positive cash flow question

[ricksconnected]

ok, i have another question. whats the formula that you use to decide if a home will bring a positive cash flow? and how much positive cash flow on paper should it bring before its a worthy buy?

[Las Vegas Real Estate]

In the market I live in it very hard to gain a + cash flow from the begging. One why is to put enough $ down on a purchase to obtain the lowest payments possible but, who wants to come out of pocket. In my area the market the rental market is very competitive. The very best you can hope for is to break even. Its only after a few years when you'll see a + cash flow. But who care about a couple hundred $ a month when your gaining 2 to 5 G's a month in equity.

[Dave T]

ok, i have another question. whats the formula that you use to decide if a home will bring a positive cash flow? and how much positive cash flow on paper should it bring before its a worthy buy?

ricksconnected,

In a nutshell, here is the formula set:

• Net Operating Income = Rental Income - Operating Expenses
• Cash Flow = Net Operating Income - Debt Service
• Debt Coverage Ratio = Net Operating Income / Debt Service

If the Debt Coverage Ratio is at least 1.25, then the Cash Flow is good enough to support the property.  You can always increase your downpayment to reduce your debt service and improve the Debt Coverage Ratio.  

I generally look for an Internal Rate of Return greater than 15%.  Getting an IRR this high and keeping the DCR at 1.25 or better keeps me from putting too much down to make the deal profitable under my investing criteria.

[niravmd]

before going into an area i find out what the avg rents are.
from that i subtract insurance, taxes, hoa( or maintenance), utilites, property mgmt.

the amount thats left has to be equal to my monthly payments with 10% down.
if it isn't then its too expensive for me.
i'm in this business to make money, not subsidize my tenants!!!

i predominantely use lease-options so my actual rent is a little higher than avg rent.
in that case i go with the higher figure and put only 5% down or even less!!!!

[ricksconnected]

finally got a hold of excel program. now my question has been answered. thank you folks !