Minimum cash flow on rentals

[LRrenewvating]

What would be a normal cash flow position for most of you seasoned investors are looking for in a rental property?  Do you look for a percentage or a specific dollar amount?

I am new and setting my 2007 goals but am not sure where to start with my figures as to what I should be expecting from my rentals.  I would like to say my goal would be to have a $300 positive cash flow monthly from each unit (after utilities, insurance, taxes and loan payments) but I think I might be shooting a little high.

What can be expected.

[propertymanager]

The first thing that you have to do is accurately determine the cash flow.  Operating expenses are NOT utilities, taxes, and insurance (& loan payment).  How about management, maintenance, advertising, entity maintenance, evictions, exterminations, capital expenses, court costs and fees, fuel for your vehicle, office supplies, legal fees, lawsuits, damage done by tenants, etc, etc, etc???

Throughout the entire United States, operating expenses run 45% to 50% of gross rents.  After you subtract these operating expenses from the gross rent, what's left over is used to pay the mortgage payment (principle and interest) and for any cash flow.

To answer your question, after I use these real world expenses, I like to have $100 per month per unit.

Good Luck,

Mike

   

[LRrenewvating]

Mike,

I realize my operating expenses were not all inclusive, but you were able to get my jist and answered my question thank you.

I am quite supprised to hear that operating expenses run between 45 to 50%.  It would seem to me that with expenses this high the rentals you speak of must have a high tenant turn-around.  If you are speaking from the managers point of view I guess I could see 45 to 50%.

I would like to hear from others on what they generally expect as their positive flow.

[dwj469]

I agree with Mike, expenses do run around there I also like to get at least 100 per unit positive of course more is better. It is a business so anything you do needs to be counted towards an expense. Even use of your computer if you use it to find deals. Everything involved.

[propertymanager]

Rick,

No, the real expenses run 45% to 50% throughout the entire United States.  This includes capital expenses, management and maintenance.  Most newbies simply ignore the real world expenses (as you did).  If you manage and maintain the property yourself, then you will earn back 15% to 20% of the gross rent, making your operating expenses 25% to 35%.   In low income areas, your taxes will be lower but your maintenance and tenant related expenses will be higher.  In higher income areas, this is reversed.  You won't hear the truth from any gurus because the truth cuts into their profit.  After all, who wants to pay $5,000 for a bootcamp to hear that real estate investing is hard work and is not a get rich quick scheme?  

Mike

[LRrenewvating]

Mike,  

I have not ignored the, as you put it, "Real World Expenses".  I have an accounting background and know of these expenses.  

I think I should be more clear that I am not in the management business but am taking on some rental property to create passive income.  My focus is rehabbing and wholesaling but if I can swing it and a good rental deal comes by or market conditions recommended holding that is what I will do.

Some of the expenses you outlined I would put under my regular business expenses and not directly related to the rental property.  I will proportionitly allocate these expenses directly to the unit if that is what drove the expense,  but otherwise, office supplies, fuel and capital expenses and some of the others are business operating expenses.  They are a cost of doing business not a direct expense to the rental. This is why I feel the numbers are a little high.

I thank you for all you input and knowledge.  I am not fighting your point just bring a different view.

[dwj469]

Hi Rick why not put all expenses related to the properties to the properties? Correct me if I am wrong but arent the tax consequences much better for yourself by creating passive rental income in the way of buying fixing renting and refiing to pull your money out as opposed to flipping or wholesaling?

[LRrenewvating]

DWJ

Yes, your correct and the rentals I have where rehabs that I kept because of the tax consequences. I also do allocate all expenses directly to the properties that incured those expenses.  I would not allocate my legal retainer fees to my rentals if the rentals did not use any leagal services it is a business opertaing expense.  If i did use the legal service to evict then that cost and a percental of the retainer would be allocated to the rental.

My passion is rehabbing.  I like taking a run down delapitated building and returning it to its glory.  Rehabbing is a hobby to me at heart and the feeling I get retailing to a new homeowner and offering them the chance at something they thought they could never own makes me feel good.  Everyone should have a chance at the American Dream of owning a home.

Wholesaling is what you do with your excess inventory.  I can only work on so many at a time.  I am not looking to be another Donald I just want to retire between 50 and 55 (about 10 years from now) and never have to worry about anything financially.

[dwj469]

Thats great and also why we are all here. To learn from others experiences.

[LRrenewvating]

well said because I have learned a lot here from people like you and the other members of this organization.

THANKS :D

[bdub]

i'd like to get to the point propertymanager is at.  however, on my first property, i'm simply $100 over PITI.  my next property will do better (aiming for a MFH for early 2007.)

[propertymanager]

bdub,

It's not optional.  You must do better on future deals if you are to keep investing (or unless you're already rich).  Most people, including me, can only have so many losing deals and believe me $100 over PITI is definitely negative cash flow.  Most people could afford a few deals like that, but I certainly couldn't have dozens of rentals if every one was losing money.  Besides that, what's the point.  I'm not doing this for fun.  If I didn't make money, I'd do something else.

Good Luck,

Mike

[Land Baron]

propertymanager,

Thanks for your willingness to share your experiences and help out us newbs.  You've responded to a couple of my previous posts.  Thanks.

I'd like to pick your brain a little more about how you calculate expenses.

First, to make sure that I understand correctly.  You use 45 - 50% of gross rent to estimate operating expenses, which covers everything except for the mortgage payment (principal and interest).  After deducting that 45 - 50% from the gross rent, what's left is available for the mortgage and cash flow.  Right?

Now, for my questions:

1. For "gross rent" in your calculations, do you assume a full 12 months rent to get that number, while allowing for vacancies within your 45 - 50% expense estimate OR do you presume a vacancy rate to calculate "gross rent"?

2. How do you allow for the security deposit within the 45 - 50% expense.  Assuming that damage isn't major, the security deposit would help to reduce this burden, no?

3. Do you find that the 45 - 50% figure holds true at different price ranges?  Median priced versus lower priced properties?  I would suspect that landlords of median or higher priced properties might not have some of the issues that lower priced properties and lower quality tennants could present.

4. Has the 45 - 50% rule held true throughout your experiences or is it a worst-case scenerio allowance?

That's it!  (for now).  Thanks.

[propertymanager]

Land Baron,

1. For "gross rent" in your calculations, do you assume a full 12 months rent to get that number, while allowing for vacancies within your 45 - 50% expense estimate OR do you presume a vacancy rate to calculate "gross rent"?

Yes, assume 12 months of rent.  The vacancy allowance is in the 45% to 50% number.

2. How do you allow for the security deposit within the 45 - 50% expense.  Assuming that damage isn't major, the security deposit would help to reduce this burden, no?

The security deposit has nothing to do with the expense figure.  In fact, by law, the security deposit belongs to the tenant even though you are holding it.  In my experience, the tenants rarely get any of their security deposit back.  Tenants are very hard on property and even a good tenant will do enough damage to lose their security damage.  I've only given back the entire security deposit twice!  So, the security deposit is basically irrelevant as far as expenses are concerned.

3. Do you find that the 45 - 50% figure holds true at different price ranges?  Median priced versus lower priced properties?  I would suspect that landlords of median or higher priced properties might not have some of the issues that lower priced properties and lower quality tennants could present.

Yes, the 45% to 50% holds true at most price ranges where rentals are found.  In relatively more expensive properties, you have better tenants but higher taxes and longer vacancies (when they occur).  For example, a $200,000 house in our area should definitely have better tenants, but could easily go many months between tenants.  Most tenants in that price range in our area would only stay while their new house was being built or other such similar situations.  In lower class rentals, you have more tenant related expenses, but lower taxes.  I have never personally dealt with upper income rentals or mansions or anything like that, so that is outside of my experience.

4. Has the 45 - 50% rule held true throughout your experiences or is it a worst-case scenerio allowance?

Yes, it holds true and is certainly not the worst case scenario.  The vast majority of new investors fail and the number one reason is lack of cash flow!  

Good luck,

Mike

 

[Land Baron]

propertymanager,

Thanks for the reply.

To clarify my Security Deposit question:  I was asking if holding a Security Deposit would actually help to REDUCE the expenses should there be damage repair costs.  Granted, it would only be worth what it was.

I still have to check on how Security Deposits are handled and make sure I'm not using the wrong terms too.  Security Deposit, Damage Deposit.  Can the same deposit be used for damages AND any backrent or fees?  I'll just have to check it out.

Thanks.

Thanks.