What % of cashflow is considered good for a rental property

[Rax Gupta]

Hi All, I am considering buying a rental property. After all, deductions, what percent of cashflow is worth going through all hassle.

[Randall Alan]

Shawn,

You have to be careful with your terminology when you say 1% cash flow on a $100,000 house.  

Cash flow is the difference between the rental income of an investment property and its expenses... it’s not all the income a property produces.   

If I try to interpret what you are suggesting, I think what you are saying is that a $100k house should be able to generate a $1000 in rental income a month and after deductions you should be in a good spot.  

The cash flow is what is left over after all those expenses and reserves are deducted. 

I would recommend doing a series of pro-forma calculations and you will find there is a curve associated between size of a property, and the rent it can generate, and the cash flow you will get after PITI (principal, interest, taxes, and insurance and a reserve figure). The first three items can easily be calculated or found on the county tax website. The last one you could ask your own insurance company to give you a quick quote, but you will quickly realize that insurance quotes can be approximated pretty easily after a few times based on the square footage of the property in your area. In my area it's about $900/year including hurricane premium (I live in Florida) for a 1,000sf property. With those numbers you can figure out what price point will yield you your best return in your area. Secret: it's usually the one you can buy the cheapest with the most square footage. As you get bigger in square footage the rent often decreases (the ROI curve isn't linear... it slopes downward the more expensive the house is).

You then use this curve data to target the size home and price point that will let you generate the best returns possible.  I can bulk analyze a list of properties pretty much instantly solely based off of square footage and price point by knowing what is the optimal house for me on the curve.

In my area it goes like this:  my optimal house is any house that I can buy for under 75,000 that can rent for at least $1,000 or more.  The better either of the numbers are, the better the deal.  In our area, units rent for about a dollar a square foot.  So to generate $1,000 I need somewhere between 900-1,000sf.

So when I scan a list of properties I'm literally just looking at square footage versus cost of the property (initially). 1000sf for $125,000... nope! $50,000 for 800sf... you betcha! It's that fast to determine "could this property fit my profile" because I already know how the PITI and reserve figures are going to basically play out. If it looks interesting you start looking at condition, what repairs it needs, etc. Side note, a $250,000 house in my area generates approximately the same cash flow per month as a $75,000 one!!! Hard to believe, but true! So why would I put 60,000 down on a big house, when I can put 20,000 on a smaller one and earn close to the same thing!

This doesn’t mean I won’t buy a house above $75,000... it just means a house more than that has to generate more rent to justify the higher cost. 

What I describe above is a system, and systems are what you will want to develop to move quickly and not get bogged down.., whether it is analyzing properties, collecting rent (we use rentec direct and love it), or developing a list of goto contractors for plumbers, septic, AC, roof repairs, etc, as well as a good accountant). 

For maximum cash flow you will want to leverage (finance)  your properties, versus paying all cash.  

To answer your initial question though, when I started out I targeted at least $300 per door positive cash flow after expenses and reserve. As I got better at finding (better) deals, I have pushed that number to over $500 / door. It takes time and patience... the great deals don't come along every day. Sometimes it's a referral, sometimes it's MLS , sometimes it's been Craigslist, you just keep looking and they will eventually come.

Hope it helps! 

Randy