$1,000 for every $100,000
Investment properties are about generating positive cash flow. Cash flow properties have monthly costs associated with them that bring down their rates of return once in operation. So a common question we get asked is: How much return should I expect to return on a positive cash flow property?
Our simple gauge is that on average your should expect $1,000 in gross income for every $100,000 spent on purchasing and rehabbing the property.
Think about it. There is an opportunity cost for money put in the housing market vs any other investment instrument. Breaking down the gross income to a NOI, you need to factor in monthly vacancy, fixed and variable costs. On average one could expect that 40% will spent on these costs to operate the property. Before tax cash flow (BTCF) would then equate to $600 per month return for every $100,000 spent. Your rate of return is calculated as follows: ($600 x 12)/$100,000 = 7.2% rate of return.
Albeit hard to find in healthy markets, this standard for investment rate of returns will help protect your investment to generate positive cash flow and actually make your investment in property worth it.
Read here about after repair value purchase strategies.