Truth is, great cash flow is not a secret, it is more of a case of completing what is often unfinished – due diligence.
Here is the typical investor:
You search online or at investment clubs and find a property that you can buy for a decent price which after expenses will give you a good cash flow. Often you will find two, three or maybe even four of these properties and compare them against each other looking for the best of the best. You buy the property, find a tenant and start your journey toward great cash flow. Month after month you collect your rents and gain your cash flow. Because we live in a real world you may experience a hic-up or two but you learn from the experience and move on.
After several months as an investor and landlord, things start happening that effect your cash flow. Maybe a toilet breaks or a water heater goes out, (hey, these things happen) competition for rentals in the area become competitive and your tenant does not renew their lease. You scramble to find a new tenant so that you do not have any loss of rent. The phone does not ring off the hook like the last time you rented it. You discover that competition is getting tougher for rentals and that few people can afford to lease your property. You start to wonder what’s happening as you see your great cash flow rapidly go from double digit returns to non-sustainable single digit returns. You are perplexed and wondering what just happened. (You may have missed the most important diligence of them all).
Here is the seasoned (purposeful investor):
Knowing the most important aspect of real estate is location, they seek to find SUSTAINABLE cash flow. Knowing this sustainable cash flow must come from a market that has as many of the attributes as possible to create the sustainable cash flow the seasoned investor is looking for:
- Sustainable employment: areas where unemployment is lower than the national average.
- Population growth: when population rises, housing needs remain strong.
- Strong rent to purchase price ratios: the 1% rule should apply.
- Job diversity: areas that have a large variety of employment create sustainable employment. Areas that are strongly dependant on one or two industries tend to go broke quickly when that industry is stressed due to economic factors.
- Job growth: local municipalities which have strategies and incentives in place to attract new businesses and job hires.
- Path of progress: you want to buy in the direction of progress, when a town has huge growth to the north you want to buy in the north as this is where the demand is.
I could go on and on but I believe the picture becomes clear. Before doing what the average buyer does, you want to position yourself for long term success. All these factors come into play when looking for sustainable cash flow.
Things such as break downs or tenant issues happen all the time that is the nature of business. To reduce your exposure to these challenges and maintain great cash flows you must be purposeful and position yourself within the correct areas to sustain cash flow. When you do this you promote yourself to the more seasoned and purposeful investor. As with any promotion, you will reap better financial rewards such as great sustainable cash flow!