Cash Flow From Rentals
Okay, so I'm looking to diversify my "portfolio". Right now I'm doing LO and wholesales and I'm thinking about buying some rental property (once I get the cash...paying off a lot of debt so I'm still broke). I was thinking about maybe buying a few duplexes or even building some and renting them out. What kind of cash flow am I looking for on a rental? On my LO I can usually get 150-200 per month but that's a little different because they can buy them and they get rent credits. But if it is a straight rental, what should I look for? $50, 100, 200+?
Thanks,
Mitchell
It's interesting that after 33 views, there still hasn't been anyone willing to address your question. I'm just guessing, but maybe it's because they don't know where to start, or they don't have a positive cashflow. I'm not trying to be arrogant(at least I hope not) as I am learning new things everyday myself and have been helped greatly by the free wisdom on this site. Anyhow, I will only give you one perspective although there are several answers to your question. If you want positive cashflow, you are going to have to look towards lower or lower middle class neighborhoods. Some people may say that you can simply put down more but I think that is smoke and mirrors myself because you are having to invest several, maybe tens of thousands of dollars extra to be able to say you get a $100 or so extra a month. I won't go into all the drawbacks of doing it that way here, I'll just stick with what works for me. I vastly prefer low income. Not only does it give extraordinary cashflow, but you are providing housing where housing is in shortest supply according to federal statistics. With low income, you could easily clear $200k/month on a low cost house. Contrast this with high end properties that are negative or breakeven at best. I have absolutely no confidence in appreciation although many go after that. Hoping for appreciation is the same as investing in the stock market. Prices have always climbed over time but what about the multi-year periods when prices of both stocks and real estate declined? I have had friends on both sides of the equation. There was one friend who made $400k on appreciation in 2 years in Silicon Valley, and another friend who was just as bright who lost his credit rating along with $100k in the housing crash in Texas that occured in the early 80's. I would much rather make a consistent 20%+ annnual profit on cashflow. Has there ever been an area that appreciated at 20%+ year after year after year with absolutely no setbacks? I'm sure you will hear some different opinions but this is what has worked well for me. Of course, saying low income does not give any of the details as to how to make it work. As they say, the Devil is in the details. Just picking a low income property at random could cost you your sanity and financial stability. It isn't rocket science but you do have to know how to tell the difference between a low income neighborhood where your property will be watched out for by the neighbors and one where the crackheads will inhabit it nightly until it eventually burns down. Just read alot about the area you choose to specialize in. Best of luck.
I started my investing in 1983 when I bought 15 homes in 45 days. Today I still own 4 for rentals providing me with approximately $700/month on each - positive cash flow.
In 1988 I became a full time investor. Primarily a wholesales and flipper. While it is true I did make substantial monies (have not touched any of my sales – due to 1031 exchanges) it stops, when I stop. Rental income does not stop and in fact when the ecomy slows down I am still able to raise rents. Looking back, I should have kept the other 11 homes.
Now my emphasis is cash flow – rental income.
Two of my rentals are Section 8.
My husband and I won't consider a property with less than a $200 positive cash flow... this is for 2 or 3 br sfh in NJ. Our only exception is the house we are buying in the town where we live and we know the appreciation rates are extremely high, so we'll accept a little less in cash flow. On our LO property, our positive is $450.
Mitchell,Let me give you some advice. I have been a landlord for nearly 28 years. Get your debts paid off and pay cash for your rentals. It makes life much simpler and less stressful. Since by paying cash you do not fear losing the house if it sits vacant a couple of months.
Thanks for the advice. I've only got about 14K of debt left, which I'm hoping to have paid off by the end of this year. I'm thinking about buying some mobile homes. Those are very popular in this city, lots of low income folks.
Thanks for the advice guys!
Peace,
Mitchell
There is no proper answer to your questions what works for me may not work for you. I have gone highly leveraged and I have gone all cash when the occasion required. I make a point of setting no rules. I can tell you what I like but the gist in the mill is different with each crop.
I once had 1800 units scattered throuogh the Hostile Slums of Los Angeles. My property management division looked like a Fighter Control Center with all the charts and crews rolling for repairs and rehabilitation. My capital exposure was almost nothing. We took the units because the owners could not collect the rents and there was an undeclared war on. So I went down into Watts, Willoughby etc. and I lived there and at the end of about three years when I returned to the Hills of Hollywood. It was all worked out. Everybody was friends, had fun and we turned it all into a nice profit and traded, some conversion into houses, shops, manufacturing plants whatever so that no tax was paid.
I have also with great care structured a purchase, fixup and hold of small TownHouses, Condos and single families. Return on capital about 8% to about 25%. I too never considered Appreciation too much In Manos Dios.
The best buy I ever made was in France while it was occupied by the Germans. That buy has increased in value so high as to be incalculatable. Its income stream larger then most State Side business. My daughter now owns it and her life is enriched, so were her five husbands. Now days she rents No not the units the gentlemen.
The worst buy I ever made was a 4 unit in Beverly Hills, I bought it so I could qualify kids to go to school in Beverly HIlls. Never hoppened. It is now one of my sons properties and it still just grinds along with the tenants continualy complaining. The only property that gets painted and trimed out every three to five years. On paper because of appreciation it looks like a winner, but as a grind out rental, terrible. The rents are very high and the complaints even higher. One tenant, elderly lady, big person at the temple. She insists that we replace her refrigerator with a SubZero. Seems it is sort of a status symbol. That along with the Granite kitchen counters. I have seriously considered changing the units into a training school for Yenta's! Go figure.We had to furnish a water softner on the main water line. Seems they could not get a good lather up in the shower. Sooo you like Beverly Hills???
What I am saying there are just too many divergent factors. To my mind the best rental areas for small houses, and small multiples is the upper working class areas of the San Fernando Valley. However rents are zooming, now up to about $1,800 for a two bedroom 1 bath house. Cost of the house over $345,000.
Now thats a spike! It also reduces the caliber of the tenant. A good tenant cannot afford the rents, a double up tenant in a fringe industry or occupation is the standard rentor and their income is subject to legal and demand pressures, therefore rents are delayed or missed and thats a headache.
I am afraid your question does not have a proper answer. Too many variables.
Sorry, Lucius
You'll get the best answers from local investors and investor groups. As Lufos said, too many variables.
I've got to disagree with MichaelChandler. Sure, paying cash for properties is nice if you have 6 or 7 figures sitting in the bank, but most of us do not, and by the time we saved up $150K to pay for a house with cash, it would now cost $400K. Not only would we miss out on the appreciation, but also many of the tax benefits once we owned it.
Markets vary tremendously from area to area. There are areas where a 3/2 home will cash flow $500 a month, and others where even if you find a great deal, you'll be lucky to break even.
Houses, duplexes, and multi's do not show the same "per unit cash flow" in any area.
For me, I won't buy anything that doesn't cash flow AT LEAST $50 per unit per month. If it won't do that, it's not worth my time (unless there's equity, low rate, or other twist.) That said, If it were only 1-6 units I'd want more than that.
Check out your local investment groups. Call "for rent" signs and chat with the owners. You'll get a better feel for your area that way.
Hibby and Lufos have covered it. Way too many variables..across markets, even within markets (nicer section to 'tougher' sections)...it will vary considerably as will investor preference. If your hurdle is 300/month, in some markets that means you'll do 1 cherry picked deal a year; in others, you could buy the market at that rate. A more anserable question would be to ask what everyone requires. I require 1,000 per month per property. This basically requires buying, fixing and holding foreclosures, not flipping.
I think how much you are comfortable with each month is a personal decision based on your situation, but I personally feel anything under $200 a month is cutting things just too close. We currently have 6 rentals (in process of rehabbing #6 and getting ready to rent) and will, by the time our tenant moves in, net about $3k a month. Our lowest net per property is $212 and our highest is $1030. We bought our first rental in 1988 and it didnt cash flow anything for several years. We were young and dumb and didnt really know much about the world of REI, only that we wanted rentals. We bought another house in 1988 that we lived in for 5 years, and has been a rental ever since, and it didn't start turning a positive cash flow until last year. The lesson in those two: we didn't buy smart. We bought full price at the top of the market. Those two homes really had almost no appreciation for several years, one because of the market timing and second because the area started a downward spiral in values. We even thought of selling the first one a few years ago, because of neighborhood problems, but wouldn't have even been able to break even if we'd had to pay a realtor commission. Luckily we held on and made it thru (hard as it was at times), and now have about $40k equity in the first property and over $60k equity in the one we used to live in. We have since only bought foreclosures and rehabbed and have always come out ahead (equity wise and cash flow wise).
All our rentals are in lower to middle income areas, 2 are thru Section 8 and of the others, only 1 tenant actually has the capability of buying a house (he is looking). We've found that the lower to middle income properties generally work well for us and the tenants usually stay for a good amount of time, because they really dont have the financial ability to pursue purchasing a home of their own.
Hey King - Assuming you are using 30 year financing, you should look for properties that can generate at least $200/month after PITI and average maintenance. I have found that older neighborhoods that have great all brick, low maintenance homes that I can buy for around $85- $95k and easily rent for $875 - $950/month are a great place to look for profits, plus those homes are much more likely to appreciate than low income housing, and you are much more likely to get a good tenant. That's my market, which is Indy, so your experience may differ. The absolute best cash flow is going to be off of good size 2 bed duplexes, where you can buy at a good price and get rent of $600 - $650/side if they are nice enough. I have one of those over on the East side and it is a cash cow, providing almost $600/month after PITI.
Happy cash flowing
Chance
I am ignorant.
I find it so hard to predict the exact monthly balance. It seems like I have to move so quickly, that I have to wait until settlement to see my real PITI, then until someone actually signs a lease and pays me, I can't predict the income, or possible "repairs".
I make the best guesss possible, and for some months (the earlier months) I have "eaten" 20-100 dollars in negative cashflow.
I operate inside the Washington DC beltway, things are a little crazy around here.
I DO run pro-formas and schedule property tax increases and rent increases etc... if I lose a few dollars now, it doesn't bother me. Thats only part of MY winning formula.
Good luck.
For my duplex, after PITI and water I clear about $450 total. This is before repairs etc. Last year (my first year) I made nothing, but the house sure looks a lot nicer (new windows, gutters, some siding, paint job, redo walls and ceiling in 2nd unit, parking lot improvements, basement work etc). All of this work was paid for by last years and the first part of this years rent. Because I showed a negative income last year for the duplex, It helped decrease my income taxes by a few hundred dollars. This year hopefully I will make a little real money on my $500 dollar investment (the rest of the money was borrowed). With appreciation of houses in my area, it is hard to break even now. Thus I want to buy more property...but the negative monthly income hurts.
I have many freinds that are in the rental game but they all seem stressed out and cash poor from non paying renters to repair/damage.
I have not seen a comparison in this forum that compairs rentals to fix/flip it would interesting to see if some one has do enough units to show true numbers.
I currently buy forclosures/or places that need a lot of TLC then flip. I can say that it has always been a positive cash flow on each deal but need to say that it requires cash to get the best deals and to do the repairs . So its a decision to make you money now or wait as the property is paid off by rent. I prefer to make the money on each deal with no long term comitment.
What do you guys think about just buying crappy mobiles for a couple of hundred and fixing them up to where they look nice and renting them? I figured I could do that and just "freshin them up" a bit after a couple of years.
I found a mobile that I can pick up for about 2K, mobile ready land for 2K, and fix up of about 6K to make the mobile really ready to live in. Average rents are like $450-500 per month in this area. You guys think this is a good deal?
Thanks,
Mitchell
I just bought my first rental and I was encouraged to see that other similar houses in the area are already selling for $10K more than I paid. However, I am having a really hard time finding a tenant and am being forced to lower my rents so that my cashflow will drop from $250 to about $125.
I was encouraged by some of the other posts that stated that their homes didn't cash flow for a while so I guess I might have to lower my rates again if I don't get a tenant.
My point is that there are no absolutes. Some people say they won't accept a property without at least $200 cash flow per month but the amount of cashflow is dependent on the market conditions in your area. I would suggest that you structure your cash flow projections to get your rental filled as quickly as possible.
My 2 cents.
JS.
As other people have said, what really matters is your local area.
I had to smile when I read someone's comments about "great brick homes." To me, having lived virtually all my life in earthquake country, "brick house" is more normally said in conjunction with words like "house of cards" and "collapsed."
My friends in San Diego and the Bay Area (San Francisco) just gag when I talk about properties that have a positive cash flow right off the bat. They think I'm living in fantasyland. Of course, some of them have seen appreciation in the last year or so in the mid double digits, and that's in an area where a two bedroom house in need of work was $500k a year or two ago.
- James
First of all ,as a Real Estate Investor you must step back and look at the big picture. As an investor with 28 properties and 75 plus tenants I can give you a good insight. I have 7 million dollars in property value and 6 milliion in Real estate debt. I tell people that want to get in the business that I can show them how to buy property with little or no money but keeping it is another thing. I ask how my much negative cash flow can you live with. When you buy a property try to avoid any negative cash flow, if you buy with negative cash flow make sure you can bring it positive in a short time by increase rents and refinance .. If you cannot afford negative cash flow dont buy it. Rents normally go up over time. So a property breaking even or slight negative cash flow will over time increase in cash flow. I have bought properties that did not cash flow but over a couple year period I have taken the negative cash flow to postitive. Of the 28 properties I only have 4000.00 per month in cash flow and by the time repairs and the like are made it all seems to break even. The big picture is this , if I raise the rent just 20.00 dollars per tenant thats over 1400.00 per month in more cash flow. Couplled with refinance the cash flow will grow to a large amount allowing me to retire from being an airline pilot. I am lucky to have a good income to finance this venture and using tax loopholes I get all my federal tax I pay refunded. In a final note the 7 million in holdings will be worth 14 million in 12-15 years. Think about this before you put another dime in your 401k. :