Rental Property Investor · Member since 2021 · 19 posts · 9 votes
Hi,
I'm looking for cities/states where I could invest in townhouse/SFH type rentals for strong appreciation while ensuring that I don't go cash flow negative. At present interest rates, are there cities where we could be cash flow non-negative (for a standard 20% down payment)?
As I live in New Jersey, somewhere in the North East is easier to manage, although I don't mind out of state properties if their growth/appreciation prospects look good. Thanks for your inputs.
While not a blanket statement, my experience is that my cash flow markets where I have my long term holds, are not going to appreciate a whole lot. And my appreciation markets, where I run STRs, are slim on cash flow…or there is a lot of “dead” equity in order for the property to cash flow.
That said, I’m going to put the extra money in a deal in the appreciation market, whether it is renovating a below-market-priced house so that I can rent. Or I put a larger down payment so that it will cash flow. Or I get an interest only mortgage. Or short term rent, so the rents are higher.
While not a blanket statement, my experience is that my cash flow markets where I have my long term holds, are not going to appreciate a whole lot. And my appreciation markets, where I run STRs, are slim on cash flow…or there is a lot of “dead” equity in order for the property to cash flow.
That said, I’m going to put the extra money in a deal in the appreciation market, whether it is renovating a below-market-priced house so that I can rent. Or I put a larger down payment so that it will cash flow. Or I get an interest only mortgage. Or short term rent, so the rents are higher.
While not a blanket statement, my experience is that my cash flow markets where I have my long term holds, are not going to appreciate a whole lot. And my appreciation markets, where I run STRs, are slim on cash flow…or there is a lot of “dead” equity in order for the property to cash flow.
That said, I’m going to put the extra money in a deal in the appreciation market, whether it is renovating a below-market-priced house so that I can rent. Or I put a larger down payment so that it will cash flow. Or I get an interest only mortgage. Or short term rent, so the rents are higher.
Kerry, thanks for your insights. Which markets do you think are appreciating at present?
@Raju Penmatcha I agree with Kerry. My appreciation markets do not cash flow as well as my non-appreciation markets.
Once you find a market that works for you I suggest you become an expert on the market and the area. This will help you determine which deals are best.
I have heard the arguments since I started investing, and I like @David Greene thoughts best: Cash flow helps us to hold on until appreciation occurs. I needed the cash flow when I was raising little kids and didn’t have much money to set aside for reserves or emergency fund. We were a military family, and we bought houses that military folks rent out.
Now, we have a blended portfolio. Over time, I have chosen better houses in nicer locations. These appreciation focused houses have amplified our family’s wealth.
If you’re looking for strong appreciation potential without going cash flow negative, Detroit should be at the top of your list. Appreciation here has been rapid over the last few years, and rental demand is growing fast. Population in Detroit is increasing again after decades of decline, which is a fantastic signal for long-term value. I've written some great articles on the Detroit market:
The Detroit market is still affordable compared to many other major metros, meaning you can get in with a reasonable purchase price and still cash flow—even at today’s rates.
I’ve found a lot of success investing here myself, and I’ve also helped other investors set up BRRRRs and long-term rentals in the area.
Outside of my own investments, I also help other investors through my team on the ground here—we source deals, handle rehabs, and manage properties after the renovations are done. We primarily work with cash buyers, but if that fits your criteria and you want to chat, here’s my Calendly link: https://calendly.com/tbiziorek/20min-detroit-re-chat
Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.
Property Class will typically dictate the Class of tenant you get, which greatly IMPACTS rental income stability and property maintenance/damage by tenants.
If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.
If you buy/renovate a property in Class D area to Class A standards, what quality of tenant will you get?
Similarly, if you put several Class D tenants in a Class A 4-plex, what do you think will happen to the property?
So, when investing in areas they don’t really know, investors should research the different property Class submarkets.
Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:
Class A Properties: Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation. Vacancy Est: Historically 10%, 5% the more recent norm. Tenant Pool: Majority will have FICO scores of 680+ (roughly 5% probability of default), zero evictions in last 7 years.
Class B Properties: Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation. Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support. Tenant Pool: Majority will have FICO scores of 620-680 (around 10% probability of default), some blemishes, but should have no evictions in last 5 years
Class CProperties: Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts. Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages. Tenant Pool: majority will have FICO scores of 560-620 (approaching 22% probability of default), many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.
Class DProperties: Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages. Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.
Make sure you understand the Class of properties you are looking at and the corresponding results to expect.
The City of Detroit has 183 Neighborhoods we’ve analyzed.
PM us if you’d like to discuss this logical approach in greater detail!
Hey Raju, have you looked into Columbus, Ohio? There's a ton of appreciation going on in the city, with a lot of large companies investing billions into the market. Big companies like Intel, Honda, Google, and Microsoft are leading the growth, causing Columbus to become a major tech hub.
You can find cash flowing SFHs in neighborhoods like Reeb Hosack, Hilltop, Linden, and Whitehall.
I'm looking for cities/states where I could invest in townhouse/SFH type rentals for strong appreciation while ensuring that I don't go cash flow negative. At present interest rates, are there cities where we could be cash flow non-negative (for a standard 20% down payment)?
As I live in New Jersey, somewhere in the North East is easier to manage, although I don't mind out of state properties if their growth/appreciation prospects look good. Thanks for your inputs.
Hi Raju, you may want to check Columbus OH. We're still seeing deals here with positive cash flow and amazing appreciation. There is a strong rental demand because of universities and growing tech sectors. And we see consistent population and job growth here in Columbus. Happy to send over some resources regarding the Columbus Ohio market and why it's a great market to invest into!
I'm looking for cities/states where I could invest in townhouse/SFH type rentals for strong appreciation while ensuring that I don't go cash flow negative. At present interest rates, are there cities where we could be cash flow non-negative (for a standard 20% down payment)?
As I live in New Jersey, somewhere in the North East is easier to manage, although I don't mind out of state properties if their growth/appreciation prospects look good. Thanks for your inputs.
A lot of investors are looking to midwest markets such as Ohio for cash flow. If you want the best chance at appreciation I would make sure that market has strong population and job growth.
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