suggestion for seeing positive cash flow in not so cheap areas

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suggestion for seeing positive cash flow in not so cheap areas

Ryan Dickson
Member since 2021 · 2 posts · 1 vote

Hello all,

I have just started considering investing in rental properties. Before asking the question I think it is better to describe my goal or what I am looking for from real estate investment. I do not want to be a real-estate champion managing many properties. I have a very busy job (which I love) and also busy family life and hence I think it will be difficult for me to manage/maintain more than 2 properties (or a maximum of 3 properties). So I think I would prefer to start investing in just 1 or 2 properties in metro areas with higher appreciation potential. So I am not looking for typical cash-flow areas (for example MidWest US states) where I can buy more properties with less downpayment. Rather I am looking for investing in established or emerging metro and its suburban areas (for example Austin, Atlanta, Raleigh, etc) because I only intend to acquire just 2 or 3 of them.

But the dilemma is that most of the properties in those areas show negative cash flow with a traditional downpayment model. As the prices of those properties (I am looking for typical single-family homes) are typically 400, 500K, etc the mortgage is close to rental income. But I also need to add other expenses on top of the mortgage like the fee of the rental management company, insurance, tax, vacancy factor, so all in all it comes with negative cash flow, and seeing negative cash flow I started rejecting the property upfront, which I think probably a not good idea considering the current market and those areas where real estate is hot.

I thought of an easy solution to fix this problem is doing a higher downpayment to keep the mortgage low, like if I do 40% or 60% downpayment (which I can) then cash flow can become positive. This will also allow me to capture the larger equity upfront. So I am thinking to increase downpayment till the point where I see some positive cash flow. That will give me some peace of mind to consider the property.

Any comments about this increasing downpayment thing to see positive cash flow? Any other tips for investing in those types of higher appreciation potential metro areas but still having some positive cash flow? Any specific area suggestion is also welcome.

Thanks a lot,

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Theresa HarrisPro Member
Member since 2019 · 15k+ posts · 11k+ votes
4y

There is more to investing than how many properties you have-ie quality vs quantity.  Some of the cheaper homes may look good on paper, but in reality they can be more time consuming and have higher turn overs and costs.

By increasing your down payment, you do lower your mortgage payments, but then the cash flow is artificial in a way as you put more money into it up front to make it that way vs lower down payment but no cash flow and you doing smaller amounts of money each month (or when repairs happen).

Expensive areas can be a problem. Look for units that have legal secondary suites whether that is an inlaw suite or a duplex.  For duplexes you may pay a little bit more, but overall you should get more rent and if one unit is empty, you haven't lost all of your rent.

Make sure whatever you get, the rent covers the basic monthly expenses:  mortgage, property taxes and insurance.  I had a place in an expensive area where the rent initially didn't quite cover those and I had to put in $25 a month or something like that.  I was fine with it as the tenants were paying down the mortgage.  Over the last 8 years the rents in the area have gone up significantly (increased by $350/month) along with house prices (almost doubled).  So keep in mind if you are close with expenses that rents do go up (as will expenses).

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  • Gary Heuston
    Winston-Salem, NC · Member since 2018 · 29 posts · 25 votes
    4y

    here's my thoughts...

    The market is very hot right now, so finding a deal in a major metropolitan area is going to be harder unless your willing to accept a distressed property and rehab it (which is really where investing bread and butter is anyway).  If your hoping to make a deal out of a 400k house your going to need to find a distressed seller who needs to get out fast and will take a hit on it, but again houses sell in hours now so that's going to be hard.

    why not look at some of the bedroom communities around these areas, outside the main city limits where working class people are likely to live, you may have better luck.  With property management already figured into your deal, the amount of time you should spend managing this property should be minimal, freeing you up for your job or looking for more deals.

    Throwing more money at a deal doesn't make it a better deal.  Run these properties through the BP calculators and pay attention to more then just cashflow, watch your Cash on Cash return, Individual Rate of Return, etc. and get an idea of what a deal really looks like.  The market is tough right now but with the right strategy you can still make it happen!  

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    4y

    Based on everything you said in your opening post above, the answer is simple, but...I will answer it with a story:

    Man goes into the Doctor's office.  Doctor asks him what's wrong.  He tells the Doctor his arm hurts really bad every time he raises it.  The Doctor says, and this is the answer to your main question, "Don't raise your arm".

    I hate to be the one telling you this, but every paragraph you wrote above tells me you shouldn't go into REI.

    If you want details on why, let me know...I would be more than willing to explain.

    1Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    4y

    There is more to investing than how many properties you have-ie quality vs quantity.  Some of the cheaper homes may look good on paper, but in reality they can be more time consuming and have higher turn overs and costs.

    By increasing your down payment, you do lower your mortgage payments, but then the cash flow is artificial in a way as you put more money into it up front to make it that way vs lower down payment but no cash flow and you doing smaller amounts of money each month (or when repairs happen).

    Expensive areas can be a problem. Look for units that have legal secondary suites whether that is an inlaw suite or a duplex.  For duplexes you may pay a little bit more, but overall you should get more rent and if one unit is empty, you haven't lost all of your rent.

    Make sure whatever you get, the rent covers the basic monthly expenses:  mortgage, property taxes and insurance.  I had a place in an expensive area where the rent initially didn't quite cover those and I had to put in $25 a month or something like that.  I was fine with it as the tenants were paying down the mortgage.  Over the last 8 years the rents in the area have gone up significantly (increased by $350/month) along with house prices (almost doubled).  So keep in mind if you are close with expenses that rents do go up (as will expenses).

    4Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    4y

    @Ryan Dickson what we're having success with in Austin are variations of short term rentals

    [email protected]512-888-9122
    The Moorhead Team5140 Reviews
    WebsiteView Page
    1Reply
  • Ryan Dickson
    OP
    Member since 2021 · 2 posts · 1 vote
    4y

    Thank you all for being kind to spend time sharing tips. I find some of the tips are very helpful and I can try to use these when getting a chance. 

    0Reply
  • Marc RiceBusiness Member
    Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2018 · 2k+ posts · 1k+ votes
    4y

    @Ryan Dickson

    Columbus OH is a good hybrid of the too where you’re not overpaying and banking on pure appreciation like an Austin or Raleigh but are actually making money and rapidly appreciating.

    [email protected]614-363-2787
    Marc Rice | Investor Friendly Agent at Reafco Tailwind Team574 Reviews
    WebsiteView Page
    1Reply
  • Jingru Sui
    Real Estate Agent · Atlanta, GA · Member since 2014 · 683 posts · 317 votes
    4y

    Hi Ryan, i have client target the film industry people here in Atlanta. They rent allowance are pretty good. If you can find a interesting little place near beltline/ponce city etc, you can try to do str or corporate rental and still cash flow. 

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