Percentage of profit on a rental property....

[Tom Wallace]

On a buy and hold investment strategy, what percentage of positive cash flow/profit do you look for on any given deal? Taking the gross rents received on any given property and then deducting your expenses associated with that property, (cost of any financing, real estate taxes, insurance, maintenance), what is considered a good percentage to have. What would be a minimum percentage?

Thanks,

[Aaron Mazzrillo]

I'm not a big fan of percentages or yields when it comes to investing. Reason being, most investors talk yield, but it is on such a small amount of money a daily trip to Starbucks would wipe out all the profit. If you are talking about 6 figures +, then it makes sense. Therefore, I don't have a percentage for you, but we shoot for $300-$400 per unit. I just can't get that excited about dealing with a tenant for $200 or less a month. The only way I would consider less money is if the financing is extremely favorable, such as zero interest. However, even on those that I negotiate, I still try to get my $300+ / month cash flow.

I talk to so many investors who think they are making money because they use 30-40% for expenses (taxes, insurance, vacancy, repairs, management or overhead). Too many new investors leave that last one out. They think it is free to drive out to their properties and do inspections, lease ups, put signs up, type up and run ads. Big mistake!

40% is too low. One large capital expenditure and all of the cash flow for 2-3 years is wiped out. It seems the people on here have it down and use 50% for expenses which is a real good rule. I have a friend who owns over 100 houses and has managed those same houses for 20+ years. He said his expenses run about 44% over the long term. Everything seems fine and dandy until that roof needs to be replaced, a water heater fails, tree roots destroy the sewer line, and don't forget about those lovely 'acts of god'. Just had a tree branch crash down on a roof and the HOA fixed the outside, but said the inside was my problem. That is when you discover if you have been budgeting for repairs or pocketing the money and calling it cash flow.

With the remainder 50%, you still need to deduct out what your financing costs are. Whatever is left is your real cash flow. Shoot for minimum $300-$400 per unit on your average rental property and you'll be a much happier landlord.