If you’re considering investing in a rental property in the Baton Rouge or the surrounding areas then you are most likely thinking about the cost of owning a the new property and its potential cash flow. Cash flow is the reason most real estate investors acquire rental property in the first place. A good question to begin asking yourself when looking for rental properties is how much cash flow do you need for a rental to make sense in Baton Rouge?
This is something you will have to research and decide for yourself. Everyone’s situation is different and every area has a different housing market. But here are a few guideposts to get you started in figuring out this question to fit your situation and market.
How Much Cash Flow Do You Need For A Rental To Make Sense In Baton Rouge?
Many investors want to start with a highly profitable cash flowing property. However this usually doesn’t happen and don’t get discouraged. Millionaire cash flow real estate expert and the author of Rich Dad, Poor Dad, Robert Kiyosaki’s, first real estate investment cash flowed just $25 each month. Today, Kiyosaki is worth $80 million dollars and has accumulated 7,000 properties. Imagine if he would have stopped investing after only making $25/month on his first property.
You must have realistic expectations.
You may or may not have a large cash flowing property at first but here’s a better way to think about it. At the end of the month, will you have less money, will you have the same amount, or will you be profitable?
These are better questions to focus on when it comes to your new rental property.
What’s interesting is: These are all options and they don’t always have to be a bad thing or a sign that your property is failing.
Cash flow negative
This is when your expenses are more than your cash flow. While some investors want to avoid this, it’s not always bad if the expenses-to-income is fairly close or if the expenses are more than cash flow for a short period of time. You may not want to experience this deficit for years but it might make sense in the short term (especially if you are borrowing money at a high interest rate to pay for the investment and are planning to refinance). Two things to remember during times of negative cash flow is appreciation and rent growth. If your rental property is in a good market then the negative cash flow can possibly be made up with appreciation of the property and higher rents in the future. I don’t recommend cash flow negative properties, especially for beginner investors. If you have anything go wrong, like a long vacancy, you might not be able to make your payments and lose the property.
Cash flow equivalent
This is when your expenses are about equal to your income each month. If you’re cash flow negative then your goal should be to get to equivalence as quickly as possible. Achieving equivalence for the short term may mean you’re on way to profitability. However, if you maintain equivalence, you might be hoping for a profitable pay-off on the sale price of the house when you choose to sell. In my opinion, hoping for anything is not a sound investment strategy, and if something goes wrong you are toast. Avoid cash flow equivalent properties unless you have big reserves or if you are living in one unit and renting out another (a strategy called house hacking). In those situations, it could be a good strategy.
Cash flow positive
This is what everyone hopes for when investing in a rental property. It is when your expenses are less than the income you earn each month on your properties. In the words of Kiyosaki (from his book Cash Flow Quadrant), he would be willing to buy investments that were even $80 cash flow positive each month – and he’d be willing to buy as many of those as he could find. I will not buy anything that cashflows less than $100/door assuming 100% financing. This leaves a safety margin for when things go wrong, which they will at some point.
So, how much cash flow do you need for a rental to make sense in Baton Rouge? Maybe less than you think. If you remember, Kiyosaki started with just $25 cash flow positive each month and there are some (rare) scenarios where even temporarily cash flow negative investments make sense. These scenarios tend to be appreciation and long-term gain (gambling).