What is the minimum cash flow a landlord should expect from their real estate investment?
The magic number for every landlord in the universe is… $1423.42. Don’t believe me? Then I’ll give you the more truthful and less sarcastic answer: it’s completely relative. I can’t give you a concrete answer and neither can anyone else. Some real estate investment gurus will give you a formula and tell you to run every deal through it, but I can tell you from experience that formulas don’t work. They have too many limitations.
The only real way to achieve success as a landlord is basing your expectations on facts. You need to know who you are, where you’re going, and how your market works. Then you can set your own expectations. Here are three steps to help you get there:
1) Define Your Goals and Minimum Cash Flow
Read just about any success book in the bookstore and it will have a chapter on setting goals. It’s a common topic for a reason. Without specific, measurable goals, you have no way to determine whether you’ve achieved success. Goals also allow you to define good and bad decisions. For example, if your objective is to make $100 per day, looking for a regular 9-to-5 job is a great idea. On the other hand, if you want to become a billionaire by the age of 80, you’re going to need more than a steady job.
The same holds true for landlords. You can’t understand the difference between a good and bad real estate investment until you have goals for your cash flow. Before doing anything else, you need to ask yourself questions like:
- How much cash flow do I need to achieve my definition of success?
- When do I realistically expect to achieve that lifestyle?
2) Compare Opportunities to Your Goals
Once you have a goal, you’re ready to research real estate investment opportunities. If your objective is to achieve $5,000 per month within three years, you probably need to make more than $100 per month on each investment. So, you would remove $100 per month opportunities from consideration. You would probably focus more on investments with $500 per month of cash flow or more.
Similarly, if you only want to make an extra $1000 per month, then maybe opportunities with a $100 cash flow are reasonable. So, you would consider them. You would also consider the opportunities making $500 a month. Remember, we’re setting a minimum monthly cash flow, not a maximum. You never want to set a cap on your success.
3) Cherry Pick the Best Real Estate Investments
The next step is to prioritize. Once you’ve eliminated opportunities that are unable to help you reach your goals, you’re ready to start comparing them to each other and ranking them. Take the following factors into consideration:
- Your Buying Power: Will the bank approve you for financing? If not, can you bring in a partner and still meet your minimum cash flow requirement?
- Your Time: How much time will the real estate investment take each month? Can you dedicate that much time and still achieve your goals?
- The Cash Flow: How much will you make each month from the investment?
- Your Return on Investment: For each dollar invested, which investment brings you the highest return?
- Market Trends: Is the market improving or declining? Will you see any appreciation?
When you’re finished, you should have a list of opportunities, ranked from best to worst. Try to create a deal from your best opportunity, and if it doesn’t work out, work your way down the list. Just make sure you never dip below your minimum cash flow requirement.