What is the Minimum Cash Flow per Month That a Landlord Should Have per Unit?

What is the Minimum Cash Flow per Month That a Landlord Should Have per Unit?

When I began investing in rentals in 2004, I remember multiple books and speakers stating that the minimum amount of monthly cash flow per unit should be $100. If you have a rental house and you’re bringing in $100 in free cash flow (rental income minus all expenses), that’s $1,200 a year in profit (not counting depreciation on your taxes or price appreciation). The problem is that if you need a new HVAC system that costs $6,000, you’ve wiped out your profit for several years.

Being cash flow positive is better than being cash flow negative. However, $100 a month is just not going to cut it. Some investors say that their minimum standard is $200 a month in free cash flow. Even then, one big repair expense could take away the profit from an entire year or more.

My wife Amira and I have a minimum standard of at least $400 per month per unit. Thankfully, we exceed that minimum on all of our rentals. There were times in my life when I was negative every month on multiple investment properties.

Now, one thing to clarify is what constitutes cash flow. Some investors might receive $2,000 a month in rent and pay $1,600 to the mortgage company for PITI (principal, interest, taxes, and insurance). So, it seems like the cash flow is $400 a month. However, that’s not the case. PITI does not factor in other expenses like repairs, maintenance, grass cutting, snow removal, Homeowners Association fees, cleaning costs, utilities, flood insurance, and one-time capital improvements. What if these costs were $600 a month? Then the property would have a negative cash flow of $200 per month.

It’s wise to set aside some of the collected rent for future capital improvements. If you own a rental property long enough, you’ll be replacing the water heater, appliances, HVAC system, roof, and maybe even the windows. If you bring in a positive cash flow of $800 a month yet you set aside $300 in a reserve account, is your cash flow $800 or is it $500? Technically, the $300 going into an account for capital improvements is your money so you could say that your cash flow is $800 a month. Regardless, it is a good idea to keep your reserve money in a savings account so it’s another passive income source.

The reserve account should at least be an amount higher than your insurance deductible. If you have a $2,000 deductible, then ensure your reserve account is at least that amount. Once you save up enough to cover your deductible, I recommend that you accumulate around $5,000 per unit just in case there is an unexpected repair. The exact amount per unit is up to you. There was a time in my life when money was tight and I had $200 or less in savings for my real estate. That made things tough for me and for my tenants when a repair was needed.

One other note about cash flow is that you could very well be negative in year 1 of owning the property. If you renovate the property or have significant vacancy as you work to stabilize it, you could easily bring in less money than you spent. The $400 per month minimum that I have is only in effect once the property is stabilized and rented. That could be in month 2 or in year 2.

Tenants benefit when their landlord is fiscally responsible. If there is a maintenance request, a landlord with sufficient capital can easily pay to have the issue fixed by a professional. If the landlord failed to collect enough money to replenish a reserve account, the tenant can suffer when the landlord can’t afford to fix something.

If you incrementally raise rents in most years yet your financing costs stay the same, your cash flow will improve. Even if your mortgage payment is fixed for 30 years, insurance, taxes, and costs for materials and labor all go up over time. Therefore, you need to raise the rents at least some of the time to keep up with inflation. Hopefully one day your loan is fully paid off, and then your cash flow will be incredible.

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai made colossal mistakes in investing (and learned some things along the way).  Tai has coached hundreds of entrepreneurs, real estate investors, and real estate agents on how to increase their income and net worth. He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.

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