How much positive cash flow should you be making off a rental?

Question

How much cash flow should I be making a month off a rental property for it to be worth it?

Kenneth Garrett · Answer

@Andrew Clark

I would count on $300 per door.  Multifamily I plan around $200.  I do not count on appreciation.  It’s to speculative.  Appreciation is a bonus do not plan your investment on it.

Ned Carey · Answer

@Andrew Clark generally people in the Midwest look for more cash flow. On the coasts appreciation is more of a factor.  Also cash flow can be measured on an absolute scale, like $3,000 a year or on a cash on cash return. An inexpensive property for example may give a better % cash on cash return but a lower absolute return.

As said the quality of the property and the amount of hassle to manage, it will impact the kind of return you expect. Expect less hassles and work on an A class property but a lower return.

Another factor is the amount of cash flow the bank will want for a given size of loan.

My criteria is $4,000  min a year for a rowhouse in Baltimore city.

Thomas S. · Answer

As Johann points out , no simple answer. Each investor has their own requirements and it can very much be dictated by your market. In high appreciating markets it is often difficult to get cash flow and in many such areas negative cash flow is very common. Investors in those areas depending entirely on appreciation. In better investing markets you can achieve both positive cash flow and appreciation (although at a lower potential rate).

Your cash flow will also be impacted by the class of property you invest in. C/D class investing should have the highest cash flow based on the amount of work involved and risk. A class will likely  have the lowest positive cash flow but easiest management. Property type will also impact potential cash flow. Multi plex properties having higher cash flow that SFHs dollar for dollar invested.

Many investors will set $100/month/door as a bare minimum to start but again it depends on may factors not the least of which is your chosen market area.

I invest in B class multi unit properties. As a minimum I require a 10% return on my cash plus a minimum $100/month/door generated by the property. If I have 20K of equity per door I need $100 + $166 (10% on equity) = $266/month/door. I keep my properties at maximum leverage and do not factor in appreciation.

How much cash flow is like asking how long is a string. The length of a string depends on what you need it to do.

Johann Jells · Answer

There's no set answer. Around here, people hold rental condos at considerable negative cashflow to get in on massive appreciation. Other places in the country don't appreciate at all and people feel they need big cashflow to make it worth it.

So it comes down to what else you could be doing with your money at what risk, and do you have more tolerance for leveraging RE than equities.

Think on this: if you have zero cashflow on a managed property with 25% down 15 year note, at the end of the mortgage you've made ~9.6% on your investment. Where are you going to get that kind of guaranteed return? Now add in appreciation, tax benefits and rising rents. Bottom line: pigs get fat, hogs get slaughtered. Chasing cashflow has it's risks.

Costin I. · Answer

@Andrew Clark - even if you were to manage to get a clear answer and/or consensus on a numerical answer, you couldn't count on it before bringing everyone to a consensus on how cash flow is calculated.

Some consider cash flow just rent minus PITI. Some also include vacancy, some might include property management fees. For us, cash flow is what remains in your pocket after all (!) the expenses - and a minimum monthly is $100 per door, with $200 and above considered good.

So someone telling you they make $500 cash flow might be in fact cash flowing less than someone who takes all the expenses in consideration and only has $100 cash flow.

Make sure you don't confuse Net Operating Income (which is Gross Rent minus Operating Expenses) with Net Annual Income (which is the annual cash flow and is the NOI minus mortgage expenses and vacancy). And make sure to account for the following in your operating expenses to get to the real cash flow:

1) Mortgage

2) Mortgage insurance (PMI or MIP) or FHA Risk base

3) Property Taxes

4) City Taxes

5) HOA (Home Owner’s Association) Dues and Fees and Assessments

6) Insurance

a) Property Hazard Insurance

b) Flood Insurance

c) Earthquake Insurance

d) Umbrella Insurance

7) Vacancy Rate (usually 8% - the equivalent to one month a year, or 5-6% if multifamily and/or if experienced, if not use 8%)

8) Utilities (you’ll have these if your tenant is not covering them and/or during vacancy)

a) Water § Sewer § Garbage

b) Electricity

c) Natural Gas

d) Propane

9) General Maintenance (usually 5%)

a) Upkeep § Landscaping

b) Snow removal

c) Repairs

d) New Appliances

10) Capital Expenditures (usually 5%, higher is the property is old and obsolete, less if fully rehabbed and all mechanicals and roof are new)

11) Property Management (8%, even if you self manage, your time still has value and there might be a time when you'll want to be completely hands off or you'll not be able to do it, vacation, retirement, etc.), including...

a) Office Supplies (e.g. stamps, envelopes)

b) Software

c) Gas/Mileage

d) Advertising + Payroll

e) Concessions

f) Lease loss

g) Property manager fees (monthly)

h) Lease renewal fees

12) Lawyer/Law office/Legal fees

13) Accounting/Bookkeeping/CPA/Tax preparer/Tax advisor

Russell Brazil · Answer

My favorite metric is rent growth. So Id rather purchase a property thats going to have significant cash flow 10 years out, as opposed to something that has that cash flows descently now, but has stagnated rent growth. This may or may not be possible in your market. My market is very varied, and I have properties where the rent has gone up $1,000 per month over the course of 10 years, and I have a couple properties where my rent has gone up $0 in 7/8 years. I now focus more on the higher demand rent growth areas even if that means breaking even.  Im in a position however where I can float carrying a bunch of my properties if I needed to, both due to cash flow on some of my properties and my income.

Berry Leonard · Answer

@Andrew Clark

We are conservative investors looking for long term cash flow. In our area , we do not have high appreciation for SFHs. We always base our purchases off of current rents with no appreciation. I have always believed it was too risky to count on appreciation to meet my target returns.

Protect the down side is the best option when you are starting out.

We have always treated our real estate like a business and cash flow is critical.  If you have sufficient start up capital to cover unexpected expenses and vacancies, then low cash flow may be acceptable. If you have limited capital, I would look for $300 per door and save for 6-8 months for unexpected expenses. After 6mths you have enough cash reserves to protect the downside.

If we have free and clear properties, we maintain equity lines on them to insure we have access to the capital for unexpected expenses.

If you have limited capital and cash flow, you will not be able to maintain the property which will cause higher vacancies.

After we hit critical mass with enough positive cash flow from the business, we are able to have more flexibility.

However, We never buy properties without cash flow.

Anthony Wick · Answer

On a side note: $1 per door is more than my 401k is making this year. Diversify.

Dennis M. · Answer

I would want atleast 200 per door and in my market pay no more than 15k per unit to get it . Of coarse that’s absurd to most investors in America unless you do older off market multifamily  in the Midwest

Johann Jells · Answer

This. I'd be nuts to be happy with $100/door when those doors cost $100k.

How much positive cash flow should you be making off a rental?

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