FUEGO
Give me a museum and I'll fill it. (Picasso) Give me a forum ...
- Joined
- Nov 13, 2007
- Messages
- 7,746
In theory, properties that yield cash flow of $50k a year have some value to them (even if they are fully mortgaged). Residential owner occupied appraisals don't consider discounted cash flow as a method of valuation, but commercial or rental properties can. Hence, you may actually have a valuable asset.
In reality, I would need more than $50k cash flow from fully leveraged rentals to make me feel comfortable expecting $40k a year in perpetuity. Let's say I have $300,000 a year in rental revenue and $250,000 a year in expenses. My cash flow is $50k. Oops, the recession hits, unemployment shoots up a few points, and my new rental revenue drops by 20% (to $240,000) due to lower average rents and higher vacancies. Now I am cash flow negative by $10,000 a year. ER plans fail.
In reality, I would need more than $50k cash flow from fully leveraged rentals to make me feel comfortable expecting $40k a year in perpetuity. Let's say I have $300,000 a year in rental revenue and $250,000 a year in expenses. My cash flow is $50k. Oops, the recession hits, unemployment shoots up a few points, and my new rental revenue drops by 20% (to $240,000) due to lower average rents and higher vacancies. Now I am cash flow negative by $10,000 a year. ER plans fail.