Why Cash Flow is Vital When Investing in Low-Income Areas

Why Cash Flow is Vital When Investing in Low-Income Areas

3 min read
Dave Van Horn

Dave Van Horn is a veteran real estate investor and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nationwide. Dave’s expertise is derived from over 30 years of residential and commercial real estate experience as a licensed Realtor, real estate investor, and private lender.

Experience
Beginning his career in construction and as a Realtor, Dave bought his first investment property in 1989. After years of managing his own construction business, Dave became a full-time real estate investor, specializing in fix and flips, buy and holds, and eventually commercial projects, before moving into note investing in 2007.

Over the past decade, Dave has also invested his time into becoming a connector and educator, who helps others achieve success. He focuses jointly on helping accredited investors build and preserve wealth with his group Strategic Investor Alliance and with general audiences through the annual MidAtlantic Real Estate Investor Summit.

Dave has also shared his strategies and experiences with real estate and note investing via hundreds of articles published on the BiggerPockets Blog and with his acclaimed book Real Estate Note Investing.

Press
Dave has been featured on the BiggerPockets Podcast twice (shows 28 and 273), as well as episodes of familiar podcasts, including Joe Fairless’ Best Ever Show, Invest Like a Boss, Cashflow Ninja, and many others. He also has been a guest of Herb Cohen’s on Executive Leaders Radio, which airs nationwide.

Accreditations
Dave is a licensed Realtor with eXp Realty with CRS and GRI designations.

Follow
Dave’s LinkedIn
PPR on LinkedIn
PPR on Facebook
Twitter @DAVIDAVANHORN

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Let’s face it, owning long-term (or buy and hold) rental properties is not for the faint of heart, especially if you decide to manage them yourself.

There are many things you need to know about, such as contract law, negotiation skills, state specific landlord-tenant laws, and even local ordinances. And this doesn’t even delve into deeper topics, such as the most efficient ways to deal with tenant turnover. The list goes on.

Cash Flow is King

If you do decide to be a landlord, whether you want to turn things over to a professional property manager or not, I strongly suggest that you invest in real estate that positively cash flows before taxes.

First, let’s make sure the rent is at least higher than the PITI (principal, interest, taxes, and insurance) at a bare minimum. Some folks like to include a percentage for vacancy, maintenance, or management fees as well. I agree, but at the very least, gross rent should be several hundred dollars higher per month than the mortgage payments. So far, so good — right?

low-income-housing

Related: “Low Income” vs. “Bad” Neighborhoods: Yes, There IS a Difference. Here’s What Separates Them.

Low-Income Areas

This is where things can get tough. Many times, the only areas that cash flow are areas that may be the tougher parts of town, either with higher crime rates, no jobs, or possibly poorer schools. The trick for me was to invest in areas on the brink of change.

Usually, I search through all the areas in my county (or the next county over) that fit in my price range. My goal was usually to be all in — purchase price, closing cost, repairs, and cost of capital — at 65% of the ARV (after repair value).

At that point, once I moved a tenant in, my goal was to cash flow a few hundred dollars per month after I got all my capital back through the refinance.

Rinse and Repeat

Once I got all my capital back to return to my private (or hard money) lender, I’d go out and find another property just like it and repeat the same process.

The reason I liked areas that were on the brink of change was because the property value hadn’t fallen yet, but the perception was that the neighborhood was about to decline. I’d go in and steal a good deal, fix it up nicely, still get a good appraisal on the refinance, and then cash flow my way into wealth.

An old-time investor had told me this strategy, and I just did what he said, but it worked.

After 30 years of using this strategy, here’s what happened. I’ve grown my equity by a few million dollars, my tenants have paid down many of my properties, I’ve written off an awful lot of expenses (thus saving a lot of money in taxes), and I’ve borrowed out a lot of my equity to do notes and private money deals for fellow rehabbers.

invest_low_income_neighborhood

Related: 5 Tips for Owning Low-Income Rentals in Less-Than-Ideal Neighborhoods

Appreciation

As for appreciation, I haven’t done spectacularly, but I’ve done OK. I’ve been through several up and down cycles. When values are down, I hold and cash flow (and sometimes even pay down properties). When the values are up, I sell some (or refinance some equity out) to cash flow in other deals. Often I’ll sell in areas where I feel it’s now time to get out and perhaps move my capital into a more valuable piece of real estate. This is especially since today I’m more financially well-off and don’t necessarily need more income.

Unfortunately, more is not always better as a real estate investor. Today, I’m not really looking for more aggravation in my life, especially when it comes to managing more properties, whether they cash flow or not. In fact, don’t tell my property manager, but I don’t even like it when she calls me. It’s not like she’s calling to say happy birthday; it’s usually about a problem.

Today my strategy is more about cash flowing in other ways, and for me that’s usually through lending backed by real estate as opposed to in real estate.

So, let me ask my fellow BP folks: How do you like to cash flow and what’s your strategy?

Let me know with a comment!

Cash flow is an important part of wise real estate investing -- but it becomes even more vital when you're putting money into low income areas. Here's why.