That is an individual choice. How much profit do YOU want to get? Some people might settle for breakeven, some want $150 or more. What’s right for YOU?
Here in the Coastal area of CA, people will welcome a negative cash flow and buy.
There are three categories of financial benefit to owning rental properties, remembered as CAT: C=cash flow, A=appreciation, T=tax benefits. Added together, you see your total return on a property. Here where I live, the appreciation has been superior over the past few decades, so people are willing to have negative cash flow. The appreciation makes them rich.
So to, a person in a high tax bracket, but with taxable income of less than $100K a year can make the most use of the tax benefits of a rental house. So, that person might be willing to buy a property with less cash flow than somebody who has little tax benefit or does not value the tax benefit highly.
People who have a full-time job might accept a lower cash flow to have in a good renter–who keeps up the place, pays regularly, and stays there a long time. Lower rents attract more of the better renters, giving the owner a chance to select a better renter.
So, you have to look at your situation and decide how much cash flow you want.
When investing in single family homes to rent what kind of cash flow do you look for? Example an $85000 house. 10% down $8500. Principle, intersest, taxes, and insurance $665 per month. $50 per month misc. TOTAL $715 per month expenses.
Do you do any deal that will be cash flow positive by any amount? In the example above what is the minimum rent you’d want before doing the deal?
Don’t forget that that 90% conventional financing will require PMI. You need to add the PMI premium to your expenses and at that same time set aside a little for maintenance.
My general rule of thumb is 30% of gross rent covers day-to-day operating costs, mortgage (PITI) takes another 50%, leaving me with about 20% of gross rent as my cash flow.
Before any of you sharpshooters start loading up, I know that taxes and insurance are really operating expenses, but any way you want to group the numbers, the net cash flow is still about 20% of gross rents.
Posted by Wayne-NC on January 09, 2003 at 19:31:34:
One question: How much does the $8,500 cost in lost investment income? I think you know where I am going with this. Just include that cost in your analysis. I try for about $50/month and keep my cash on cash return at 15% or above.
I am an admitted neophite, but personally I shoot for a minimal of $150 a month over my expenses on a SFH. I generally achieve this through purchasing distressed/rehab type properties. I do this for 2 main reasons, 1) can pull significant cash out of properties after fix up and still see acceptable cashflow, and 2) I can easily finance 100% of the purchase and fix up using no (very little) money of my own.
I really don’t like coming out of pocket for down payments… I like to keep the cash liquid and only use it for purchases when I have no other choice. I’d rather pay interest and points on borrowed money than deplete my own personal liquid capital.
I try to get $250 to $300 cashflow a month on SFH.I buy two bedroom houses and convert the fla room and or garage into more bedrooms,This is how I increase cashflow.