How much monthly cash flow should you get on a rental property?
Alpharetta, GA · Member since 2018 · 67 posts · 28 votes
I have been reading a lot of books on rental property investments and have heard varying opinions on what qualifies as a "good" rental property investment based on monthly cash flow.
I've read anywhere from $80 to $600 net monthly cash flow. I am in the north Georgia region and realize there are varying expenses based on region.
For any experienced rental property owners: Obviously more is better, but do you have a minimum monthly cash flow amount that you require in order to purchase a property? If so, what is this figure for you?
Thanks so much for any feedback.
Jordan - I'd focus less on the "per door" number and more on your return on investment. Think about it - you could deploy the same amount of money for one large unit (say a single family, large condo, etc) or a 4-family property. By nature, the 4-family is going to cash flow less on a "per door" basis, which means that it's nearly impossible to use this metric to compare properties on an apples to apples basis. It's an irrelevant metric. When I first started investing, I used cash-on-cash returns (annual cash returns/cost to acquire) because it seemed to me a logical way to compare the investment to others, like you might look at a stock investment. Over time, it became apparent to me that even that metric is somewhat flawed because it's so easy to jigger the numbers (ie the same property will have a different "cash on cash return" if you put down 10%, 20% or 30%). In my opinion, cap rate (net operating income/price) is the best way to judge because it's a constant.
The apples to apples comparison thing is particularly important when you then consider that whatever market you choose to pursue is going to have differing definitions of what the market will bear for a "good investment". Denver looks different than Georgia which looks different than Cleveland from a cap rate perspective. It will even vary across asset classes, neighborhoods and quality of tenant (higher end properties in general will yield lower cash flow and lower cap rates, which isn't the end of the world, it's just the trade offs you are making when you choose a subset of the market in which to invest). Here in Colorado, I have properties ranging from 7 caps to my best, which is a 9.2 cap at the time of acquisition. That's my definition of "good" and they are challenging to find in my market and for the class of housing that I seek for my rentals - probably less than 10% of listings I see in my market have a cap rate in excess of 8. But at least now I have defined standards - either something that already is, or I can make into something exceeding a 7.5/8 cap - instead of spending my days ruminating about how the perfect deal is going to come to me. At the same time, there are folks on this site, particularly in different markets, that would not touch my 8 cap with a 10 foot pole.
This book reads more like a text book than some of the other real estate books out there, but is very good for getting a basic grasp on how to look at basic metrics to analyze a deal: What every real estate investor needs to know about cashflow by Frank Gallinelli.
It's going to depend on where you are is the short answer.
I average $662.50 per door in ohio before expenses and $304 after expenses. I currently have 12 units and I'm pretty happy with my return.
It really depends on your area however...
Some investors follow the 1% rule when looking to buy a property which is, to have the rent be greater or equal to the mortgage payment, so you can at worst, break even.
Check out this article - https://www.biggerpockets.com/blogs/7325/46689-the...
The 2% rule is considered a "good" investment where the where your monthly rent should be equal to or higher than 2% of the purchase price to yield good monthly cash flow.
Check out this article - https://www.biggerpockets.com/renewsblog/2013/04/1...
Hope this helps!
Jordan - I'd focus less on the "per door" number and more on your return on investment. Think about it - you could deploy the same amount of money for one large unit (say a single family, large condo, etc) or a 4-family property. By nature, the 4-family is going to cash flow less on a "per door" basis, which means that it's nearly impossible to use this metric to compare properties on an apples to apples basis. It's an irrelevant metric. When I first started investing, I used cash-on-cash returns (annual cash returns/cost to acquire) because it seemed to me a logical way to compare the investment to others, like you might look at a stock investment. Over time, it became apparent to me that even that metric is somewhat flawed because it's so easy to jigger the numbers (ie the same property will have a different "cash on cash return" if you put down 10%, 20% or 30%). In my opinion, cap rate (net operating income/price) is the best way to judge because it's a constant.
The apples to apples comparison thing is particularly important when you then consider that whatever market you choose to pursue is going to have differing definitions of what the market will bear for a "good investment". Denver looks different than Georgia which looks different than Cleveland from a cap rate perspective. It will even vary across asset classes, neighborhoods and quality of tenant (higher end properties in general will yield lower cash flow and lower cap rates, which isn't the end of the world, it's just the trade offs you are making when you choose a subset of the market in which to invest). Here in Colorado, I have properties ranging from 7 caps to my best, which is a 9.2 cap at the time of acquisition. That's my definition of "good" and they are challenging to find in my market and for the class of housing that I seek for my rentals - probably less than 10% of listings I see in my market have a cap rate in excess of 8. But at least now I have defined standards - either something that already is, or I can make into something exceeding a 7.5/8 cap - instead of spending my days ruminating about how the perfect deal is going to come to me. At the same time, there are folks on this site, particularly in different markets, that would not touch my 8 cap with a 10 foot pole.
This book reads more like a text book than some of the other real estate books out there, but is very good for getting a basic grasp on how to look at basic metrics to analyze a deal: What every real estate investor needs to know about cashflow by Frank Gallinelli.
And of course all these numbers people throw out should include expenses such as vacancy, maintenance (future), management (even if you are managing), capital expenditures such as replacing the roof in 10 years. These expenses get narrowed down to a monthly cost and should be deducted from your rents. Many people like to have $100/door positive cash flow to give them a cushion. Break even gives you no room for error. Also these numbers assume you have a mortgage payment.
@Steve Miller I see what you're saying about the cap rate vs cash flow. That's part of what I was curious about.. the best way to determine a "good deal"
This topic is currently what I'm focusing on, so I think the reference book you gave me will be very helpful! I hope it's on audiobook. If you have any other books you recommend, I would really appreciate it!
Thanks so much for your response!
@Anthony R. Those sound like pretty great returns. Do you plan to hold on to your properties long-term? Of course then once your mortgages were paid off those will returns will increase significantly, I assume. Thanks for the response and congrats in your success!
@Christopher Finn I have heard of these rules. Thank you for the links.
I am very number-oriented and feel the need to sit down and calculate all costs to the closest estimate before considering a deal. Of course I'm brand new to this, but I do see the value of eliminating options that are way outside of the above "tests"
Thanks so much for the response!
@Brigham Pyron Yes certainly. I have heard 10% of rent is a good figure to set aside for maintenance and vacancy. Maybe 15% for higher turnover units such as multifamily units. Would you agree? I would not wish to make an investment without positive cash flow as this is our entire goal.
@Dr. Jordan E Smith Thanks. Yeah I'm a buy and hold guy. I'm considering a trade here in the coming weeks but it's going to be a four family for a twelve. Then we plan on dumping all profits into the mortgages and paying them all off in the next four years. It only took 5 years to get to this point and that wasn't even aggressive I don't think. I spent more time honing my landlording skills than I did trying to get buildings.
The long and short of it is, if you want to get started, I would start with something small and make sure you can handle tenants, structuring a deal that makes financial sense and setting up a system/workflow. Once all that's in place it's very very easy to bolt on new properties. I collect all my rent online with quickbooks, sign all the leases with docusign and I have my "team" that I can pull from if I need paint, carpet, carpet cleaning, contracting, lending, real estate leads, tax advice etc etc etc.
This is a much more difficult question to answer than most investors care to admit, or maybe even understand. Cash flow being based on NOI after all expenses and debt repayment is in fact not based on yesterday or today it is based on the life of a property long term. For this reason no investor will know their cash flow until the day they sell a property.
Investors will build future expenses into their calculations but if you ask what their real cash flow is they will likely state a exaggerated number based on yesterday.
The best you can do is guestimate based on educated math. I personally would not consider any thing below $150/door but will generally target a higher return knowing long term is entirely unpredictable beyond a guestimate.
You should base cash flow calculations using a hypothetical 100% financing. This improves your accuracy in calculating true cash flow. Equity buys a separate cash flow stream from the property. Investors including income generated by equity in cash flow calculations are artificially inflating their numbers and this will contaminates the properties income calculations.
Any investor can inflate cash flow by throwing their own cash at a property.
As stated your ROI is what is of greatest importance. You must keep in mind that as a mortgage is paid down and appreciation occurs your investment increases reducing your ROI. Appreciated value of a property minus any debt owing as your actual investment.
@Anthony R. Wonderful.
I definitely do not plan to ultimately do any property management (i will hire) as I'm looking to free up more time and continue to practice, but initially I probably will.
I'm encouraged to hear you make it sound doable because i am anxious to find a good deal and complete our first purchase.
We do not currently have a mortgage but we do have a hefty mortgage worth of student loans so we are working to get our DTI down. I'm interested in units that have more steady tenants so were on the hunt for a single family home.
Have any suggestions on the first time buyer opportunities that we should try to take advantage of? Is the Owner occupied loan something we should try to do while we have the option?
Thanks!
@Dr. Jordan E Smith I would not suggest going to audiobook route for the Frank Gallinelli book I suggested. It's basically a reference book - it has charts, equations etc. I suggested it to you because it's the exact opposite of some other books (Rich Dad Poor Dad, The Millionaire Real Estate Investor, etc.) that might get you pumped up to go buy some real estate but then leave you thinking "how do I actually do this?" from the perspective of actually analyzing prospective deals or the performance of your current portfolio.
I see what you're saying. Yes perhaps I should have been more clear that I do not even wish to consider appreciation, loan pay down, or tax benefits in the monthly figure. I would consider all costs as accurately as possible though, including saving for repairs and vacancies.
The figure I was seeking the monthly profit received from rent after paying mortgage, insurance, tax, loan interest, and saving 10% of rent. I assume this is the $150/door you mentioned..
Thanks for being specific in your response.
@Steve Miller Gotcha thank you.
Yeah it seems the best way to do it is to finish getting my license and begin doing BPOs in my area and check out listings on the MLS.
I want to be able to recognize a good deal so that once we have our downpayment and fix up cost saved up along with 4 months mortgage/expenses, we can move on it quickly when I hunt one down.
@Anthony R. Wonderful.
I definitely do not plan to ultimately do any property management (i will hire) as I'm looking to free up more time and continue to practice, but initially I probably will.
I'm encouraged to hear you make it sound doable because i am anxious to find a good deal and complete our first purchase.
We do not currently have a mortgage but we do have a hefty mortgage worth of student loans so we are working to get our DTI down. I'm interested in units that have more steady tenants so were on the hunt for a single family home.
Have any suggestions on the first time buyer opportunities that we should try to take advantage of? Is the Owner occupied loan something we should try to do while we have the option?
Thanks!
I did three house hacks (where you live in your rental along side your tenants)
My first was an FHA loan on a foreclosed duplex and my first real experience with being a landlord. We ended up selling that place after about 18 months and took a nice profit.
Next I did a VA loan on a four family that I lived in for about a year and a half. I still have this building. It's a great cash flowing asset. Though I am considering doing a 1031 exchange with it at the moment.
After that one I did another four family, this time with an FHA loan. I didn't have a ton of cash so I only put 3.5% down on it and had a HUGE payment monthly because of PMI. I then refinanced the mortgage and dropped the payment by about $500 a month. This building, which I still live in, cash flows nicely now.
My most recent four family I bought with a conventional loan and had to put 25% down on. This was a huge blow to me after my first three buildings and I wouldn't recommend doing it if you can do an owner occupy first. 25% down on something that you're trusting other people to take care of to some extent is tough. If you have plenty of cash flow to support repairs it's no big deal but just be ready for it.
If I had to do it all over again, I would take the same exact path I did. Owner occupying in order to build up your asset column is AWESOME and a very fast track to financial freedom.
@Robert Herrera That is definitely a good investment in my eyes. I am glad to hear you collect more in rent though to give you more passive monthly income. So any loan that requires a lower downpayment (such as OO) would be worth taking advantage of?
Thanks
@Anthony R. wow thank you so much for sharing your experiences. It's fun to hear and also helpful. I have heard that several times about the OO loan. We have a very nice living arrangement now though and it would definitely be a sacrifice to go this route but hey, with how quickly the years are going by lately, I think it would be worth it. Like you said, actual assets are what lead to financial freedom.
Thanks so much for all the feedback!
@Dr. Jordan E Smith First I would never buy anything with little cash flow hoping for appreciation. That said I would want at least $300 net cash flow from a property or why bother? I only pay cash for my properties so I have a fairly large cash flow from each property. I see it as planting a money tree and I pick hundred dollar bills off it every month but still have the value of the tree plus any appreciation. Your money is making money in your sleep (Rich Dad Poor Dad) . Also as time goes on you can force appreciation and higher rents by improvements and rents tent to go up on their own over time based on inflation.
If you can buy properties inside a self directed IRA (as I have) then you never have to pay tax on the incoming rents or capital gains when/if you sell the property. This is huge.
Personally on a single family or Duplex, Triplex or Quad, it would not be worth my while if I was not cash flowing at least $300.00 a month after all expenses. I am pretty safe and on a single family and only one or two front doors, I would keep at least $10,000-$15,000 in reserves, so that when Murphy raises its ugly head, you will not be phased. A roof is expensive!! So is a furnace, AC, a tenant claiming bankruptcy, a death in you unit, divorced tenants, mechanical weathering of driveway, walkway, water pipes and sewer issues, roots in pipes etc...
One that fails to plan, plans to fail!! I keep hearing I was lucky that my first purchases appreciated so high and that is how I received the seed money for my 8 apartment complexes I currently own. Luck is really when preparation meets opportunity. Without preparation and opportunity "Luck" rarely appears.
Swanny
I prefer to maximize my returns through maximum leverage with adequate cash reserves. Obviously I target ROI. If you are targeting cash flow as opposed to appreciation I would strongly advise against investing in SFHs. They generally have the lowest cash flow due to having the highest expenses and cost per door. Additionally the market is driven by home buyers not investors.
Your best, safest, highes return option is to purchase a multi unit with a home owners mortgage.. house hack.
I will use different metrics to answer different questions. I don't look at cashflow per door or cashflow per square foot etc for anything other than curiosity.
I do look at cash on cash return when evaluating a property - because I am comparing options for the best use of my cash - should I put it in a property, or the S&P 500, or pay down a loan?
Once I am operating a property, a more relevant metric to look at is the RoE - return on equity. With this, I can evaluate if the equity I have in the property is meeting my expectations and if it can be redeployed to a different purpose (albeit at quite a cost!). This needs to be looked at over years, though, as a big expense or loss of income (or both, with an eviction) certainly impacts it.
I don't currently invest with appreciation as the goal.
Ultimately, the decision on whether the cash flow meets your expectations is a very personal one. Is that cash flow worth your time to own the property and worth the equity investment in the property, and worth the opportunity cost of investing that elsewhere.
I bought a duplex recently for $264,500. One of the fastest growing suburbs in the nation. Rents are $1,325 for 3 bed 2 bath and $1,110 for 2 bed 1 bath (discount for recent 2 year lease). On the surface, these numbers may not sound "great". But, that purchase price came with seller paying for egress and basement roughed in bath install ($7k), home warranty ($600), and new furnace/hot water heater/AC on both sides before close (honestly don't know what that cost seller). Roof is 3 years old. Both sides upgraded a bit 3 years ago. So, I net about $525 per month after PITI/PMI, and before expenses. Tenants pay all utilities/yard work/garbage/snow removal. I'm pleased with results. And, as this is a small side gig, we bank all the money for now, with zero cash pulled out on a monthly basis. I wanted to buy close to home, and there were exactly ZERO duplexes available on MLS. Realtor found one anyway.
I like Brendon's answer. Is this the best real estate deal I can find? Is this deal better than putting my money to work elsewhere, like the stock market? You don't have to beat anybody elses deal in my opinion. You have to evaluate YOUR options and do what is best for YOUR money.
There is no right or wrong answer. For some making an extra $100 per month is great, others why bother. It all depends on each individual . So not really sure how to respond to this. All my clients avg not less then 11% , net , they are very happy. My personals 20% + Continued success to all .