For those that own smaller rental properties (1-4 units), how much of the rent check is left for you to enjoy? When I was in that situation, my answer would be, "It depends." I'll explain later.
I want to own assets that optimize the amount of money that I take home after all expenses are paid. I want stable cash flow.
What do I mean by stable cash flow? Cash flow is the amount of money that is received on a regular basis after expenses are paid. Stability means that I can predict how much cash flow I'll get, and I can rely on the cash flow on a regular basis. Cash flow is different from property value or equity. Increased equity is great, but I only see that as a cherry on top because a transaction must occur in order for equity to be realized.
What are main factors for optimizing cash flow?
1. Cash on Cash return, or total income/total cash invested. For MF investments, a typical cash on cash return is 7-8%. With single rental units, there is high volatility due to the huge impact of vacancies and repairs. Looking at cash on cash returns prevents you from making mistakes like forcing cash flow on a property. An example of forced cash flow is when an investor pays for a property with all cash in order to reduce mortgage payments and ultimately receive some great cash flow. However, putting a lot more cash down means less returns for your money. Compare the amount of cash invested (purchase, interest, maintenance, and renovations) to how much money you are getting back on a regular basis.
2. Property Income: This includes rental income and other income (laundry revenue, storage unit fees, etc.). Also understand what puts income at risk such as vacancies, payment delinquencies, poor management, etc.
3. Total cash invested: This includes acquisition costs, operating expenses (repairs, maintenance), capital expenditures (plumbing systems, electrical systems, HVAC, roofs, parking lots, etc.), mortgage payments, etc.
How do I stabilize my cash flow?
In my early years of real estate investing in single family homes (SFH), I switched from forced cash flow by putting more down on my bay area, CA rentals to higher cash on cash returns by investing in a less expensive market - Birmingham, AL. Even so, every time a tenant vacated, our cash flow would go negative. Thankfully, we were saved on the equity side.
I quickly realized that I can have a lot more confidence of MF cashflow. In MF, there is reduced risk on income with more tenants and reduced expenses with cost savings from economies of scale. This ultimately drives more cash flow.
Now I enjoy much more stable cash flow through MF, and you can too! For upcoming investment opportunities with us, join our investor club to be notified!