Where and how to find cash flow when markets are favoring the sellers
So, you are investing in real estate and cannot seem to find good cash flow properties anymore? Prices are rising, inventory is tight, rent increases are decelerating and you are getting frustrated because you cannot find cash flow. You are not alone, and be comforted there still is cash flow available.
Real estate is a great investing tool but let’s face it if it were super easy everyone would be doing it. Actually many are doing it because it is usually pretty easy but when it gets hard to find the good deals that are when many people get frustrated and give up. Please tell me this is not you.
The number one reason you cannot find good cash flow
Quite simply put you are no longer looking in a Buyers’ market. Real estate markets always ebb and flow. If cash flow is no longer easy to find it is very possible the markets have shifted from a buyers’ market to a seller’s market.
Make sure you are shopping in a buyers’ market. Markets that have these 7 attributes
1. Population growth: A city that is growing in population maintains constant need for housing and creates competition in the rental market keeping strong rental rates.
2. Job growth: Finding markets where the city has a desire to grow and the local governments have programs in place to attract new industry and businesses into the area will provide plenty of jobs for your tenants.
3. Job Diversity: A cities’ survival is dependent jobs. Insuring plenty of job diversity in an area you wish to invest in is paramount to maintaining a thriving local economy. Remember what happened when the economy went south and the gaming industry suffered. Las Vegas property values plummeted. Because gaming was the main job creator in las Vegas. The same thing happened when Motor city left Detroit. They are still trying to recover as both of these towns were dependent on one industry.
4. Sustainable employment: An area where the unemployment is equal to or less than the national average insures you have a location that will maintain sustainable employment.
5. Path of progress: Okay. so you found a city with all the above elements now to put your investments on steroids you want to invest toward the path of progress. As an example all of the city is growing to the north end of town that is where the demand is. The north end of town is where people will pay larger rents and when it is time to sell you can maximize your exit strategy and sell to the retail buyer who is also looking for this higher demand location.
6. Affordable markets: For a home to be considered affordable you should be able to purchase a home for one third of your annual salary. Which means the area’s median income should buy and pay for a median price home for a third (33%) of its gross annual salary. When you can find a market which requires less than 33% of the median income to pay for a median price home you have an affordable market. This shows sustainable growth as the home values can rise before even being considered a balanced market. Now when you add job growth and population growth etc. the fundamentals will continue to grow exponentially.
7. Rent to purchase price ratios: Locations where the rental rates in comparison to purchase price are equal to or greater than 1% of the purchase price. Known as the the 1% rule. If you buy a property for $100,000, the monthly rent should be at least 1% or $1000 per month.
So knowing what makes a great buyers’ market you may ask yourself is this is still representative of the market you are trying to find cash flow in. if not that is your challenge. Simply go to a Buyers market and ride the wave of prosperity.
More ways to find cash flow.
Knowing what properties make for good cash flow may have never really been on the top of your mind as cash flow properties were everywhere. As markets tighten understanding what makes for a cash flow property will be the magic sauce that helps you find property.
Properties have the ability to either be great for cash flow or great for equity buildup. (Those properties that are best poised to appreciate in value the) . The tradeoff for strong appreciation is lower cash flow.
The flipside is also true. The properties that provide the best cash flow offer less ability to appreciate in value. Cash flow investors are most focused on the strong positive cash flow coming in month after month than they are the potential for appreciation.
Characteristics of strong cash properties.
· Cash flow properties tend to be in higher density areas which are stronger in tenant occupied housing
· Cash flow properties tend to be older in age and toward the inner city
· Cash flow properties tend to be C and D class properties
· Cash flow properties tend be lower in priced
· Cash flow properties tend to be multifamily property (economies of scale)
Perhaps the best cash flow is multifamily property in a buyer’s market.
As markets tighten we have found some of the best cash flow to be in multifamily properties. We are seeing cap rates to be 2 to 4% higher in multifamily investing than single family investing lately. Here are some of the benefits these multi families have and why so many have been investing in them lately
1. Economy of scale pricing: With multiple units you can often get better pricing, even property management fees tend to be less because of these economies of scale.
2. Financing: Loans for Multifamily properties are tied to the financial merits and performance. When you have 5 or more units this loan is a commercial loan and most often based on financial merits of the property and not tied to your personal credit score.
3. Higher cash on cash returns: when seeking higher cash on cash returns for the Multi- family. You have one roof that needs repair and multiple tenants to help pay for repairs. Or you have multiple units to manage so a property manager may discount the fees/ of the building. Again this is a benefit based on economy of scale pricing.
4. Less rent loss risk: with multiple tenants to cover expenses, you always have at least some revenue coming in even when one unit is vacant.
5. Price per unit: The cost per unit (commonly referred to as per door cost) is lower than the per door cost of a Single family property. This lower (per door cost) often increases the cash flow on a per door basis.
6. Lower repair costs: With multiple units there is economy of scale pricing, so repairs can be less expensive. This also goes for property management costs as the landlord has only one address to go to for all their follow ups.
Now here’s a shameless plug: Here at How To Buy USA Real Estate we have made it easy and put together a list of properties not listed in MLS from various emerging markets that fit the above criteria. Take a look at some of these high cash flow properties still pushing the double digit cap rates.
For access to all the inventory, visit our property pages. Don’t forget to subscribe at the bottom of the page to get properties emailed to you as soon as it hits the market.