Seeing that a rental property will produce cash flow isn’t enough. The amount of that cash flow is important too. It is even more important if you are not factoring in much for maintenance costs.
The Question is….
What is your Cash Flow Threshold?
This number will be different for everyone depending on the goals and risk appetite. There is one thing I can tell you though. There is definitely an absolute number you do not want to be below.
What is the minimum number? – $100 per month
If something is not going to cash flow at least $100 per month after you have allocated money for vacancy, maintenance and reserves, you are better off moving on to the next property. In the long run it will likely not make for a great investment.
You have zero room for error and the cash on cash return probably won’t be all that great in many instances. That last part is not an absolute, but run some numbers through the property calculator. More often than not properties that are cash flowing shy of $100 will be produce a lousy cash on cash return.
Single Family vs. Multi-Family
Using a straight number like that is simple for single family. As for multi-family, use the average monthly cash flow of all the units. Again, you will want that number on the other side of $100.
Focus on Cash on Cash Return
In the end, focusing on the rate of return you are getting on your cash is key. Mainly because nearly anytime a property throws off an acceptable cash on cash return it is also produces a respectable amount of monthly cash flow.
Big Swings in cash flow
An example would be the difference between buying with a loan or buying outright with cash. There will be a noticeable difference in the amount of monthly cash flow being generated between the two. After all, you don’t have a mortgage payment with the cash purchase.
However, if we focus on cash on cash return and what percentage is acceptable to us then we will be in good shape.
For instance – my acceptable rate of return is 8%, which is rather conservative. I’m yet to find a property that gives me at least 8% cash on cash return and does not produce monthly cash flow of at least $100 or more per month.
Be sure you are running properties through a calculator to find the expected return. If you don’t have one, download the scaredycatguide property calculator from the home page.
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