What is the Best Cast Flow Investment?

I get this question all the time. To me, if feels like a loaded question. However, no one wants to hear, "It Depends." So I'll try to break it down a couple ways.

There are really two parts to this answer. Since you specified cash flow investment, you’re going to have tenants. First, you need to know what your prospective tenants looking for in a property to lease and then you need to know what you as the property owner need to consider.

Let’s start with the tenants. Different areas will have different things to consider, but the constant is “put yourself in a tenant’s shoes.”

Do they have kids? If so, the school district is important.

People want their children to attend the best public schools that their budget will allow. So looking at school district rankings, parent reviews etc., is required.

The quality of the school district is vital for a long term real estate investor. A mistake some investors make is chasing cheap homes near lousy schools.

People often move because they want some more space to stretch out, maybe a backyard and a garage. So you look for properties that have at least 3 bedroom 2 bath, 2 car garage and 1200-1500 square feet or more of living space with a reasonable yard.

Proximity to workplace, access to major thoroughfares, availability of shopping, dining and entertainment are all factors people take into account when leasing. So it would make sense to acquire properties in neighborhoods that are well appointed, close to highways and toll ways with lots of grocery stores, restaurants, movie theaters and the like.

Neighborhood Niceties – People often rent a home that provides a lifestyle they previously did not have. Community pools, playgrounds, walking trails, lakes, parks and the like are what attract good tenants and keep them in your property longer.

Floor plan functionality – The way the home is laid out affect the tenant’s immediate interest in their first visit to the property. A family with three kids may be interested in a split floor plan; whereas a couple with two dogs may not be as concerned. Consider the floor plan unless you want to be in the construction industry.

What are you looking for in an investment property?

All the stuff I mentioned above is important but in the end, the numbers have to make sense.

Growth Potential – Purchase a property that will not only preserve its value but appreciate in value over the long term. This is where most of what your prospective tenants want overlaps with what you need. If you purchasing a property with a nice floor plan within a great school district, well located within a neighborhood with great amenities will ensure that you capture the most appreciation over time. Growing your capital is a priority within your long term strategy.

Cash flow- Your plan is about passive cash flow and lots of it. Whether you try to create intermittent cash flow to accelerate the growth of your capital now or income to live comfortably, you’ve got to manage two aspects:

Balanced Operating Costs – You could achieve everything a tenant wants in a great property by purchasing a $500K home in “The Hills” but would it make a good investment property for you? You need to be aware of operating costs: Taxes, Insurance, and Vacancy. In higher priced properties, those can often be much too high. Well balanced operating costs vary in the 40-50% range depending on the home.

Low maintenance costs – You want to keep your maintenance costs as low as possible and you achieve that by one of two ways. A) Purchasing properties that are recently built so you don’t have to replace major systems, roof, A/C, plumbing, etc. B) Buying a property that can be adequately rehabbed so you don’t have any surprises or excessive repairs. To figure out what properties can be adequately rehabbed is another conversation, but in a nutshell the, you should use the Maximum Allowable Offer formula. The MAO formula is 70% of ARV (After Repaired Value) minus repairs. Don't forget to add a little fudge factor. In Real Estate you make your profit when you buy, and collect that profit when you sell.

Low (or No) Vacancy – Here again you can orchestrate a win-win by purchasing a property in an area where there’s high tenant demand with great amenities. Setting a fair price and reasonable rent increases help maintain the vacancy low. Last but not least, being very selective with whom you decide to lease the property can make the difference between turnover and no vacancy for 3-5 years. A good property management person is really worth the money, so don’t forget to include that in your costs.

Granted, I could spend hours on this topic - and have with various clients over the years. There are endless options available beyond a traditional rental unit as well. However, in the interest of keeping it simple...Know what your prospective tenant wants and what you as the owner wants.

Best of Success, Andrea

ps..If you'd like to brainstorm & explore your investment options further, Check out my Phone Consulting Offer!