NEXT TO CASH FLOW, THE #1 MUST HAVE WHEN INVESTING IN BUY AND HOLD PROPERTY
February 24, 2017 By Larry Arth
Like many true investors, you want to invest in and own cash flowing appreciating investment property for the long term. You want as much cash flow as you can get that is sustainable for a long period of time.
You do your diligence, you analyze the numbers and of course the condition of the property itself and when you believe you’ve got a great investment you make the purchase.
Then the unforeseen happens!
Common conversations of past investors unfortunately too often go something like this. I bought this great property and the cash flow was going great for the first year (or perhaps 2 years) and all was well
Then I had trouble renting it when a tenant left and eventually I had to lower the rents. Now my monthly cash flow is sucking wind and my equity position is no longer growing because price appreciation appears to have stalled out.
This investor is left with little (or even no) cash flow and a property that is not generating equity build up.
I know it happened to me a number of years back which is why these statements hit close to home and now I am able to share this with you coming from a position of strength.
Fortunately there are a number of things you can do to avoid these changes. The truth is, the events that cause these changes to happen do have definite clues that they may be coming, so all you need to do is know how to watch for the clues and it starts at your due diligence of the buying process.
Shop for Investments best poised to maintain equity growth
It starts with purchasing undervalued properties within appreciating markets. These properties are better positioned to maintain equity growth year after year as the market is undervalued (meaning the median incomes in the area can afford a larger house payment than is required to buy the median priced house).
While most people are busy analyzing Pro-formas, the seasoned investors are busy (First) looking for sustainable investing markets. We all know the critical aspect of real estate investing is to insure you have solid cash flow and that is best fueled by best locations.
The seasoned investor knows that the almost 90% of millionaires who have created their wealth in real estate did not create that wealth with just cash flow. It is the wealth building principle of appreciation that generates the lion’s share of the wealth.
What is an undervalued market?
Perhaps the largest “AH HA” moment I ever see on the faces of people is when I share this simple little equation. Are your ready for it?
This is not about the property you purchase but instead it aims to help you identify the position of the market you invest in.
Here it is: Median income needs to be able to afford the median home price.
Sounds simple enough doesn’t it? Yet most people totally overlook this simple little piece of diligence which helps to determine the viability of the property values in the area to continue to increase.
Let’s break it down. Assume the city you want to buy a property in has a median income of $60,000. Then 33.3 % or simply 1/3 or $20,000 per year for total household expense is considered to be affordable. These affordable markets are best poised for sustainable appreciation.
Making it even quicker. Median income x 3 = median home price. $60,000 x 3 = $180,000. If $180,000 represents affordable and the markets median priced home is actually $150k then that is an undervalued market better poised to offer long term growth. Tenants here will be able to keep affording to pay rent and your home values are apt to continue to rise.
But wait there is more!
Undervalued Emerging Markets
Yes, there are always new and emerging markets that are becoming strong economically and these undervalued markets with ability to grow offer you even better appreciation potential.
When an emerging market has strong job growth, population growth with plenty of job diversity this market is poised to not only give you strong and sustainable cash flow but also strong and sustainable appreciation.