How Much Cash Flow Should Your Rental Properties Produce?

all right so a buddy of mine texted me the other day and said hey Brandon I've got this real estate deal I want to buy and it should produce between a hundred and two hundred dollars per month in cash flow is that a good deal what do you think all right so here's what I responded with basically a hundred dollars of two hundred ollars people often time hear me say that I'd host a webinar every week on bigger pockets bigger pockets comms eyes webinar where I talk about this idea of I generally aim for $100 to $200 in cash flow per unit that I buy so for the duplex I want $200 minimum if it's a four-plex I want $400 minimum and that's cash flow like leftover in my pocket after all of the bills been paid after everything said and done I want at least a minimum $100 per month per unit on a multi-family or a single-family house I usually aim for about $200 again after all of the bills have been paid now I say that but then there's a caveat there because it really depends on how big the deal is right I mean think about it this way if you were to spend a million dollars you were to invest a million dollars into a into any kind of investment and you were making a hundred dollars a month is that a good deal I mean doesn't sound like a very good deal right but if you were to invest five dollars into an investment in every single month you made a hundred bucks that's the best investment in the world right and so the idea of a cash flow per unit or cash flow per door is a great metric is a great measure but it's only one metric that you can really go by and so there's another metric that we care a lot about as well and that is cash on cash return that's another metric I look at a lot cash on cash returns says what percentage of my investment did I make back this year in cash flow so to do some basic math if you invested a thousand dollars into an investment and you made back a hundred dollars in the whole year that is a 10% return so cash on cash return is how much money you made in profit in cash flow during the year divided by how much money you put into the deal so going back to my buddy who asked me is $100 or Twitter dollars maybe a good deal for this single-family house and he wants to buy well the question I asked him was well how much money you put into it his answer was 74 thousand dollars okay well someone from basic math right so if you were making let's go with the higher number two hundred dollars per month every single month you're making 200 bucks a month in cash flow every single month that's $2,400 a year twenty four hundred divided by seventy four thousand is three point two percent so three point two percent cash on cash return out is that a good deal well you know for me know my minimum that I generally aim for is between ten and twelve percent I want to see like twelve percent real now why did I pick that number well on average the stock market has averaged between six and seven percent over the past like hundred years so I was like well I want to get a lot better than that so 12 percent became a really good rule of thumb for me now I can't just rely on twelve percent because you know you got to also look at the total amount of cash flow you're getting I mean here's why if you invested a dollar into a real estate deal one dollar and you made two bucks a year two dollars a year in profit is that worth all the headache of putting into a real estate deal probably not because you're only getting two dollars a year but that's a two hundred percent cash and cash return shouldn't you do it well no because it's only two bucks I don't care so I like it both those numbers I look at cash and cash return of a minimum twelve percent I might go slightly lower than that if I believe in a the market is doing a really well appreciation wise like if property values gonna climb in fact I'd you actually just bought a property I'm closing on tomorrow here on the island of Maui in Hawaii and I'm only gonna get like just under ten percent return now why would I do that why would I violate my rules because it's Maui and I believe that price is on an island are gonna go up really well so that's just I will budge a little bit but my I want both those things I want a minimum one hundred dollars per month per unit personally and I want minimum twelve percent cash in cash return that's my general line of thought then there's one more metric that I look at and that's overall return there's a couple ways to look at it some people look at IRR which is called internal rate of return I kind of look at just average average rate of return there's again a few different formulas for getting out but it kind of tells you the same thing the idea is if you hold this property for let's say five or ten years and property values go up a little bit the loan gets paid down a little bit over that time frame over that time frame what's my average return each year and so for that I typically shoot for around fifteen percent so when I go into an investment I typically want to see about fifteen percent in fact I'm doing like a big syndication deal right now where I'm raising money for a big real estate deal big mobile home park conglomerate that I'm buying and so that's that was always the metric that we were aiming to beat I wanted to be able to give investors at least 15% because if you can get 15% by doing your own deal or 15 or more by investing in somebody else's why would you do your own deals that was the logic behind picking that 15% number in our syndication funds so that's kind of the idea of how I look at a deal whether or not I'm gonna do it or not whether or not I get the $100 per month per unit minimum that's just a base hit I'd actually like more than that that's minimum for a average blue collar type property and then 12 percent cash in cash return and then a 15 percent average return per year and again if you want to look at our or some more complicated metrics like that you can so if you liked this video make sure you give me that thumbs up button below the video and let me know you want more informational videos like this unlike real estate investing topics follow us here on BiggerPockets wherever BiggerPockets we found I mean it's YouTube Twitter Facebook all that good stuff Instagram and if you want to follow me personally you can find me at beardy Brandon on Instagram for BiggerPockets com my name is Brandon Turner signing off [Music]

Channel: BiggerPockets

Views: 289,901

Keywords: biggerpockets, real estate, real estate investing, rental property, investing in real estate, bigger pockets, RENTAL PROPERTY INVESTING, cash flow, cash flow rentals, rental property cash flow, brandon turner, brandon turner biggerpockets

Id: hufXoUBiTY0

Length: 5min 53sec (353 seconds)

Published: Tue Nov 05 2019