for my logic this also becomes an argument for not investing in stuff that rents <$650 a month, or only investing in small multi at that price range. I don't see how the property pays for its own repairs there.
Originally posted by
@Mark S.:
Courtney M. ,
Great post. You’ve started a healthy discussion. Here’s my opinion:
As others have stated, I've heard the term "cash flow" used many different ways and it seems to mean different things to different people. For example, I've heard one podcast host (who has received some pretty unfavorable reviews on here recently for his turnkey business) say things like, "We buy properties for $50,000 that cash flow $700 or $800 per month." No, you don't. He's talking about "gross rents" as cash flow. Very different things. I've heard others refer to "cash flow" as gross rents minus PITI. Again, this is wrong. What I think most investors on here will agree with, "cash flow" refers to rental income minus all expenses, reserves, and debt service (if any). Here's how I look at it when I run my numbers and talk about cash flow:
Gross Rents
- 8% vacancy (roughly 1 month/yr; this also covers lease renewal fees, tenant placement fees, etc.)
- 10% property management fees (I never have, and plan to never have to, manage my own properties)
- 5% cap-ex reserve (for big ticket items; I buy turnkey that have all major things replaced as part of the rehab, so shouldn’t need to tap into this fund for a long time, but important to start building it up)
- 5% maintenance (for ongoing expenses that pop up, tenant turnover, etc.)
- PITI (debt service, including taxes and insurance which are escrowed)
= Cash flow
I’ve been buying “1% properties” where my minimum cash flow that I would consider acceptable is $100/month, although I’m getting closer to $150-$175/month. These are purchased at or above market from a reputable turnkey operator with in-house property management. I wouldn’t invest, personally, any other way. I realize it will take me longer to reach my passive income goals this way, but I’m okay with that because without turnkey, I likely would not invest in real estate. These cash flow numbers, when coupled with other metrics (principal pay down by tenant, depreciation loss on paper, ability to leverage at 5:1, etc.) still blow most average annual stock market returns out of the water - and that’s factoring 0% appreciation. Hope this helps. Many people will disagree with me, but I’m fairly comfortable with my strategy so far.
