Best cities for cash flow

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Best cities for cash flow

Alex Aguilar
Newark, CA · Member since 2016 · 38 posts · 7 votes

I live in the bay area and am looking to invest for cash flow. California isn't a great place to do that right now.  I hear that the mid west tends to be the best place for cash flow. I was wondering what cities are particularly fruitful?

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Sebastien Hitier
Rental Property Investor · Hong Kong, Hong Kong Island · Member since 2014 · 188 posts · 114 votes
10y

Hi @Alex Aguilar, the cities mentioned have high positive cashflow. 

I would be interested in pointers for Oklahoma City and Raleigh. Those are very healthy cities but I did not find any easy way to invest there for an out of state investor. 

Some of the cities mentioned have a secular trend of population decline, which does not bode well for the long term. You can use it to check how population changed from 1950 to now, and from 1990 to now.

Also, there is a caveat about high yield. I believe you can get 14% net even from turnkey, you can get above that in Detroit, but also in many inner cities. The worst that can happen is that the tenants vandalize the property, then once it is vacant, the property gets stripped of its furnace,boiler,windows,copper pipes and wire by burglars. (I don't know what thieves are doing with all these used furnaces/boilers/wiring. For all I know, it makes sense for them to sell them back to people who need them for rehab.)

An increase in marginal yield corresponds to an increase in marginal risk, but that risk is not born evenly by investors: the ones with bad setup end up with a vacant property, while the ones with good setup can access that higher nominal yield.

To support that "city xxx" is good for investment, one would need to know what gross yield, vacancy rate/average tenancy duration (there is a cost to switching tenant) and net yield people achieve there. 

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  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    10y

    Hey Alex. Chicago, Indianapolis and Kansas City are all really good. Chicago has my favorite properties of those. Indy has some great options too. Some of it depends on your price range and whether you want SFR or MFR, etc.

    I'm down in LA and have always bought out-of-state too.

    3Reply
  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    10y

    The cities in the midwest and south are generally the best, i.e. Raleigh, Memphis, Kansas City, Oklahoma City, etc.

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    2Reply
  • Derrick Craig
    Memphis, TN · Member since 2013 · 969 posts · 524 votes
    10y

    @Alex Aguilar

    I say Memphis, Birmingham, and Cleveland are good choices.... Shameless plug for my city LOL!!! 

    2Reply
  • Alex Aguilar
    OP
    Newark, CA · Member since 2016 · 38 posts · 7 votes
    10y

    Thanks for the advice! I'll start doing some research on the cities you mentioned. 

    0Reply
  • Sebastien Hitier
    Rental Property Investor · Hong Kong, Hong Kong Island · Member since 2014 · 188 posts · 114 votes
    10y

    Hi @Alex Aguilar, the cities mentioned have high positive cashflow. 

    I would be interested in pointers for Oklahoma City and Raleigh. Those are very healthy cities but I did not find any easy way to invest there for an out of state investor. 

    Some of the cities mentioned have a secular trend of population decline, which does not bode well for the long term. You can use it to check how population changed from 1950 to now, and from 1990 to now.

    Also, there is a caveat about high yield. I believe you can get 14% net even from turnkey, you can get above that in Detroit, but also in many inner cities. The worst that can happen is that the tenants vandalize the property, then once it is vacant, the property gets stripped of its furnace,boiler,windows,copper pipes and wire by burglars. (I don't know what thieves are doing with all these used furnaces/boilers/wiring. For all I know, it makes sense for them to sell them back to people who need them for rehab.)

    An increase in marginal yield corresponds to an increase in marginal risk, but that risk is not born evenly by investors: the ones with bad setup end up with a vacant property, while the ones with good setup can access that higher nominal yield.

    To support that "city xxx" is good for investment, one would need to know what gross yield, vacancy rate/average tenancy duration (there is a cost to switching tenant) and net yield people achieve there. 

    8Reply
  • Samuel Rushing
    Choctaw, OK · Member since 2015 · 4 posts · 3 votes
    10y

    I live in OKC, so I have at least some region specific knowledge. Good cash flow rentals are fairly easy to find here. However most of the volume for these types of properties is in C or D areas with high turnover/lots of tenant issues. That isn't to say that there aren't any good deals in nicer areas, you just have to really nail your marketing to find them. 

    One caveat to this is Townhouses which I feel are much easier for out of state investors. The nice thing about Townhouses in OKC is that the HOAs are way lower than in most areas, much easier to get them to cashflow. If I was going to buy and hold in OKC from out of state I would definitely go that route and I personally know some people who are killing it with that strategy.

    Just my two cents.

    3Reply
  • Will Zena
    Rental Property Investor · Estero, FL · Member since 2016 · 195 posts · 105 votes
    10y

    Does anyone know how the Fort Myers FL or Naples FL area is for cash flow investments or where I can research that information?

    0Reply
  • Trevor Shettron
    Real Estate Investor · Oklahoma City, OK · Member since 2013 · 116 posts · 81 votes
    10y

    I buy, sell and hold in the Oklahoma City Market and would love to speak directly with anyone interested in learning more about opportunities here.

    Call me anytime!!!

    2Reply
  • Daniel HymanBusiness Member
    CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
    10y
    I did not see Milwaukee listed on this thread. I'm curious to know how Milwaukee is regarded by out of state investors.
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  • Dawn AnastasiPro Member
    Rental Property Investor · Milwaukee, WI · Member since 2013 · 6k+ posts · 4k+ votes
    10y
    Originally posted by @Daniel Hyman:

    I did not see Milwaukee listed on this thread. I'm curious to know how Milwaukee is regarded by out of state investors.

     People don't want to talk about Milwaukee because they want to keep it a secret.  :)

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    7Reply
  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    10y

    Well, I think Dawn is spot on. But from what I see with my clients there is not as much competition between out of state investors and locals as I thought originally. Out of State investors are looking at the rent to cost ratio in Milwaukee and realize that they can find good properties in great condition, that will actually cash flow right out of the box, no rehab necessary. Most local investors are looking to buy at a deeper discount and are willing to go though a an extensive rehab, or a full BRRRR like I do for my own portfolio. But there is really not as much overlap than I would have thought.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    Are you talking about short term cash flow or long term cash flow? Long term cash flow is San Francisco ... I don't know nor do I care about short term.

    1Reply
  • Kyle Grimm
    Investor · St. Louis Mo · Member since 2015 · 211 posts · 129 votes
    10y
    Saint Louis!
    0Reply
  • Ben Zimmerman
    Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes
    10y

    In the short term most any Midwestern city should cashflow decently.  In the long term the highest cashflow will be wherever has the highest appreciation rate.  Some people call it speculative investing, but it doesn't take a genius to know that people naturally want to live in places like CA, Phoenix, or Florida.  I've never once met anyone that really really wanted to move to Omaha Nebraska.

    2Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Ben Zimmerman:

    In the short term most any Midwestern city should cashflow decently.  In the long term the highest cashflow will be wherever has the highest appreciation rate.  Some people call it speculative investing, but it doesn't take a genius to know that people naturally want to live in places like CA, Phoenix, or Florida.  I've never once met anyone that really really wanted to move to Omaha Nebraska.

    Bingo! You've got that right on high demand, and I would add the other key element for high appreciation: you also need perpetually limited housing supply. For example, San Fran has no vacant lots, crazy strict building restrictions, and is surrounded on 3 sides by water.

    1Reply
  • Karla Olivares
    Simi Valley, CA · Member since 2016 · 15 posts · 2 votes
    10y

    Interesting point @Ben Zimmerman! I'm a new investor from Southern California as well and I have been trying to figure out an area to focus on as the prices of properties here in so cal are high. I am attracted to the cash flow in the mid west cities but I would also like potential for appreciation which they don't seem to have too much of. Do you have any recommendations for any specific areas where one could get cash flow and appreciation potential? Also any buy and hold investors in the Midwest, could you comment on what your long term strategy is for investing in the mid west considering properties in the mid west don't appreciate as much? I would really appreciate your input as I have been torn between these two topics. Great question @Alex Aguilar! 

    0Reply
  • David Chan
    Investor · Omaha, NE · Member since 2016 · 34 posts · 24 votes
    10y

    @Ben Zimmerman For someone that has lived in Austin and California, that moved from Hong Kong to Omaha.: HEY! Nice to meet you, because I actually like the Midwest enough to move here permanently rather than Texas or California. So, there you go. (And I even picked Omaha. lol)

    Sure, you can buy in the places where people want to live, but let's take San Francisco or Los Angeles for example: just how long can their prices keep going up? Or can they even maintain their current price levels? I'll stick my neck out there and would bet that within 12 months the tier 1 markets may be primed for a rude awakening.

    The Midwest (employment hubs like Omaha, Kansas City, Minneapolis) and most of the deep South and Gulf Coast seem to have good numbers still. Most large cities in Texas are getting pretty rich now (probably just too advertised in the last decade as a "strong" state). Pretty much the regional tier 2 hubs in the strongest employment states are the strongest candidate cities.

    Now as for your capital appreciation thesis:

    I'll be a contrarian and bet that tier 2 cities will not lag behind tier 1's in the future, either tier 2 rises significantly, or tier 1s fall catastrophically. I surmise it's probably somewhere in the middle. The majority of tier 1 cities and states in the US has housing affordability at "lofty" levels. Rent-to-income in some cities are getting close to what we saw pre-financial crisis. San Fran hit '07 levels, and if you want international London has gone past '07 highs.

    http://www.burbed.com/wp-content/uploads/2015/03/M...

    San Fran ^

    http://www.economicshelp.org/wp-content/uploads/20...

    London ^

    From an arbitrage perspective, tier 2 cities are starting to look attractive from a real housing cost basis when you have to spend over 80% (sometimes over 100% if you are more junior in your career path) on living expenses to live out on the tier 1 cities.

    You can find 1% rule properties in the midwest, that won't suffer catastrophic market collapses, that generates 8-12% cash on cash returns, with the potential for 3-4% long term capital appreciation that you can lever up on. Not a terrible bet.

    -David

    4Reply
  • Account Closed
    Investor · Omaha, NE · Member since 2015 · 111 posts · 12 votes
    10y

    Hi Mr. Alex,

    Here in Omaha, we have great 'buy & hold' and 'buy & finance' properties.  I can find 2-3 good deals a week, and 1-2 great ones every month.

    ~ Yoshi 

    1Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    10y

    Talking San Fran watch this!

    San Fran

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    These markets have been appreciating at a higher rate than the rest of the nation for the last 50+ years ... check the long term track record of housing prices if you don't believe me, they're public record. Throughout that 50+ years, people have been saying that the market is way over priced, that they can't possibly keep going up, that there is no way that they can even maintain their current price levels. Those people that said that have all been proven wrong. Yes, the market has had ups and downs over the years, as all markets do, and will continue to have volatility, but I'm talking about the long term ... as I said, I don't care so much about the short term except to ensure that I can make it through any short term volatility. It is possible that I could wake up tomorrow in bizarro land and LA could turn into Detroit, we could hit an ice age and the great weather could go freezing, an Earthquake could put us underwater (literally), people in mass could decide that they prefer Omaha, all the tech companies, studios, and VCs could decide to move to Fargo, but I don't think so and I've got decades of data to back that up ... just in case my thesis is wrong, though, I always have multiple exit strategies to hedge against those kinds of risks and always watch and question assumptions.

    3Reply
  • Eric P.
    New York City, NY · Member since 2016 · 470 posts · 348 votes
    10y

    I cannot believe that Bob Bowling hasn't chimed in yet. He lives for threads like this. Must be out enjoying that Hawaii weather

    0Reply
  • Alex Aguilar
    OP
    Newark, CA · Member since 2016 · 38 posts · 7 votes
    10y

    Wow guys/girls, thanks for all the great info! I definitely have some research to do on the cities you listed. 

    What a great community here at bigger pockets! 

    1Reply
  • Thorney Gibson
    Engineer · Bel Air, MD · Member since 2009 · 136 posts · 24 votes
    10y

    Following. I'm looking into buying in other states now.

    0Reply
  • Michael Henry
    Real Estate Consultant · Brookfield, WI · Member since 2014 · 873 posts · 350 votes
    10y

    @AlexAguilar I think that it all depends on ones investment plan and exit strategy. Many cities in the Midwest won't be prone to the massive swings as the coasts. However with less a volatility comes less opportunies huge upticks in appreciation. I think the key is knowing the market that you want to invest in well and taking it from there.

    Thanks,

    MH

    1Reply
  • Jarred Smith
    Investor · Oklahoma City, OK · Member since 2015 · 10 posts · 7 votes
    10y
    If anyone is interested in truly finding out how Oklahoma City REI's cash flow then let me know. I have multiple properties in the 1.4-2.0% range and get more daily.
    3Reply
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