What is your cutoff for cash flow/door?
New to Real Estate · Rome, GA · Member since 2017 · 107 posts · 34 votes
Hello BP Folks,
What is your cutoff for cash flow per door? This is more of a poll. No need for explanation or rationalization but feel free to elaborate if you like.
Personally I don't care about cashflow. I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth). Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth. I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.
For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:
If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.
Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home. While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases. At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.
Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years. Expand this horizon to 20, 30 or 50 years and the numbers become insane.
People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.
Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything. But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.
Cashflow allows you to retire, but growth rate lets you build an empire.
Personally I don't care about cashflow. I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth). Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth. I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.
For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:
If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.
Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home. While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases. At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.
Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years. Expand this horizon to 20, 30 or 50 years and the numbers become insane.
People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.
Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything. But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.
Cashflow allows you to retire, but growth rate lets you build an empire.
One of the best posts I've read in a very long time!!!
@Nathan Hui cash inflows are nice, but true wealth is built from growth. I have TK's that cash flow, but if I could go back in time, I wouldn't do any of them again. The only person to whom I would recommend TK's is someone who wants to spend a minimal amount of time with their real estate investing and will be happy with 4-5% returns (don't believe the 9% rosy figures they try to pass on to you). You're making other people rich if you invest in TK's.
I feel as it is common practice for most investors who are just getting started to be attracted to the "cash flowing/cash cows." I was definiltey one of those investors. Finding/ buying anything that would "allow me to retire by the age 30" and I personally think that is the one negative about Biggerpockets. It had me so anxious to chase cash flow.
BUT.....
Buying those properties taught me great great lessons and I still own all of them today, and has allowed me to progress in my investing career. I will eventually sell most of them and do 1031 Exchanges once the time is right, but the fact of the matter is , I have to wait for the forced appreciation and the slow slow equity pay down from my tenants to do this for me. These lower income rentals that are "cash cows" will never appreciate, and could potentially depreciate. So I am collecting the cash flow now, allowing my buying power to slowly increase due to Net Worth Increase and experience build up, which is allowing me to purchase higher "value" property.
I think it all comes down to reaching your NOI goal. How you get there is up to you. IF you want / need lets say $250,000/ yearly income , then you have to find a way to generate $250,000 NOI / year. Whether that is through 500 rentals, 50 rentals, or 1 unit (maybe you own a high end AirBnB somewhere), again everyones strategy is different.
Good luck and happy investing!
It seems like your investments are primarily cash flow focused. What would have you done differently with your strategy if you were to do it all again?
Personally I don't care about cashflow. I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth). Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth. I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.
For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:
If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.
Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home. While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases. At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.
Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years. Expand this horizon to 20, 30 or 50 years and the numbers become insane.
People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.
Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything. But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.
Cashflow allows you to retire, but growth rate lets you build an empire.
One of the best posts I've read in a very long time!!!
@Nathan Hui cash inflows are nice, but true wealth is built from growth. I have TK's that cash flow, but if I could go back in time, I wouldn't do any of them again. The only person to whom I would recommend TK's is someone who wants to spend a minimal amount of time with their real estate investing and will be happy with 4-5% returns (don't believe the 9% rosy figures they try to pass on to you). You're making other people rich if you invest in TK's.
Instead of TK, what would have you purchased? BRRR homes?
Personally I don't care about cashflow. I care about buying a property below fair market value in solid neighborhoods that are projected to experience high long term growth rates (wage and population growth). Cashflow is all fun and games in the short term, but in the long run the only thing that matters is growth. I would rather buy a cashflow neutral home in a high growth area than a 200/month unit at the same price point in an area that has virtually no growth.
For simplicity sake, lets assume a hypothetical 100k home where total expenses is 800/month:
If that home is in a small market in the midwest and the rent is 1k/month, then the home cashflows 200/month and assuming no growth, (or limited growth) will generate $2400 per year, or $24,000 over a 10 year holding period, and the home is still worth roughly 100k.
Buying a 100k home in a more desirable geographic location might only rent for 800/month (because the home is likely significantly smaller), and thus this home is initially cashflow neutral but with an annual 5% growth rate will easily beat the other home. While it starts off by generating no cashflow, over the 10 year period it actually generates more cashflow because of the regular rent increases. At 5% growth that home will generate $24,748 in total cashflow over those 10 years and is cashflow positive by $441 per month during year 10, and the cherry on the cake is that the home has appreciated in value to 163k.
Overall this home would have increased your net worth by 3.6x as much than the no growth home would have over those 10 years. Expand this horizon to 20, 30 or 50 years and the numbers become insane.
People like to talk about the snowball effect of owning cashflow homes, but with growth rate properties it isn't a snowball, its an avalanche once you start tapping in to that equity.
Cashflow is safety, it is stability, it buffers you against economic downturns and minimizes the chances of you completely failing and losing everything. But assuming you are otherwise financially stable and have sufficient reserves then growth rate should be the metric you look for.
Cashflow allows you to retire, but growth rate lets you build an empire.
Hey Ben, I wanted to revisit this post. Do you have some advice that you could give me on determining appreciation potential when doing analysis. How do you get a numerical value that you can feel confident in?
Hi Nathan, thanks for revisiting, I missed this interesting post the first time through.
I look for a minimum of $100 estimated cash flow using relatively conservative numbers. Actual cash flow has turned out to be higher. I'm investing in B, B- suburbs of Kansas City, in 2019 they are 100-120k properties. They were all done with BRRR, so they have $0-10k of my money still in them except the last two which are held free and clear. 100% of the money I receive from my property manager goes into an account which is used for repairs and further acquisitions. The reserves are in place when needed whether they were considered cash flow or ear marked for maintenance in my original calculations . I got lucky with my timing, entering the market in 2013. Although the mid West is considered a no/low appreciation area I have done very well between the instant equity and actual appreciation.
Estimated cash flow formula: Rent -10% vacancy, -10% maintenance, -10% property management, -principal/interest,-property tax, -insurance.
Hi Nathan, thanks for revisiting, I missed this interesting post the first time through.
I look for a minimum of $100 estimated cash flow using relatively conservative numbers. Actual cash flow has turned out to be higher. I'm investing in B, B- suburbs of Kansas City, in 2019 they are 100-120k properties. They were all done with BRRR, so they have $0-10k of my money still in them except the last two which are held free and clear. 100% of the money I receive from my property manager goes into an account which is used for repairs and further acquisitions. The reserves are in place when needed whether they were considered cash flow or ear marked for maintenance in my original calculations . I got lucky with my timing, entering the market in 2013. Although the mid West is considered a no/low appreciation area I have done very well between the instant equity and actual appreciation.
Estimated cash flow formula: Rent -10% vacancy, -10% maintenance, -10% property management, -principal/interest,-property tax, -insurance.
Thanks for you input! This is great, so CF at $100 with conservative numbers. I appreciate your CF formula and all the details about where, when, and how you are getting your deals.
I'm guessing you don't actually see 10% vacancy and I'm sure since you BRRR your homes your maintenance overhead is probably minimal. Do you include cap ex into your maintenance expenses?
We have been experiencing an average of around $250-350/door after debt service. That being said, it doesn't mean getting lower is necessarily a bad investment. Netting positive cash flow right off of the bat, after debt service and other costs is solid if you have a healthy financing structure.
Meghan Latenser
10% maintenance includes CAPEX.
The 10% vacancy has turned out to not be an overestimate. Turnovers are rarely only one month.