Sustainable Cash Flow and Capital Growth
I may be doing this single handedly, but I feel it is imperative to discuss the aspect of sustainability for your cash flow and your appreciation (capital growth). Sustainability is the most ignored aspect of real estate investing, as well as the most important. Actually there are two, location and sustainability. The two actually go hand in hand. As an investor you want to make sure you invest in a location that can SUSTAIN the cash flow and or growth.
With the perfect storm that makes up U.S. real estate investing today, it is very possible to go to any city within the U.S. and purchase a cash flowing property, or to purchase a property with anticipated capital growth. BUT, IS IT SUSTAINABLE? If your new investment purchase cannot continue to hold a strong cash flow or growth for an extended period of time, it becomes useless to you. It may even become a financial burden to you.
Here are a few things you will want to consider:
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 in 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 SUSTINED CAPITAL 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 suggests a much larger capability for appreciation or capital growth.
Here is why: when inventory levels are high (meaning there are lots of homes on the market) builders stop building. High inventory levels drive down the prices, and it is not until inventory levels stabilize that builders will start building again because they cannot compete from a price standpoint. No one will buy new construction if they can purchase a property for half the cost of new construction. As this new construction emerges, this is representative of inventory levels falling.
As the inventory of existing homes falls and new construction emerges, the prices of existing homes will increase to closely match the cost of new construction. So understanding this and knowing you are looking for SUSTAINED capital growth, you will want to make your investment purchase that currently has the largest spread between today's purchase price and today's building costs.
As you can see there is a huge difference between buying a cash flow property or a capital growth property and buying property within locations that can actually SUSTAIN the cash flow and growth.
Be purposeful, invest in the best locations for sustainable cash flow.
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