Buying Rentals for Cash Flow and Equity
Among the three major categories of real estate investing—flipping, buying rentals, and wholesaling—buying and holding rental properties is the only one that allows you to build long-term equity and cash flow. I like to use the phrase, “he who holds the gold, makes the rules,” because it is important to consider what you will see as a result of investing on a cash basis.
This ranges from better property prices and loan rates to better equity and cash flow positions. But, if you are concerned about where this cash is going to come from, rest assured, we will be covering these topics and many others in this week’s episode of Real Estate Investing for Professional Men and Women
Tools of the Trade
Using databases to distill the information about the area you want to buy in is extremely helpful, but it can be much more efficient if you follow a process. First, I suggest going to Melissa Data to get an overview. Melissa Data is a marketing tool developed by the USPS, which allows you to see carrier routes by zip, and a break down of businesses, residences, average property price, and average income. You can use this information to locate areas with a higher concentration of apartments since these are more likely to yield higher rental concentrations than areas with primarily single-family homes.
The County Planning Commission utilizes tax dollars to build infrastructure, and they provide a wide variety of demographic information to the public, including occupation ratios and property classes which can be used strategically in your search. When looking for rentals, the sweet spot ratio is between 1/3-2/3 tenant occupied because increased homeownership drives prices up, but the rates of rent do not increase at the same pace. Additionally, the properties could be a low-end area, where misconstrued cap rates represent both risk and reward and create a false sense of opportunity.
Another resource is the Tax Assessor’s Database, which is published by a party that determines what properties in a given county or municipality should be taxed at. With the sweet spot ratio in mind, you can locate the best specific properties in that area based on tax information, and identify all of the units in an area by highly-specified criteria. You also have the opportunity to communicate with the owners directly, but this is a waste of valuable time unless you know what you’re looking for.
One way to uncover your ideal prospects is by searching for landlords who are evicting tenants. This provides insights into individual properties that are most likely being mismanaged, and those are the ones you want. After that, you ideally come in and manage the property to profit based on what you discovered.
Reap What You Sow
A good opportunity to build on this strategy is to implant yourself in networking events such as property management association dinners, where you can mingle with other management companies, as well as owners who may be looking to retire or sell. Direct contact and relationship building is the name of the game, and it will go much farther than any marketing plan. When you’ve farmed opportunities and done your due diligence, the last thing to look for is what type of units you are investing in.
Before you start to see a passive income, you have to assess the level of preparation necessary. A turnkey property that is in a condition to sell, and to be rented at current market rental rates without any headaches or grueling work. In many cases, you will ideally buy it with units filled, and start receiving a passive income from day 1. A buy-remodel-refinance requires much more work but can be more lucrative. By increasing rent for each unit and increasing the property value physically, you can double-dip and benefit from refinancing as well.