How Much Cash Flow Should Rentals Make? | Daily Podcast

TL;DR

Aim for $100-$200 cash flow per unit, with 12% return.

Transcript

this is bigger pockets daily kicking off your monday with a daily dose of real estate information and education the article i'm about to share is one of more than 10 000 blog articles available on bigger pockets but you can't read the blog when you're walking the dog or browsing the mls how much cash flow should rentals make by brandon turner alrig... Read More

Key Insights

• The ideal cash flow for a rental property ranges between $100 and $200 per unit, depending on the property type and size.
• Cash flow per unit is a useful metric, but it should not be the only factor in evaluating a property's profitability.
• Cash-on-cash return is another critical metric, reflecting the percentage of investment returned annually through cash flow.
• A minimum of 12% cash-on-cash return is a good benchmark, although exceptions can be made for properties with high appreciation potential.
• Investors should aim for a 15% average annual return to justify the effort and risk involved in real estate investments.
• Internal Rate of Return (IRR) or average rate of return are additional metrics to consider for long-term property value assessment.
• High cash-on-cash returns might not always equate to worthwhile investments if the absolute cash flow amounts are minimal.
• Market conditions and property location can influence investment decisions, sometimes leading to adjustments in expected returns.

Questions & Answers

Q: What is considered good cash flow for a rental property?

Good cash flow for a rental property is generally considered to be between $100 and $200 per unit, depending on the type and size of the property. This cash flow should be calculated after all expenses have been paid, ensuring that it reflects the true profitability of the investment.

Q: Why is cash-on-cash return important?

Cash-on-cash return is important because it measures the percentage of your investment that you earn back each year through cash flow. It provides a clear picture of the profitability of an investment, helping investors determine whether the returns justify the amount of capital invested.

Q: How does property size affect cash flow expectations?

Property size affects cash flow expectations because larger properties, like multi-family units, typically generate higher overall cash flow. For example, a duplex might be expected to produce at least $200 in cash flow, while a fourplex might aim for $400. The goal is to ensure each unit contributes to the desired cash flow target.

Q: What should investors consider beyond cash flow per unit?

Beyond cash flow per unit, investors should consider cash-on-cash return, market conditions, potential property appreciation, and other metrics like Internal Rate of Return (IRR). These factors help provide a comprehensive view of an investment's long-term profitability and risk profile.

Q: What is a good cash-on-cash return benchmark?

A good cash-on-cash return benchmark is typically between 10% and 12%. This range provides a reasonable return on investment compared to other investment vehicles, such as the stock market, which averages around 6% to 7% over the long term. Investors may adjust this benchmark based on market conditions and property location.

Q: Why might an investor accept a lower cash-on-cash return?

An investor might accept a lower cash-on-cash return if they believe the property has significant appreciation potential. For example, properties in desirable locations, like Maui, may offer lower immediate returns but promise higher long-term value growth, making them attractive investments despite lower initial cash flow.

Q: What is the significance of a 15% average annual return?

A 15% average annual return is significant because it represents a robust return on investment, indicating that the property is likely to be profitable over the long term. This benchmark helps investors evaluate whether the potential returns justify the risks and efforts involved in managing a real estate investment.

Q: What additional metrics can investors use to evaluate deals?

In addition to cash flow per unit and cash-on-cash return, investors can use metrics like Internal Rate of Return (IRR) and average rate of return to evaluate deals. These metrics provide insights into a property's long-term profitability by considering factors like property value appreciation and loan amortization.

Summary & Key Takeaways

• This content discusses how to evaluate the cash flow from rental properties, emphasizing the importance of both cash flow per unit and cash-on-cash return. It suggests aiming for $100 to $200 per unit in cash flow and a minimum 12% cash-on-cash return.

• The author explains that while cash flow per unit is a useful metric, it should not be the sole factor in decision-making. Other considerations, such as the total cash-on-cash return and potential property appreciation, are also crucial.

• Investors are encouraged to aim for a 15% average annual return when evaluating real estate deals. The content also highlights the importance of understanding market conditions and adjusting expectations based on location and property type.