What is a good cash flow deal? I was always taught that a good cash flow deal is when rents are 1% of purchase. In this article, rehab is already included in the purchase. So if the property rents for $1000, then you would be willing to pay $100,000 for that property. Would you be happy with that sort of cash flow. Let’s do some calculations. At 6% interest on a 30 year fixed, you are paying $600. Add $200 for tax and insurance and you cash flow $200, right? Well, what about property management of $100, and vacancy of 10% or $100. Now you are breaking even. And who thinks they will never have to spend a penny on maintenance? An investor could end up negative cash flow on a deal with these numbers. Then you are left to speculate for appreciation which is completely out of our control.
I believe a good cash flow deal is when rents are 1.5 - 3% of purchase. Or rents are double PITI. In the above scenario we are looking at $1500 - $3000 in rents. That is some great cash flow. Let’s look at another example of a great cash flow deal.
Duplex – two 2bed/1baths
- Purchase + Repairs - $50K
- Market Value - $80-100K
- Rent - $650/unit = $1300
- Payment at 6% 30yr fixed - $300
- Tax+Insurance - $100
- Property Management - $130
- Vacancy 10% - $130
- Maintenance 10% - $130
- Total Expenses - $790
- Positive Cash Flow - $510
At $510 positive cash flow per month, the next question is how many of these do you need to fire your boss? If you live frugally like me 3-4 would do the trick, but 10 or even 30 would be much better. I will discuss when it is time to fire your boss in a future post. Also, in one of my next articles, I will identify markets full of great cash flow properties just like these
