Current Market Conditions and Rental Cash Flow

4

The perfect storm is underway to help landlords cash flow on their rental purchases in certain market places.  The dramatic decrease in  home prices, underwriting guidelines that require larger down payment, low interest rates and the increased number of renters can lead to more cash flow for investors.

Market places across the country have seen double digit decreases in housing prices.  This is good news for investors buying homes.  Some market places are now half the prices of the market just 3 years ago.

While there are still many home loans available to investorsthere are no more zero downpayment loans.  Many lenders require at least 20-25% down.  While this may limit the number of homes you buy it also leads to small principle balances, lower mortgage payments and the ability to cash flow in many cases.

Interest rate have continued to hold at the 6 to 8% range for investment properties.  As the stock markets and financial markets calm, investors could have a chance to take advantage of even lower interest rates.  Low interest rates and low principle balances equal low mortgage payments.

Finding the right renters is always a challenge, but most market places have a good demand.  Some average rental rates have declined just a little, but they have not fallen to the same proportion of home prices.

As we combine all these factors, it becomes clear that the rental market is healthy and the individuals that can buy should take closer look into their market place and other market places.

Based on the average of four metro areas, Los Angeles, Phoenix, Atlanta, and Chicago I have put to test my theory of cash flow.   These figures are based on Housing Urban Development’s Fair Market Rents(2009) for each area on a three bedroom home and the National Association of Realtors median home price (2008 2Q).

Phoenix, AZ

  • Median Home Price $205,000
  • Fair Market Rent $1,277
  • Mortgage Payment with 30% down at 6.5% = $907.02 + 200 (taxes&insurance) = $1107.02
  • Cash Flow: $169.98

Atlanta, GA

  • Median Home Price $158,000
  • Fair Market Rent $1069
  • Mortgage Payment with 30% down at 6.5% = $699.07+ 200 (taxes&insurance) = $899.07
  • Cash Flow: $169.93 

Chicago, Il

  • Median Home Price $257,000
  • Fair Market Rent $1227
  • Mortgage Payment with 30% down at 6.5% = $1137.09+ 200 (taxes&insurance) = $1337.09
  • Cash Flow: $-110.09 

Los Angeles, CA

  • Median Home Price $417,800
  • Fair Market Rent $1828
  • Mortgage Payment with 30% down at 6.5% = $2640.78+ 200 (taxes&insurance) = $2840.78
  • Cash Flow: $-1012.78 

Keep in mind these number indicate an estimated cash flow of income to mortgage expense.  Every investor needs to account for maintenance, increased property taxes,  vacancy and a number of other items. My arguements is not for the calculation of cash flow, but targeting cities that have the opportunity for the most cash flow.  There are a number of websites that can be found to give you averages and estimates.  Use these numbers to identify opportunity and dig deeper into that market place.

If you dig into the Phoenix market place you will find a number of homes at nearly half the median home price. These home might rent for close to the average fair market rent.  My point is statistics can lead you to market place that are more favorable and better use of your time.

Photo Credit: turkeychik

About Author

4 Comments

  1. I agree! If you have the money, now’s the time to invest in these cash flow communities. Rental markets are going to get strong over the next 6 months. People still need homes, even if they can’t buy them. Invest smart, and you’ll come out ahead.

  2. I agree with you that the Rent Revenue to Cost Ratio in most areas has gotten better over the last year. I’m not sure it has gotten down to really attractive yields yet. In my area (Chattanooga, TN) it isn’t anywhere near as attractive as it was in 2001 when I first started.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here

css.php