In the last year I have had two different conversations about cash flow that I was amazed by.
- The first was an investor that owned one property. He was so excited to tell me “It only took 3 years, but my investment property is finally making a positive cash flow”. I felt sorry for him that his real estate agent had sold him the wrong property.
- Secondly, I went to a seminar where the speaker (a mortgage consultant) recommended that it was OK to take $300-500 per month out of your pocket each month to pay for the negative cash flow of your investment. He suggested that you should simply reduce the amount you contribute to your 401k each month and divert it to an investment property!
Maybe I am going to get some letters for this post, but I am sad for the guy in example #1 and outraged at the mortgage consultant in example #2. If you are pouring $300-$500 per month into the property on your best day, what happens when you have a vacancy or a major repair?
My bare minimum rule is that an investment property must generate $100 per door per month. In other words, a duplex must make at least $200 per month. This simple math does not automatically validate a property as a good buy, but it is a start. You must still look at your cash on cash return and your return on asset. Do you think spending $600k for a duplex (with $60k out of your pocket for the down payment) to only make $200 per month would make you excited? Probably not. Using a highly qualified mortgage broker that works with investment property is good way to insure you are spending (and making) your money wisely.
In this market, with mortgage financing drying up, it is more difficult to find decent properties that cash flow. I believe you just need to work harder and look longer to find them. You also may need to take bigger risks by going into neighborhoods which may be depressed today. I also believe that using a real estate agent that works with (and owns) investment property is the only way to approach it.
2 comments
#1JasonMarch 11, 2008, 10:10 am
Great post. I am new to property investment and wondering how can I buy a property with 10% down and still have positive cash flow. It seems an investment with 10% down in a single family house that costs more than, say, 250k will not generate a positive cash flow because you can only charge so much for rent. A nicer house may generate more rent but it costs more. Do you always invest in multi-unit property so the price per unit is lower, for example 70k, and it’s easier to have positive cash flow? Can you provide a rough estimate of property cost to have a positive cash flow? Thanks.
#2Investment PropertyMarch 11, 2008, 1:29 pm
There are lots of properties out there that will cash flow with just 10% down. It just depends on the neighborhood and property type. Single family houses need to be generally under $200k to cash flow (but the neighborhood drives the rent so that may be higher or lower depending up the location).
If you contact me, I would be happy to give you some examples.
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