How Much Cash Flow do you Need on a Rental Property?

26 Feb
How Much Cash Flow do you Need on a Rental Property?

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I am a strong advocate that investors should buy rental properties for cash flow and not appreciation. I talk much more about why cash flow is so important in an article here.  Another question an investor must ask themselves is how much cash flow is needed on their rental properties? How much cash flow do you need to be secure? How much cash flow do you need to justify spending a lot of cash on a rental property? How much cash flow do you need to reach your financial goals?

How do you calculate cash flow on a rental property

The first step in figuring out how much cash flow you need is determining the actual cash flow on a rental property. The easiest way to do this is to use our cash flow calculator located right here.

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It is very important that maintenance and vacancies are accounted for. I have learned that even on a completely remodeled home you will have maintenance issues with renters. I have been extremely lucky that I have had no vacant months in the last three years, but you can’t count on that. I like to live by the philosophy: plan for the worst, but hope for the best. For more information on maintenance and vacancies check out this article that describes the cash flow calculator.

Positive cash flow is very important with rental properties

After you enter numbers into the cash flow calculator, you may realize the numbers don’t look as good as you first thought. If you are using a property manager, they can really cut into your returns.

It is no fun paying money into a property every month that is supposed to be making you money. It is true that you are paying down the mortgage and getting tax benefits from the rental property, but negative cash flow can cause a lot of stress even with those benefits. If you are hoping for appreciation, remember there is no guarantee that prices will increase. How long are you willing to pay into a rental property before it pays you back? The easy solution to this problem is to make sure any rental property you purchase has positive cash flow!

Why should you be conservative with your cash flow estimates?

I mention I like to plan for the worst, but hope for the best. I designed the cash flow calculator to be conservative and account for maintenance and vacancies. My actual returns have been better than what the cash flow calculator estimates, but I have been lucky with vacancies and repairs.

If your vacancies or maintenance ends up being higher than you think, it is best that you planned for the worst case scenario. Hopefully with unexpected costs you will still have positive cash flow if you were conservative in your planning. I have $500 a month in cash flow on my rental properties and that is plenty of room to absorb unexpected costs.

How much positive cash flow is enough?

Positive cash flow is a great thing, but how much is enough? Obviously the more cash flow the better, but awesome cash flowing properties don’t exactly grow on trees. It really is a personal decision on how high of returns are needed to justify spending a lot of cash on a rental property.

Our cash on cash calculator can help you determine what the actual returns will be on your cash invested. I like to see high returns on my rental properties; over 20% cash on cash. Some people would be happy with 15%, 10% or even 5% returns on their cash.

I also think you need to determine how much cash flow per month is enough. If you only invest a small amount of cash, then you could have skyrocketing cash on cash returns, but only a small amount of cash flow. Much of this determination will depend on your financial stability. Do you have an emergency fund? Do you have cash reserves for each rental property? Is $100 a month enough or do you need $200 or $500 to build up your cash?

The great thing about rental properties is they produce higher returns than the cash on cash returns. Besides cash flow you will have equity pay down, tax benefits and HOPEFULLY appreciation.

What should you do with the cash flow you make?

I use my cash flow to pay off my mortgages one at a time and I discuss exactly why I do this in this article. This may not the best strategy for everyone, in fact in a perfect world where I could get as many fixed rate, 30 year mortgages as I wanted I would not pay off my rentals. If you are short on cash to buy new properties or don’t have an emergency fund you may need to save your cash flow.

If you plan to pay off your mortgages quickly, you can also save and invest that money until you are ready to pay off the properties. I currently use my monthly cash flow to pay down one mortgage early every month. I am thinking of saving that money instead and investing it until I am ready to pay off that property. This can be a risky strategy if you are putting your money in the stock market, which could go up or down in the short-term. I am not a huge fan of the stock market and I have a few other investment opportunities I am looking at.

Conclusion

I think it is a must that you buy rental properties with positive cash flow. How much positive cash flow you need is a decision you will have to make based on your goals, financial situation and local market. It is not easy to find great cash flowing properties, but buying homes below market value is a great way to get started.

Related articles

Complete guide to investing in long-term rentals

My plan to purchase 100 properties

 

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15 Comments
  • Marcus Boehler
    Posted at 19:24h, 26 February Reply

    It has been nice to find your blog and get some extra motivation for starting to invest in investment properties. My wife and I have an offer on a short sale right now that we plan on converting to a rental in 6 months to a year. I fell into this by reading and following John Schaub. So it is nice to hear other perspectives like yours.

    My question about this article: can’t it be a little risky to only look at cash flow? Because often, the most highly cash flowing properties are not in desirable neighborhoods and aren’t going to attract very desirable tenants. Which leads to evictions…vacancies…vandalism…all hits to the bottom line and real cash flow.

    I think my mistake has been disregarding cash flow too much. And I am going to adjust my strategy. But I also think it is healthy to not think only in terms of cash flow; thinking about the types of tenants a property is going to attract in conjunction with the numbers seems important.

    • investfourmore
      Posted at 20:29h, 26 February Reply

      Hi Marcus, yes, those are also very important considerations. If you look at my rentals they are all in middle of the road neighborhoods. Some people do great on the low end, but it does take more maintenance and work.

      • Marcus Boehler
        Posted at 19:12h, 27 February Reply

        I was also curious why you target one home to pay off, but use the equity of another with a refi to buy more? Maybe it has to do with the terms of your loans?

        • investfourmore
          Posted at 23:12h, 27 February Reply

          Hi Marcus, Yes I get 5 year ARMS on all my properties because that is what my portfolio lender offers. I am trying to get them all paid off before they can adjust. Plus it is better to have less mortgages in your name if possible.

  • Andrew E
    Posted at 02:50h, 27 February Reply

    I love finding your website! Your strategy is exactly how I have wanted to invest in real estate. Now I have some $$$ saved up and it’s time to start. My question is if you are using the cash flow to pay down mortgages what money do you use as a down payment on your next property?

    • investfourmore
      Posted at 17:16h, 27 February Reply

      Hi Andrew,
      I use income from my real estate business and fix and flips. That is not always possible for everyone, so it may make sense for you to save that cash flow for new down payments.

  • SK
    Posted at 22:42h, 14 June Reply

    Hi Marcus, great article and a great calculator, definately an immense help. Thanks! I have a unique scenario where I am looking at a property as a personal residential property (i.e. condo) but possibly turning it into a rental property in the near future. I have read that investing on a property with a negative cashflow can be dicey and risky at the same time, but how much negative is still a safe bet – $(100), $(200) or $(300)? Or is it a flat no-no? Would relying on a appreciation of the property in years is a bad idea? Look fwd to hearing your helpful insight. Thanks again!

  • How 11 Rental Properties Have Increased My Net Worth By $600,000 in 3.5 Years - Invest Four More
    Posted at 03:59h, 25 January Reply

    […] be fun to figure out how much those rentals have increased my net worth.  I like to focus on the cash flow my rental properties produce, because that is actual money in my pocket.  After doing some […]

  • Kevin
    Posted at 21:55h, 07 February Reply

    Hi Mark, I’m buying a short sale which is about 5% below market value in that area (house price average for this area is about $550,000). This area is is Lake Forest, I guess it is just a middle to high income area in California. After 25% down payment with 30 year fixed mortgage I got around $250 per month cashflow after Mortgage, tax, Insurance, mgmt. fee. Plus equity principal paydown is around $650 per month. Is it ok to invest in this case? management fee is $120 monthly, so I could have save $120 per month more in cashflow if I manage it myself, what your advise on this? I have full time job to consider.

    • Mark Ferguson
      Posted at 18:42h, 08 February Reply

      Have you considered maintenance or vacancy costs at all? What does your cash on cash return look like?

  • Kevin
    Posted at 19:05h, 11 February Reply

    Hi Mark, I already listed out all cash used such as 25% down, cashflow=$250, principal part is $650 as this is with fixed rate 3.5% 30 years., any thing else you need to determine if it is a good buy? This is the best area I could find and plan to move to raise my kids or retire in future like 10 years, so I really like to lock in now as I know cashflow is lower compare to others, but if I wait then who know prices will go up….right now price is still in affordable range for me & still have cashflow, and tenant pays my mortgage.

    • Mark Ferguson
      Posted at 22:49h, 11 February Reply

      Yes, but are you considering any maintenance costs? The home will most likely need work no matter how new it is or how great your tenants are. A common percentage for maintenance is 15% of the monthly rents. Homes also will have turnover and occasionally evictions. 10 percent is a pretty common figure for this. As far as a cash flow play you are probably going to break even or possibly lose money every month if you have a lot of maintenance or vacancies. Its a personal decision if the future retirement home is worth the loss until you move in.

      • kevin
        Posted at 19:11h, 13 February Reply

        Thanks Mark, if adding 15% for maintenance & 10% for other, which is 25% of rent around $600 per month, then we want extra cashflow on top of that. With this I don’t think I can find any deal in Southern CA would able to invest now. I guess we have to wait for the next crash when houses in OC back to 300k-400k range.

        • Mark Ferguson
          Posted at 19:21h, 13 February Reply

          That is the trouble many investors are having in SOCAL now.

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