Real Estate Investing Info - Large Cash Flow versus Sustainability

Large Cash Flow versus SustainabilityReal estate investing info comes at you from all directions and with sometimes conflicting ideas. In our rebounding economy, cash flow is a wonderful thing. Everyone is attracted to the large quantities of cash flowing properties today that we are able to obtain do to the fall in home prices, low interest rates and extremely high demand for rental properties. The real estate investing arena has attracted seasoned investors like Warren Buffet and now even Wall Street has accelerated the desires of many individuals to own investments in real property. In fact, 51% of all real estate investors are new to the investing arena. It is hard not to be lured by some of the large cash flow projections we are seeing promoted on websites, real estate offices and investment magazines.

Are you evaluating real estate investing properties with open eyes?

You set out to find high yields on investment property and you decided that within our stressed market you should be able to obtain a 10, 15 or maybe even 20% return on your money. You found a few sources that say yes, you can get those returns and indeed you see the numbers. You are thinking “By golly it is true”. You can buy property for such a low price that you indeed get the high returns in upwards of 10, 15, 20 percent and beyond. You purchase the property “because, why not” You would be a fool to pass by such returns.

Or would you?

You purchase the property and the first month or two rents come in and you are thinking you are the best real estate tycoon ever to have walked the planet. In the upcoming month you are being hit with repair bills and soon repair after repair ensues. You may have even under taken a vacancy as the tenant moved out and you had to replace the tenant. By the end of the year you determine the double digit returns were no longer there and the added expenses were eating away at your projected returns. You are now struck with the reality of lost sustainability.

Real estate investing sustainability...slow and steady wins the race.

OK, this is not a race and yes you should get a double digit return. The analogy of slow and steady wins the race suggests you do not want to be greedy, AND expect the high returns to be sustainable. As the saying goes, if it is too good to be true it probably is. Many properties are priced low because, frankly that is all they are worth. Low priced properties suggest the property is old and tired out (which means lots of future repairs) or it is in an area that is of low demand. Low demand areas do not demand a high prices today and probably will not demand a high price when you wish to sell it either.

Be specific to be terrific.

If you want long term sustained returns you need to know what you want to accomplish/ when you want the best returns you want to look long term. Ask yourself a few basic questions to see if your investment purchase will pass a sustainable return test.

  • What is the population doing? There are many people promoting strong cash flow in markets that have a shrinking population. The laws of supply and demand suggest these cash flowing homes within these locations will rapidly diminish.
  • What is the baby boomer appeal of the location? This may suggest future population growth or the lack thereof.
  • What is the job growth rate of your location; this affects ability to pay increased rents and affects the ability for your home values to increase, if you are looking for capital growth
  • What is the current affordability margin of your location? Undervalued markets that are undervalued by say 10% can grow 10%. When these undervalued markets also are in areas where job growth and population growth exist the values have further room to grow as the incomes will rise as job creation competes for quality workforce. This competition creates increased wages and with increased wages comes higher affordability. It is this higher affordability that creates SUSTAINED CASH FLOW AND SUSTAINED CAPITOL GROWTH
  • What does the local government have in place (if anything ) for economic growth
  • Is the local government more of a land lord friendly area or a tenant friendly area?
  • When you purchase the property what is the spread between your purchase price and the current cost to build (replacement cost) of the property. The larger the spread between your purchase price and the price to build suggest a much larger capability for appreciation or capitol growth.

As you can see there is a HUGE difference between buying for strong Cash Flow or Capitol Growth and Buying Property and within locations that can actually SUSTAIN the cash flow and growth.

Be purposeful; invest in best properties and best locations for sustainability.

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