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Cash flow expectations

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10-29-2008, 08:07 AM	#1
notinthebiz Registered User Join Date: Aug 2007 Posts: 152	Cash flow expectations I'm going to make this fairly brief and depending on how people answer will determine if I need to follow up with a more detailed version. For either a single family resisdential rental unit or a duplex what should be the monthly cash flow expectations? Net income and not with all the tax benefits that come with real estate investments. I'd put a small amount down, 10% probably so that will obviously change the expectations. My thought is I need to make at least a 20% return on my investment before it makes sense right????? Thanks in advance.

10-29-2008, 11:09 AM	#2
pricespector Registered User Join Date: Mar 2004 Location: New York Posts: 1,351	Rental units should be at least net zero. Any profit in cash flow from a rental property is viewed as a success by many. In fact, many people will initially go cash flow negative and view it as a long term investment. What I mean is that if you have to pay $200 per month out of pocket to eventually own an appreciating $400k property, that's not too shabby. Keep in mind the true profit lies in the fact that you are also going to realize a profit in equity and cash flows will have built-in increases. The cash flows will grow (as will equity) as you hold the property. For example, if you are net zero cash flow today, rents will rise with inflation, but your mortgage payment will remain flat. So from day one the spread between your fixed mortage payment and rising rents will begin to increase your positive cash flow. Down the road, you can refinance your mortage and further lower your fixed mortage payment and ramp up your cash flows. This same concept can be used to buy multiple properties. The combined properties should be at least net zero. Obviously, more is a plus! In short, you usually don't make a whole lot of profit in the few years, like almost everything else...time is the wealth builder.

10-30-2008, 01:53 PM	#3
notinthebiz Registered User Join Date: Aug 2007 Posts: 152	If a property is net $0 how do you calculate your investment return to know whether it makes sense vs. just investing into an IRA, stock, bond, MM, etc. Is there a tool out there? If I do a 30 year loan at 7.25% on $175,000 my total out of pocket expense will be $434,000 (P&I). Is it expected that in those 30 years the proprty value will go up $434+? Help me understand. I think I do but walk me through it. Thanks

10-30-2008, 06:43 PM	#4
jIM_Ohio Registered User Join Date: Mar 2007 Location: Ohio Posts: 324	You need to factor in taxes and similar. For example on the 175k property, you need to depreciate the 175k over a given time period. You will have rental income increasing your income. The depreciation reduces the income which is taxable. Still learning the details of doing this myself, but the tax benefits need to be factored into the equation as well. __________________ Light is faster than sound. That is why some people appear bright until you hear them speak.

10-30-2008, 09:03 PM

pricespector

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Join Date: Mar 2004

Location: New York

Posts: 1,351

Quote:

Originally Posted by notinthebiz

If I do a 30 year loan at 7.25% on $175,000 my total out of pocket expense will be $434,000 (P&I). Is it expected that in those 30 years the proprty value will go up $434+? Help me understand. I think I do but walk me through it.

You do realize that if you hypothetically rent the property on a continuous basis with a zero cash flow (no out of pocket expense) that you haven't paid a cent for it right? In the perfect world, you don't pay a DIME of your own money to own the $434,000 property. You're not using your own money...your renters buy it for you.

Some people will actually rent properties for a loss over periods of time (even very experienced ones). It eats into the profit, but still they come out ahead. And of course JiM_Ohio has illustarted how taxes vs. deductions factor into your cash flow.

One of the biggest factors when entering real estate (especially rentals) is that you have sufficient liquidity elsewhere to carry your through emergency repairs, no renters, etc. The people that fail in rentals are usually the ones that don't have the liquid assets to cushion them in the first place.

Last edited by pricespector : 10-30-2008 at 09:08 PM.

10-31-2008, 09:23 AM	#6
notinthebiz Registered User Join Date: Aug 2007 Posts: 152	I actually get, to a point, the tax benefit side of it and how depreciation, interest (assuming financing was used to purchase the property), prop. tax, insurance, cell usage, gas milage, etc. all feed into making a net $0 property really a net (tax benefit/refund) $5000+ annually property.....situations differ. I guess I'm just looking for the equation on how to calculate the return on investment so I can compare different investment options. Price - I do realize that a net $0 means I won't pay a dime but I think after reading it I feel much better about it. I guess I'm conservative enough where if something is in my name I still feel like it is coming out of my pocket when in fact it is but as it goes out of my pocket my other pocket will be replaced with what just went out. It's all a learning experience and I appreciate the info.

10-31-2008, 10:30 AM	#7
pricespector Registered User Join Date: Mar 2004 Location: New York Posts: 1,351	notinthebiz, Here's what you're looking for! "Return on Investment (ROI) = [(Appreciated Value + cash flow)] - Original Value) ÷ Amount Invested If we add the appreciated return on investment shown above to the cash-on-cash return, which is the spendable income the asset produces after all operating expenses and mortgage payments are subtracted, the total return on investment is even greater." And this a great link (source): http://www.biggerpockets.com/articl...-investment-roi- Hope this helps.

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