BiggerPockets - How Much Cash Flow Should Your Rentals Make?

Short Summary

Main recommendation: Target a stabilized cash on cash return of at least 7% by roughly year two (within about 12 to 18 months) for any rental property, and calculate that return using true cash flow after all expenses, not just rent minus mortgage. Cash on cash return is annual cash flow divided by total cash invested, which measures how efficiently your money earns, rather than the raw dollar amount you pocket each month. The speaker notes this 7% figure is his personal number and that each investor should set their own.

Key Points

• True cash flow equals total rent minus all expenses, including mortgage, taxes, insurance, repairs, maintenance, vacancy, and turnover costs; netting only rent against the mortgage overstates returns.
• Cash on cash return is a better gauge than absolute dollars: $500 a month on a $500,000 investment is about a 1% return, while the same $500 on $100,000 is 6%.
• The speaker targets 7% because it must beat alternatives such as the stock market (historically about 8 to 10%) and yields a total annualized return near 12% once loan paydown (about 3%) and tax benefits (about 2%) are added.
• Cash flow and appreciation trade off: high-appreciation markets like San Francisco, Austin, Denver, and Nashville usually produce less cash flow, so younger investors may favor appreciation and later-career investors may favor cash flow.
• Positive cash flow protects against being forced to sell during job loss or downturns, since selling incurs transaction costs that often produce losses.

Details Worth Noting

• Concrete instructions:

  • Calculate cash flow as: total annual rent minus all operating costs and debt service, including mortgage, taxes, insurance, repairs, maintenance, vacancy, and turnover.

  • Calculate cash on cash return as: annual cash flow divided by total cash invested (for example, $6,000 a year on $100,000 invested equals 6%).

  • Set your target by weighing upside: accept about 3% cash on cash return only for properties with strong appreciation or value-add potential in a strong neighborhood with active nearby investment; require at least 8% (ideally higher) for properties with limited upside in stable, slow-changing areas.

  • Confirm upside exists before accepting a lower return: value-add potential, path of progress, zoning upside, or likely rent growth.

  • Underwrite pessimistically: do not assume top-of-market rents or strong appreciation, and assume taxes, insurance, and expenses rise.

  • Stabilize properties within roughly 12 to 18 months through a business plan such as raising below-market rents or renovating (new kitchen, bathroom, floors, paint).

• Compounding example: $100,000 at 8% for 20 years grows to about $466,000, while at 12% it grows to about $964,000.
• Investor loan rates were cited around 6.25 to 6.5% at the time of recording.
• Buying negative-cash-flow properties is sometimes done, but only with a funded plan to reach positive cash flow within 12 to 18 months.

Bottom Line

Set your stabilized cash on cash target based on how much appreciation upside a property really has, and underwrite conservatively so positive cash flow holds up even when assumptions go wrong.