I define cash flow as Net Operating Income minus Debt Service and minus Tax Liability.
I don’t start out looking at minimum cash flow as an investment criteria all by itself. Instead I compute my debt coverage ratio, capitalization rate, and my internal rate of return for the potential investment. Of these three parameters, only internal rate of return uses cash flow in the computation.
I have thresholds for each of these parameters, and if a property “makes” the numbers, then I consider the property a potential acquisition.
Computing each of these parameters keeps me from paying too much for a property and at the same time, assures me that I can afford to keep and maintain the property.
The danger of using only cash flow as your sole investment criteria: Assume that you pick $100 per month as your cash flow requirement. A low priced property with a low-rate mortgage might easily generate $100 monthly cash flow and meet all my investment parameter thresholds as well. If that property is more expensive and the net operating income barely covers the mortgage, then $100 monthly cash flow is inadequate to take care of the unexpected emergencies or vacancies that invariably come up.
…okay, i’m so dangerously close to actually making a deal or two, is scary! For those of you who recall, the broker who talked me out of everything and I have parted ways, so…I’m on the loose… 2 things, for anyone who
cares to comment:
1 – Is there a minimum cash flow per unit I should stick to? …I realize there is cash flow today and potential cash flow to consider, but just looking for input from the
veterans and
2 – I’ve found what I think is a GREAT opportunity
to buy a rehabbed 2 family and convert it cheaply to a HUGE
single family, it’s a relatively solid area…lots of SF
homes surrounding it, quiet and clean…it’s just the jitters… I would offer financing and sell the note at closing, I’m just looking for anecdote about anyone who’s done this, FSBO, using classifieds…do the calls generally flood in? Do you keep a list of potential buyers, as you sell properties?
Posted by Alicia -Stl on March 31, 1999 at 11:51:07:
Dave: Thanks for the response…I do have my handy excel spreadsheet fired up, and I have two columns, one which reflects current rents, expenses, and one which reflects what I believe to be market rents…
so, there’s today, and there’s what good management can do for the place…right? …I also put in the misc. expense for the unexpected…I’m wondering, how much do you rely on the cap rate? 'cause if I can get my price on this 8 family, the cap rate is .20, which is really good…
Laure: thanks also, for your input. Here single families always go for more! The rehabber is an individual who lives in the neighborhood, and wanted to save the place. She even mentioned that it could be converted, and I do not know why she didn’t do it.
…hmmm…but hidden expenses? We were thinking of offering it for sale first as a 2 family, before conversion, to minimize risk, we could always convert it … it only needs one opened wall and the upstairs kitchen (which is a bare bones kitchen) converted to a bath. I know what you mean about greedy though, do you feel comfortable holding the note? what kind of check did you do? did you record the mortgage…thanks!