All Forum Posts by: James W.

Thanks for posting @Joel Owens

The main reason the post focuses on the cash flow side is to look at the investor's protection in a stressed environment.  I agree that cash flow is only a part of the investor's return, but loan amortization and appreciation do not pay the debt service either.  

Investors with deeper pockets do not necessarily need the cash flow, but I am guessing that is not the case with most of the people who post on here.  Most of the people posting on here asking about what they should aim to get in cash flow likely are not the ones just looking for a safe place to park their cash.

Good points Will Grabert A few things I did not even consider!

Thanks for adding Mike Dymski The exact thing I am trying to get at is that new investors are trying to learn and that the info they are being given isn’t necessarily safe at all. It can work for an experienced investor in a value add scenario, but is not a good rule of thumb at all.

@Zachary Gwin  Send me a message with your email address if you still need one.

@Steve Vaughan I agree there can be room in a portfolio for a little speculation and lower cash flow for the right investor.

I just don't think it is a great play for someone new getting into the game when RE is at an all time high in some areas.  

@Jason D. Personally, I am not as focused on dollars/door as much as what I need to withstand a stressed environment.  That will depend on the property.  Cash flow/door is what is getting recommended to new investors.  I brought it up to better understand how people are arriving on this metric as I do not understand what $100/door represents or how it can get looked at universally as a "rule of thumb" across all markets let along a given market.  

I don't want to rely on beating my estimates or foregoing maintenance/Cap Ex in order to meet my debt service in a stressed environment.  Who is to say the recession won't happen when you need to put a new roof on a building?

My analysis of $100/door assumes all variables are accurate and do not have any additional cushion above what would be needed for a property.  It is good that you sock away your cap/ex in a separate account but the reality is that it is taxed as income in the given year and many investors do not specifically put it away for a rainy day.  

I don't think it is reasonable to assume a new investor will beat their maintenance/Cap Ex so I am not sure it should be looked at as a consideration when recommending $100/door after all expenses to someone who is new.

@Luke Duffney It is possible to find deals in the twin cities market, but you need to look closely and understand the numbers.  Spend a lot of time analyzing deals before making an offer to ensure you fully understand the numbers.  

In regards to your partner question, you need to ask yourself if they are going to be a partner or act as a bank to lend you the money.  If they are a partner, you still make the money together and can reinvest it if you are not living off of it.  A partner can help limit your risk exposure and can help with additional resources to scale to another property too.  

@Henri Meli

I concede that a value add situation is completely different and can be looked at as feasible if the $100/door is a starting point and not where it is at the end of the value add.  

What I am getting at is what you hit on, which relates to new investors getting into the game.  Many do not have the knowledge, time, resources, financing, or ability to start into real estate with a value add so many simply look for a property that will cash flow from the beginning.  At the same time, their numbers are not solid but I am taking that out of the picture all together by starting at the $100/door without any expected variances coming up from the pre deal analysis.

The comments on Dustin's post is what led me to start this post but it isn't new.  I have invested in Minnesota RE for 10 years off and on part time, but have not been on this site long.  In the last several months, I have seen many people providing the guidance of $100/door to new investors.

I don't understand the $100/door, do not see it as enough cash flow to scale into additional properties and do not think it provides enough cushion looking at rents in an average market.  I didn't want to hijack his post by asking everyone directly how they arrive at $100/door and thought it might be a good discussion to bring up separately in case there is something I am missing myself.

@Jameson Sullivan After thinking the $100/door scenario through, I think I would run even if it was only a little over $100/door as I do not have anywhere near the scale to get any sort of efficiencies myself.  In my market, at $100/door and rents at or above $1,000/door it only leads to a 10% variance in vacancy or rents becoming a break even situation which I think is a possibly situation in a recession.  

In my mind, the $100/door rule, might make more sense to be looked at as a 20% or 25% of gross income rule as far as the amount of cash flow needed to go back to the investor after debt service and cap ex.  This would seem like a safer number and using a percentage would take into consideration the differences in the rental market of geographic locations.  

As it is now, $100/door in cash flow is completely different in downtown Seattle as it would be in Aberdeen, WA, or other cheaper areas.  If we look at it as a 20% rule instead of $100/door, it would add a lot more cushion for an investor to weather a storm or handle the unexpected.  

It could play out as follows:

High demand USA rent $1,500/mo

$100/door cushion=6.6% of rents go back as cash flow-not much cushion against changes in vacancy or rents.

$300/door=20% cushion.  This is 3X the cushion offered to protect in a recession as compared with $100/door.

Standard area USA rent $1,000/mo

$100/door cushion= 10% of rents go back as cash flow.  As looked at previously in this thread, it only leads to $100/mo in stressed rents to get to break even or 10% more rents than anticipated.

$200/door=20% cushion.  This is double the protection and would allow the investor to withstand up to 20% more vacancy than initially planned or up to $200/mo in rental.  It would also allow the investor to withstand both to a lesser extent (10% each) as well.

Lower cost USA rent $650/mo

$100/door cushion= 15.3% of rents going back as cash flow.

$130/door cushion= 20% of rents going back as cash flow.  This is not as big of a difference with $100/door so it is possible $100/door could work assuming there is no major employer that drives an area and could lead to a major issue.  It seems reasonable to think that a lower cost/unit might have less fluctuation in price than a higher cost area but it might be about the same as a percentage.  

Some might look at me as too conservative related to this, but the reality is that the investor needs deep pockets or needs excess cash flow to protect against changes in the economic cycle if they are looking at investing in a safe area with only $100/door in cash flow.  There is more protection in $100/door if investing in cheaper areas, but odds are that all of us are not investing in these areas and $100/door might not offer much protection as a "rule of thumb" when looking at average rents across the US.  

I hope this thread continues to get traction and that some longer term investors can chime in with how their assets performed in the last decline.  In the $1,000/mo scenario, I don't think cash flow coming back at $100/mo (10%) is enough to weather a storm, but I don't have the experience to suggest that it will have an impact of >10% of vacancy or 10% in rents either.  

If any of the current posters were investing in rentals since the early 2000s, I would be curious to see how your portfolio fared.   

@Steve Vaughan I can assume your best IRR investments on the SFRs that operated at break even were purchased between 2008 and 2011 correct? It is safe to say everyone who invested did well just after the last recession.

Timing the sale is important when there is reliance on appreciation but if held a little long, can do what happened to everyone purchasing from 2003-2007 that held their homes a little too long and lost up to half of their equity in some places.