Rental Residential Property Investment: Market Recommendations

8 Replies

Hello All,

I am interested in investing in rental properties in economically diverse/robust cities (cities like Atlanta, Dallas come to mind).  Key criteria for me are (1) Corporate america presence (2) Not necessarily positive cashflow but rent should be able to pay for ~80%-90% of the mortgage (3) Price/Rental Income <15 (3) Strong population, economic growth projections (4) Access to reliable property management companies. 

I do anticipate accumulating a good number/concentration of properties in these cities once i start, hence the starting decision is important.

What markets/cities would the gurus on the site recommend?

Hey Jay. Any reason for not necessarily caring about cash flow? There are plenty of options out there that not only cover the full mortgage but leave profit for you after all expenses too. The only reason I can think to not want to go that way (if you are willing to be open to various markets) is if you want really nice properties in the nicest areas (since those don't typically leave positive cash flow each month). 

Atlanta and Dallas have both already had their heydays, but there is still some cash flow in each. Just minimal on inventory and more minimal on any appreciation potential. 

Let me know more on your thoughts about the numbers and I'm happy to make more specific recommendations. Lots of markets fit your criteria but also with nice cash flow.

Please, please, please have positive cash flow or do not do the deal. There are too many deals out there with positive cash flow to settle for less. And you are in for a world of hurting if you take negative cash flow deals (especially 80-90% of the mortgage payment). You will also have a hard time accumulating any number of properties if you have negative cash flow. Lenders will turn you down every time.

I'm in DFW area and things are still hot hear. I picked up two SFR rentals this year, and both cash flow well ($450 & $250 after all debt service and expenses). Can't count on the appreciation though. Nobody knows if the market is at the top now or will continue to climb for years to come. There are lots of corporate relocations driving growth here in DFW. Prices are getting quite high, but rental market is still strong. 

@Jay Thacker I'm curious as well why you're not concerned with positive cash flow? I personally would never advocate that any of my investors purchase properties where they wouldn't achieve positive cash flow. Atlanta and Dallas are both booming markets. Atlanta has a number of large scale 5-10 year projects currently underway (the beltline is the big one that comes to mind) and which a plethora of fortune 500 companies whom call this city home it's quickly becoming a hot spot for investors both outside of the state and country for that matter. The biggest factor I stress about Atlanta is understanding the different areas (draw backs and benefits) which is important in any city but none more so than Atlanta. Often times it only takes 3-5 blocks to see home values change 30-50% so it's imperative you learn your areas. Hope this helps!

@Jay Thacker As others have said, I would strongly discourage you from properties that do not cash flow from Day 1. Even in the Dallas market, it is not hard to find deals that meet the 1% rule if you know where to look. I would consider 1% rule here as about breakeven in terms of cash flow (property taxes in Dallas are very high).

Yet another vote for cash flow.  Number one rule for me is, don't lose money, not cash flowing is losing money.  Sound sounds to me like you want to speculate in real estate, not invest in real estate.

I live in Dallas, but I am looking in more linear markets for my next purchase.

Thank you all for your gracious feedback. Much appreciated!

@Ali Boone - your hunch is right. I am looking for best situated properties in very well diversified A+ cities (close to corporate offices, good school districts). IMHO, with interest rates at historic lows again for past 7-8 years, asset prices are likely to be a little inflated. When a market correction comes (triggered by interest rate increases or other catalysts - i cant predict), i anticipate the tide will recede from other areas first and better situated properties later/less commensurately. So why not just wait for the correction? I am not smart enough to time it - if it comes say 5-8 years from now, i will likely still be in-the-money after the correction if i invested now. 30 years out, if i am able to hold onto well situated properties in A+ cities, i should definitely be very much in the money. So i figured go for a better class of asset while i am still new and a little uncertain of macro factors (to avoid heartache/acidity/deep paper loss in the short term). I am hoping a better asset class also self selects the kind of tenants so i am hopefully a little less worried about tenant headaches. The downside is rental yields might be lower and cash-flow might be negative. Life's been kind to me and i have been able to save some money that might help me offset these negatives for a while. To offset these negative cashflows, i plan on building out the portfolio a little cautiously/slowly right now and sit on some dry powder for when the opportunities are lying around on the streets....   

Having said all of the above, i am a total newbie. Let me know if you think even the best downtown corporate apartments in atlanta, Dallas might also be cashflow positive? When i modelled some of these out, i didnt see a lot of cashflow. BTW, i am also really liking Charlotte as i am learning more. Any thoughts on that market?

Please let me know if i am smoking something. Dont spare my feelings :)

I am currently working with an investor buying in Evanston, IL (where Northwestern University is). My investor is a newbie and my analysis shows he will experience positive cash flow and 10% annual cash on cash returns even when considering each unit will be vacant 4 weeks out of every year. The last one he bought at $120,000 and put down $33,000. Our analysis shows on the conservative side he should walk away with about $3600 a year after paying all his expenses and budgeting for one month out of every year the unit being vacant. He wants to hold on to the property so is banking on appreciation and renter paying down his mortgage. I know these aren't big numbers here but I think the above is a great example of a newbie doing well in the Chicago land area. Let me know if you would like to explore this market.

You're definitely smoking something. Haha, jk. But no, you won't find cash flow in downtown corporate Atlanta or Dallas condos/apartments. Atlanta and Dallas are struggling to hang on to positive cash flow in their B to B+ neighborhoods/properties (which is usually where the best combo of positive cash flow and highest quality tenants exist). They still have it, but it's almost out in the optimal investing areas, so it definitely won't be in the A's or with condos. Condos will always be touch because of condo fees. That almost always knocks out cash flow. 

I hear you on the tenant issue though. I swear, my own experience has taught me that the costliest thing in owning rental properties (in my opinion) is bad tenants. So I've always shot a little higher up on the property prices (and therefore for a little lower on projected returns) simply to try to get the better tenants. The bad ones are too expensive and I don't like the headaches.

But, again, A's won't get you the cash flow. So you'll have to decide which combo of cash flow and location you are most comfortable with. There are mitigations to help with tenant quality and such, but there are no guarantees with any of them....not even the A's

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