Investor · Woodbridge, VA · Member since 2019 · 162 posts · 64 votes
7y
Cash Flow depends on many variables, one in particular being how much equity you have in the property. I find the larger the down payment and greater the deal/discount on the property, the more you cash flow (for rentals). There are also things like repairs, but that depends on which strategy your following. I'm still learning but that is the conclusion I've come to.
The cash flow is dictated by rent to value and age of the building which impacts repair and capitol expenses. Ideally you would want the rent to be a minimum 1% of purchase price, the higher the better.
Don't be fooled by cash flow generated by equity. Dead equity reduces your ROI and sucks money away from the actual cash flow from the property itself as opposed to increasing it. Income generated by the equity is a entirely different income stream on the property and needs to be calculated at a minimum 10%. This is the first deduction you will make from the rental income before all other expenses (debt repayment, repairs, cap expenses, insurance, vacancies, evictions, legal, taxes etc)
Once you deduct your ROI, debt repayment and all projected expenses you are left with the actual cash flow from the property.
To do a rough calculation on a perspective property assume debt repayment based on 100% financing and 50% expenses. At minimum this will allow a % return on your equity equal to the prevailing bank rates. Your goal after equity returns and all other deductions is then to achieve positive cash flow on the property itself. In todays markets (4% mortggae rates) this is no where near enough return on your cash but it is a start point for evaluating a property. If these numbers do not produce any positive cash flow then the likelihood is the property is not worth investing in. If you want a greater return on your cash than prevailing bank rates and it does not show positive cash flow it is definatly not worth investing in.
This is why leverage maximises ROI and why cash buyers of properties worth more that 50K achieve the lowest possible returns (ROI). Dead equity is bad not good for investors.
Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
7y
Most rental markets look like a bell curve. Many new investors tend to think only of the lower half of the curve, perhaps up to the median and overlook the upper median and the premium segments. And as the curve flattens out there is still the luxury segment, which is typically not a good on purpose investment.
I was quite surprised when I first conducted a full analysis of my home market, when I found that cash flow was strong as expected on the lower end and then would start to decline as you go up in price. Also expected. The surprise was that cashflow started to increase again in the premium segment, for a second peak. Going up from there rents do not keep up with prices and the two curves start to detach, which is for me at about 250k.