Looking for Cash Flow with Capital Growth? You Can Find it in the Sweet Spot

We can all relate to the sweet spot. I am not referencing a chocolate bar or your favorite dessert, however it does lend for an interesting parallel. As investors we all have (or should have) a plan as to what you are wanting out of your real estate investing. Today there are more and more investors looking to get a nice mix of cash flow with anticipated capital growth. This is where the men are separated from the boys, the woman are separated from the girls, the seasoned investors are separated from the new investors. Let's elaborate.

Looking for Cash Flow with Capital Growth? You Can Find it in the Sweet SpotToday’s investors believe that in today’s market anyone can find a number of properties in pretty much any city in the U.S.A. that will provide a decent cash flow. Based on today’s market shift and purchase price, you can assume you will realize a good return. This appears to make sense, but it is based more on hope more than diligence. I always say “Hope is not a strategy”!

What the seasoned real estate investors do that the new investors do not when looking for cash flow WITH capital growth

Seasoned investors understand numbers on a spread sheet are only part of the equation, they do more diligence. They want to sustain the best possible cash flow while increasing their chances for highest appreciation (capital growth). They want to invest in the sweet spot so they start with the following:

The Big Picture (Macro Analysis)

  • Looking for strong economic growth with growing populations
  • Markets with good job growth
  • Markets with large diversity (i.e. several different occupational types and medium to higher salaries)
  • Markets with good rental demand
  • Markets with good affordability (median income can easily pay for a median priced home)
  • Markets with "Baby Boomer" appeal
  • Rental payment versus mortgage payments (i.e. markets where the cost of home ownership is less or much less to own then to rent)

The Closer Picture (Micro Analysis)

  • Markets with absorption rates on the rise (i.e. more homes selling each month than inventory being added)
  • Today's acquisition cost versus today's building costs, the larger the spread the more capital growth potential
  • Areas with good school districts

The Sweet Spot:

All of the above bullet points represent things seasoned investors are looking for to guide them to the sweet spot. This is the dashboard report that points investors to the areas within the best market that will give them the best rental yield, as well as the best possible capital growth.

Characteristics of the sweet spot:

Safe and sustainable cash flow returns. The price of a property should be positioned to provide a good cash flow without shooting for too high returns that tend to be non-sustainable (typically a $70,000 to $120,000 price point with 9 to 11% cash flow returns is safe and sustainable). More cash flow then this means a lower price point which translates to older properties in lower economic areas. These older homes tend to require more repairs and have higher tenant turn over which attacks the sustainability of a higher yielding cash flow.

Positive anticipation for capital growth: Nice properties that are highly sought after in the U.S. (the 3 bedroom, 2 bath, 2 car garage is the standard and most highly sought after home today).

Homes that are in higher concentrations of home owners: For optimum returns your exit strategy will be to sell (eventually) to the end user. These end users will pay retail prices. When you purchase low priced homes, they tend to be in higher concentrated areas of tenants. Your end user then tends to be another tenant and therefore your end user is looking for discount pricing and will not pay the retail price.

Real Estate Investing Note:

Sweet spots may look different from one market to the next. Identifying that sweet spot will indeed be sweet when you cash your monthly cash flow checks and be even sweeter when you sell to an end user for top retail pricing.

We work with investors daily, letting them know the sweet spots of the US real estate market and showing them cherry-picked properties that are available for sale TODAY. If you would like to find out about my top recommendations, please give me a call 941-718-7761.