Best cities for cash flow
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?
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.
I have an interesting History.
I started a Real Estate Education Business where I taught my own Real Estate Course based upon a solid foundation of Financial Calculations such as PV, FV, DCR, Amortization Tables, ROR, ROI, Cashflows, IRR, etc.
The Year I started the Course was around 2005 or 2006 and I tried recruiting students from an REIA that was called "NYCCashflow".
What I offered was to teach all the Math that was necessary to become a sophisticated Real Estate Investor.
There were also 3 Levels to the Class and each level needed to have a Final Exam to move up.
I only charged $20 per week, but you had to spend 3 hours for that single class per week for approximately 6 months because most Students, including most Investors, are really Financially Math Illiterate.
Really, if you don't understand how to calculate a Future Value or Discounted Cashflow........... I would advise people to learn it before they invest. It's the only way to understand Investing in any kind of Investment.
Of the 500 students who took the class, Adults like you and me, some without College degrees, some with PH.D.s a full range of rich and poor..... only about 30 students were able to get past the 3rd Level exam, which basically made you calculate the Internal Rate of Return of any investment, especially Real Estate.
Of that 30 students, about 20 of them pulled the Trigger as their Analysis proved that there was merit in buying an Investment Property, particularly in Brooklyn and close by.
One student in particular, made $2 Million, again, on a Clinton Hill property.
Most of the other students, made somewhere between $50k and $1 Million.
Some of those 20 are now my partners. We employ our sophisticated spreadsheets to continue to buy in Brooklyn. In fact, we are in Contract to buy a 3 Family in Ditmas Park.
There seems to be a fallacy that I have kept on hearing in my entire multiple Decades long Real Estate Investment Experience.... that somehow Price Matters.
It's not the Price of the Investment that Matters necessarily, it's the Future Cashflows of the Investments in relationship to the Purchase Price that Matters.
Another way of putting it is like this.....
Using about $27k of investment money, I bought a 2 Family property in Windsor Terrace for $140k in 1999. It wasn't a Bargain. It was the same price as all the other 2 Family Properties in that particular block.
But my Internal Rate of Return Analysis (IRR) told me that given all the factors that affect the future cashflows of this property in this area, that this was going to be a great deal.
in 2013, I sold the property for $675k in order to buy a Bed-Stuy property.
The return was astronomical. You can try to do the calculations given that in 1999, the invested Capital was $27k and the sales proceeds was approximately $675k minus $150k (paid of Mortgage and other expenses for the sale) = $525k.
Rents also tripled during that time. Cashflow was great except in the beginning where I had a small negative Cashflow for about 2 years.
Anyway, it's a long story and I'll leave it up to the readers.
The theme here is to really understand the Math about what you are doing. There is a great Book that I had all my students read, Frank Gallenelli's "What Every Real Estate Investor Needs to Know about Cashflow...."
In fact, don't just read the book...... UNDERSTAND the book. There is a difference between reading, and understanding which was why I implemented exams in my course. Too many students were reading and not understanding.
So, back to your question.... did I change strategy? NO. I make assumptions which will get updated when I look for the next investment. Assumptions like what is the likely appreciation rate, how much will rents and expenses rise, what is the long term economics of the area, etc.
I then plug it into my IRR Spreadsheet and it then tells me to pull the trigger.
@Llewelyn A. great insight. A very thoughtful (and thought provoking) answer. I need to remind myself that these high entry points don't make BK a bad investment. They do, however, force non-institutional investors like myself to get a little more creative when it comes to capital. Your point about rigorous analysis is equally well taken.
When you say California is bad for cash flow, do you mean immediate cash flow or long term cash flow incorporating appreciation, etc?
I got the impression that the right cities in California would provide more long term income, while many Midwest cities will immediately cashflow more, but in the long run net less income between lower appreciation rates and other headaches.
Could anyone chime in on this?
@Llewelyn A. I'm purchasing the book. I hope you still teach. If you don't, if I took a course hopefully on par like the one you taught, who would you recommend?
@Alex Aguilar California is a big state, so it can feel out of state even in the same city. I agree with @David Faulkner and I'm bullish on places like Los Angeles for long term appreciation of rents and values, and cashflows. San Fran might be a one trick pony with tech and suffer those bubbles in addition to housing bubbles, so places like LA with more diversity tend to weather short term corrections much better, and bounce back much quicker.
For those who mention Milwaukee, anyone that invest there have any opinions on this?
We have a family friend who lives in WI and says that the state does not allow for evictions in the winter since it gets so cold. Does this prove to be an issue for investors?
I do teach, but only for selected Groups of Investors in Private Classes.
The goal is to create more potential partners. After a Group of Investors fulfill my requirements for the curriculum, they must then conduct a thorough Internal Rate of Return analysis on a specific property that they believe would be a good investment. They would also have the means to purchase it.
If I confirm their calculations and it is in fact a good deal, depending on how good, I will join them in the Investment if they invite me into it as an equal partner. But there is no obligation to invite me into a deal, although if I am asked to verify it and I don't request to join, that's their clue that I don't think it's good enough to buy!
Unfortunately, I don't know of any other courses where they go through all the Calculations, except for a CCIM degree.
My version is more of a consolidated CCIM.
I will say that if you are taking classes, especially in a Guru class or REIA, and there is no talk about things like Present Value versus Future Value, Discounted Cashflows and especially 10 years pro-forma projection for Internal Rates of Return, then you should be thinking that they are just making money off of your tuition.
Why don't you just spend the $10 it cost for the book, learn it so that you thoroughly understand it, and save 10s of thousands of dollars by educating yourself. I didn't need to study from someone else. I learned it all on my own.
Investor Llew
For those who mention Milwaukee, anyone that invest there have any opinions on this?
We have a family friend who lives in WI and says that the state does not allow for evictions in the winter since it gets so cold. Does this prove to be an issue for investors?
This is not true. You can evict someone any month of the year.
Thank you so much for taking the time out to respond! I'll check-in with you when I have financial questions. I took a class at the Baltimore REIA this year as I'm looking into investing in Baltimore - http://www.baltimorereia.com/rental-cash-machine/ by Janet Tonkins. I've been reviewing long-term trend reports online etc. What do you think about the Baltimore market?
The B-more market is spotty. I grew up there. North areas like in Towson are great and quite stable. Further South near DC are also quite good. You may not want a super cheap house in a bad "crack" / crime hood. If you are an out-of state investor we can get financing for you which can be difficult.
Alex,
Have you ever considered popping over the hill to Reno, NV. Prices are still high her but not as much as CA. With the industry coming here like TESLA and Switch there is some good potential. But who know what will happen. Good Luck investing. Let me know if you need any information on the Reno area, been living here over 20 years.
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. :)
I agree, let's Milwaukee as our secret dream land =)
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?
Rank cities by price-rent ratios...the best for cash flow are Michigan, specifically Detroit, and Ohio maybe Columbus. FYI: not coincidentally, these are probably the worst places for appreciation.
What's your specific investment goal? You're probably asking the wrong question.
What about tenant quality, ease of management, appreciation potential, overall investment return, industry/job diversity, job growth forecasts, etc.?
It doesn't appear that you're experienced enough to know what questions to be asking. I'd suggesting joining a local REI group and researching further before seriously considering out-of-state investing. Feel free to checkout some of the groups I manage (see my profile).
Appreciation is your best friend. Resale prices are typically 10 X rent roll. So if you are in a city in demand and get a deal your cap appreciation will grow with the rent roll. Out of state investing can be difficult to come by so don't give up, just get in touch with us.
I do teach, but only for selected Groups of Investors in Private Classes.
The goal is to create more potential partners. After a Group of Investors fulfill my requirements for the curriculum, they must then conduct a thorough Internal Rate of Return analysis on a specific property that they believe would be a good investment. They would also have the means to purchase it.
If I confirm their calculations and it is in fact a good deal, depending on how good, I will join them in the Investment if they invite me into it as an equal partner. But there is no obligation to invite me into a deal, although if I am asked to verify it and I don't request to join, that's their clue that I don't think it's good enough to buy!
Unfortunately, I don't know of any other courses where they go through all the Calculations, except for a CCIM degree.
My version is more of a consolidated CCIM.
I will say that if you are taking classes, especially in a Guru class or REIA, and there is no talk about things like Present Value versus Future Value, Discounted Cashflows and especially 10 years pro-forma projection for Internal Rates of Return, then you should be thinking that they are just making money off of your tuition.
Why don't you just spend the $10 it cost for the book, learn it so that you thoroughly understand it, and save 10s of thousands of dollars by educating yourself. I didn't need to study from someone else. I learned it all on my own.
Investor Llew
Keep posting. Many BPers don't understand these concepts you teach and invest by. So many newbies are told initial cash flow is the most important metric and bail the goldmines in LA or NYC for greener pastures which are really browner than brownstones when compared.
@Mike Gould Thank you for the advice. I'll be reaching out to you soon...after reading the book recommended by @Llewelyn A. I want to be well-prepared. :-)
Thank you @Llewelyn A. for the book reference. I just started to read it.
lol @Ben Zimmerman I just had a closing today with a couple the relocated to Omaha from Phoenix. They were so excited to be here in Omaha so it must not be that bad. I love Phoenix also, but we have some great things going for us here in the Midwest. Our housing prices have remained slow and steady over the years and we get great cash flow. So if you are looking for a good market to buy and hold Omaha is a great place to consider.
Hi All,
I just wanted to mention a few things about Best Selling RE Books.
Most of those Best Selling Books don't have any sophisticated Math. Any RE Book which professes to teach RE Investing, in my HUMBLE opinion, and does not go into things like Discounted Cashflow (DSR), Rates of Return (ROR) and Future Value.... well.... they are really just Motivational Books with possible some good tidbits here and there.
Another great Math Calculations to fully understand is the Math behind the Mortgage. What we typically call an Amortization Loan. That kind of Calculation will open your eyes once you see how the Principal and Interest moves in relationship to a 30 year fixed rate mortgage. You begin to understand Investing by Math Calculations.
All Investments will have different variables and assumptions. There is ONE RULE that I often Teach for ANY investing: "If you can Predict it, you can Profit from it."
To fully understand it, you have to start to understand what sets of variables and assumptions are not predictable and what are ABSOLUTELY predictable.
The most predictable part of any RE Investment IS THE AMORTIZED Mortgage. This is the one reason why I utilize this because it's absolutely predictable that it will follow a Financial Mathematical Schedule of Principal and Interest Payments, as well as Balance reduction.
Because the Amortized Mortgage is absolutely predictable, and I for one follow the RULE "If you can Predict it, you can Profit from it", I actually look to Maximize this within reason.
So while I put down 20% for an Investment Property to maintain a level of skin in the game and reduction of risk by having an attractive interest rate, I generally take about mortgages around $1 Million or above.
That is because the Mortgage, being paid by my renters, will follow a very predictable path, one which will make me a millions as each one gets reduced or paid off.
In fact, if you receive ZERO cashflow but your Million dollar Mortgage disappears in 30 years, you have effectively made an average of $33,333 PER YEAR for 30 YEARS.
And, if you consider that the Mortgage Interest is deductible, especially for a Rental Real Estate Business, you have earned even more than the Million dollar mortgage.
For some reason, this kind of thinking is not taught ANYWHERE that I have seen. But yet it's an incredibly powerful concept.
So, no only reach about the Financial Calculations........ take those calculations and think outside of the box. Learn not what is just taught to you, but learn how to make use of it even though you have not directly learned it yourself.
If you can think like that, there is no investment you cannot conquer.
Investor Llew
Here is Bigger Pockets approach on this question. Good read!
Texan cities always have good cash flow, usually the Southern and smaller towns do. (I invest in Southern I agree with @David Chan's answer.
I'm seeing a lot of the same cities mentioned here on these lists as well:
http://www.texascashflow.com/2016/01/12/which-are-the-best-cities-to-invest-in-real-estate/
@Chris Egan, I'm a new investor also in Omaha. I'm curious: have you found 2% rent-price returns (not sure if that's the proper term) in Omaha, or are they closer to 1%?
@Paul B., let me know if you find 2% in Omaha. I have been able to achieve 1% without much trouble. I think 2% is out there, but it'll take a multi family or a brrr opportunity to achieve that.
Love the thread, I'm looking to relocate to the midwest in the next year if possible. I plan on my first purchase being a 2-4 Unit Multi-Fam in a larger metro-like Detroit, Chicago, or Cleveland. Would love to know what you guys think as far which city is best for cash flow and overall return on investment?