# How Much Cash Flow Should Your Rentals Make? Source: https://www.youtube.com/watch?v=NAOhCIVgjDw Recap page: https://rapidrecap.app/video/NAOhCIVgjDw Generated: 2026-01-30T05:05:21.236+00:00 --- ## Quick Overview The required minimum cash flow target for an experienced investor like Dave Meyer in the current market is a 7% cash-on-cash return expected by the time the property is stabilized, not necessarily on day one, because this target helps achieve a minimum 12% annualized return when factoring in amortization and tax benefits, which significantly outperforms the stock market's historical 8-10% return. **Key Points:** - The proper definition of cash flow requires subtracting all expenses, including mortgage, taxes, insurance, repairs, maintenance, vacancy, and turnover costs, from total rent. - Cash on cash return is the recommended metric, calculated by dividing total annual cash flow by the total cash invested into the property, measuring efficiency rather than just absolute dollars. - Dave Meyer's target is a 7% cash-on-cash return by year two, which stabilizes his total annualized return to at least 12% (7% cash flow + 3% amortization + 2% tax benefits). - Investors should evaluate stabilized cash flow, which is the return after executing the business plan (like raising rents to market value or value-add renovations), rather than day one cash flow. - Cash flow and appreciation are a tradeoff; investors favoring high appreciation (like in San Francisco or Austin) might accept a lower stabilized cash-on-cash return, potentially as low as 3% if upside potential is significant. - Investors must underwrite pessimistically, avoiding optimistic assumptions about rent increases or appreciation, preferring a pessimistically underwritten 5% deal over an optimistically projected 12% deal. **Context:** Dave Meyer, Chief Investment Officer at Bigger Pockets, explains how experienced real estate investors should calculate and target required cash flow from rental properties, emphasizing the importance of return on investment efficiency over raw monthly dollar amounts. He stresses that current market realities in 2026 make finding high day-one cash flow difficult, shifting focus toward stabilized returns achieved after executing a business plan, such as value-add renovations or market rent adjustments. ## Detailed Analysis The core principle discussed is prioritizing cash-on-cash return rate over absolute monthly cash flow, as a low cash flow on a large investment (e.g., $6,000/year on $500k investment equals 1.2% CoC) is inefficient compared to a higher rate on a smaller investment. Meyer's personal benchmark is achieving a 7% stabilized cash-on-cash return, which he calculates yields a minimum 12% total annualized return when combined with loan amortization (around 3%) and tax benefits (around 2%), aiming to significantly beat the stock market's historical 8-10% return. He illustrates the power of compounding, noting that 12% return over 20 years yields nearly double the final wealth compared to an 8% return. Meyer clarifies that this 7% target is for stabilized properties, meaning after value-add work is complete, which can take 12 to 18 months; he insists on never buying a property that cannot eventually cash flow positively to ensure long-term holding capability. He advises adjusting this target based on the deal's upside potential: lower cash-on-cash returns (as low as 3%) are acceptable for properties with high appreciation potential or significant upside (like zoning changes), while stable assets with limited growth require a higher stabilized return, ideally 8% or more. Finally, he strongly advocates for conservative underwriting, demanding investors project worst-case scenarios for expenses and rent growth to protect against unforeseen market shifts. ### Cash Flow Definition and Calculation - Proper cash flow deducts all expenses including variable costs like vacancy and turnover - Calculating cash flow by only subtracting the mortgage payment is incorrect and leads to inflated return expectations - Cash on Cash Return is calculated as (Annual Cash Flow / Total Cash Invested) to measure efficiency. ### Target Return Rationale - Meyer targets 7% stabilized cash-on-cash return to achieve a minimum 12% total annualized return when accounting for amortization and tax benefits - This 12% target significantly outpaces the stock market's historical 8-10% return, showcasing the power of compounding over decades. ### Stabilized vs. Day One Cash Flow - Investors must focus on stabilized cash flow—the return after executing the business plan like raising rents or completing renovations—as day one cash flow is often difficult to achieve in the current market - Even if day one cash flow is negative, a plan to achieve positive stabilized cash flow within 12-18 months is necessary for long-term holding. ### Cash Flow vs. Appreciation Tradeoff - Properties offering maximum appreciation potential (e.g., path of progress markets) warrant lower stabilized cash-on-cash returns (as low as 3%) - Properties with limited upside in established areas require a much higher stabilized cash-on-cash return, ideally 8% or more. ### Underwriting Philosophy - Investors must underwrite pessimistically, avoiding optimistic assumptions about rent growth or market appreciation - A pessimistically underwritten 5% cash-on-cash return is preferred over an optimistic 12% projection because it provides a defensive buffer.