If you’re thinking about investing in a rental property, you might be weighing the costs and potential income. If so, you’re probably wondering: “How much cash flow do you need for a rental to make sense in California?” This is a great question, and the answer might surprise you…
Cash flow. It’s the reason why most real estate investors acquire rental property! So perhaps you’re wondering how much cash flow do you need for a rental property to make sense in Los Angeles – GREAT question.
The answer is challenging to give (because the number is different for everyone) but here a few ways to figure it out for yourself…
How Much Cash Flow Do You Need For A Rental To Make Sense In California?
Many investors want to start out of the gate with a highly profitable cash flowing property, but that’s not always the case. Millionaire cash flow real estate expert Robert Kiyosaki’s first real estate investment was just $25 cash flow positive each month! Today, Kiyosaki is very successful and wealthy.
So the first thing you need to do is make sure your expectations are realistic.
Instead of focusing on a single large cash flow amount each month, think of it this way: at the end of the month will you have less money left over, will you have exactly the same amount, or will you be profitable?
What’s interesting is: all of these are viable options…
Cash flow negative
This is when your expenses are more than your cash flow. While some investors want to avoid this scenario, it’s not that bad if the expenses-to-income is fairly close or if the expenses are more than cash flow for a short period of time. While you may not want to have a large cash flow negative scenario for years, it might make sense in the short term (especially if you are borrowing money to pay for the investment).
Cash flow equivalent
This is when your expenses are about equal to your income each month. If you’re cash flow negative, 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.
Cash flow positive
This is when your expenses are less than the income you earn each month on your properties and it’s a great place to be. 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 get his hands on. Fortunately, it’s not hard to reach this level… and beyond.
So, how much cash flow do you need for a rental to make sense in California? Probably less than you think! After all, Kiyosaki started with just $25 cash flow positive each month and there are some scenarios where even temporarily cash flow negative investments make sense.