indicates that 'mortgage note' is not PITI.  You can't have it both ways!

Many property managers charge an additional fee for advertising, leasing up an apartment, arranging maintenance, etc.

Someone must pay the utilities during vacancies and many water companies force the landlord to pay unpaid tenant bills.

I agree, you are showing more than many sellers do.  However, the point is that you are not including everything and thus your numbers still are not accurate, so why mention cash flow at all?

That's certainly not true.  Just because your example doesn't cash flow does not mean that "no property anywhere" will cash flow.  It just means that the property in your example won't cash flow.  Millions of properties in the United States will cash flow if you buy them at a big enough cash flow.

All of my rental properties cash flow.

Mike

Jon Holdman · Answer

Like Mike, I read "payment" as just the P&I, and not the full PITI payment.

I think that maintenance allocation is very low.  For a SFR, you'll typically go months with nothing, then have something to deal with.  If you have to pay someone, its probably $100 minimum.  I'd typically reserve 10% of rent as a maintenance reserve.

Around the Denver area, property managers get 10% of collected rent.  They also typically charge a full months rent to fill a vacancy, and charge you for advertising.  If you have a vacancy once a year, and have two months actual vacancy, then the PM costs you 10% of the 50 weeks rent they collect, plus one full month.  That amounts to 18% of your gross rent.  Yeah, I know people will say you should shop around and find a cheaper one, but its very consistent.

Water is lienable here.  That means, if the tenant doesn't pay, you do.  Its only billed every other month, so you could pretty easily get stuck with four months water.

Fully agree that most deals that are claimed to cash flow are actually losers.  If a MLS listing says "this cash flows", you can bet they mean rent is more than PITI.

Michael Rossi · Answer

If you're wholesaling properties, I would suggest not saying anything about the cash flow.  That is up to the buyer to determine and you're just increasing your liability by advertising a certain cash flow.

Look at the information above:

Neither of these numbers is even close to being accurate.  The cash flow on this property is really ZERO!  The problem is that although you've done better than someone who is just including PITI, you've still missed a LOT of the expenses.  How about taxes, insurance, advertising, legal fees, entity maintenance, utilities (even if only during vacancies), evictions, court costs, tenant damage (beyond the security deposit), capital expenses (not technically an operating expense), etc, etc, etc?  Throughout the United States, operating expenses run 45% to 50% of the gross rents.

You certainly don't want to do that!  Most sellers don't even know what expenses to subtract from the rent in order to calculate a NOI.  Most sellers don't have accurate records of their expenses.  Most sellers won't tell you the truth even if they do know the numbers.  Calculate the NOI yourself.

As Tim said, if you're serious about being in this business, you better know how to determine the cash flow yourself based on YOUR knowledge of the rents and the YOUR knowledge of your market.

Good luck,

Mike

Curt Davis · Answer

Mike,

PITI stands for Principal, Interest, Taxes, Insurance so when I said PITI, thats all included and not another extra fee like you made it out to be!!!   
Advertising fee - thats the property managers job to get the home rented out.
Utilities - tenant pays all of that.

I understand there can be many other extra fees but what I presented were the bare bones of a basic deal. Most people trying to sell a property will not even show half of what I show my clients. If my example will only cash flow zero then I guess no property anywhere will have cash flow. I guess we should all just dump our properties and invest in the stock market or something!!

Timothy W. · Answer

Anymore I tell my realtor to give me three things: # of bedrooms, price and taxes.  If you're serious about buying in an area, you can figure the rest out yourself and you should.  I've been given fudged numbers on everything so I learned the local numbers for myself.  These three items though they generally can't fudge numbers on.

Tim

Adam Black · Answer

Very good points Curt. This is actually what I wanted to do my first blog on, comparing apples to apples. 
We get outsold everyday by less than honest sellers who don't give the buyer all the facts.