The problem with shiny things is that people chase them without much thought. During the Gold Rush of 1849, people like Levi Strauss made more money outfitting gold miners than many miners made finding gold.
The lesson? Don’t get distracted by shiny real estate trends: mobile home parks, lease options, wholesaling, multifamily, medical office parks, vacation rentals, etc. While each of these opportunities has allure, few investors flourish by dabbling in many different opportunities simultaneously. The focused investor succeeds more than investors chasing flashy opportunities. Let’s focus then on a proven money maker—cashflow properties!
Is Your Market Cycle Timing Right?
It’s hard to win at cashflow real estate if values have far exceeded the 2007 peak, especially if rents are not close to one percent of the property’s purchase price. It is also hard if properties are getting 15 offers in 24 hours and supplies of foreclosures are dwindling. These are signs that a market’s cycle is in equilibrium and possibly headed to decline. If the only deals are in D and F neighborhoods being marketed as C+, you’ll want to find other markets. Look for markets that are in absorption or expansion.
Are You Choosing the Right Neighborhoods?
You’ll struggle to cashflow in A- and B+ neighborhoods unless you’re buying in decline. During other market cycles you should expect, at most, six to eight percent cash-on-cash returns. Appreciation will be stronger.
You can cashflow in B and B- neighborhoods where returns will typically be between seven percent and 10 percent. Appreciation and cash flow will balance more in these areas.
C+ neighborhoods will feature lower appreciation but returns often as high as 10-14 percent. Avoid dipping much below C+ as headaches with tenant damage, vacancy, missed rents, and evictions typically increase as neighborhood grades decline.
Are You Targeting the Right Properties?
Rental properties priced at or below the median home cost often produce the strongest returns. Try to stay below $150,000 when purchasing. At price points higher than this, rents will struggle to keep up, leaving cashflow weak or non-existent. Also, lower priced properties mean a lower cost of entry and greater diversity for your portfolio.
Are You Partnering to Find Deals?
The properties with the best returns are often not in the MLS. You’ll need to look to off-market properties where one or more of the four Ds (death, divorce, debt, and drugs) are motivating sellers to sell at a discount. Contacting potential sellers through direct mail marketing can be expensive and time consuming. Why not consider partnering with someone who utilizes multiple strategies to find discounted properties? Let them take the risks and pay the up-front costs. Many times, buying properties from a turnkey provider means you get high quality rentals at retail prices but without the hassle and risk of doing it all yourself. After all, it is often a better strategy to work a proven, if less flashy system, and profit while others are chasing the often-elusive profits of riskier ventures.
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