When you live in a hot market, it is very difficult to find a rental property that will provide decent returns. You are basically lucky if you can even get it to cash flow. If you are okay with purchasing rental properties that don’t cash flow then your chances of financial freedom are slim. There are some folks who also are okay with even just breaking even on rental properties. This also I avoid like the black plague. I just cant find any reason why I would ever do this. Some may say that they are hoping for appreciation and that in a few years they can make out by selling the house at significant amount more then what it was purchased for. This I also avoid. I am not in the business of gambling my friends and this is exactly what type of investment this is. I mean don’t get me wrong, I like to throw some money down on draft kings during football season for some fun but that’s a whole different topic to be discussed anotherday.
At some point you will come to the conclusion that if you seriously want to invest in real estate, rental properties that is, you will have to go outside your comfort zone and start looking outside your hometown. This could be an extremely scary thought for some however if done properly you can minimize risk. Just make sure you have a strict criteria and you due proper due diligence on your new city, your new turnkey seller and the house(s) you are interested in. If everything comes out as expected then I say go for it. That is exactly what I have done now and so far its going great.
I thought long and hard about what city I wanted to begin purchasing rentals and after countless hours of reading about all kinds of statistics and stories I decided onthe great city of Indianapolis. Indianapolis fit all my criteria as a city and from a real estate market perspective. The following stats and qualities below can be applied to any city. Its a good idea to incorporate some if not all of these in whatever city you wish to invest in: (in no particular order)
1) A steady increasing population. If you google your city name with population appended to it you will see the chart. You want to see this going up, not down.
2) A city with a diverse economy and not tied down to single job industries. One withplenty of big employers there and the city is not relying onsingle companies or an industry to keep it afloat.
3) A city with a good sports/arts/cultural awareness. Nobody wants a boring city. People needs things to do and places to go. Look for professional sports, major universities. Acity that has a great night life also helps. If ithas plenty of bars and a good music scene it will attract more people. More people = more renters!
4) Cheap real estate! I realize the amount real estate is worth is greatly dependent on where you are from and what you are used to. To me and the type of properties I’m looking to purchase, I wantthese properties to be affordable. Its possible to get a good rental in blue collar area for anywhere between 50k to 70k all in. I also have houses in my hometown where they are in the 115k to 150k range. These types of properties make for good rentals as long as the rent prices are in the $1200 – $1600 range. Now grant it the cheaper the properties, the more run down the neighborhood might be. This is why due diligence is vital and you need to make sure you do not purchase in a neighborhood you are not comfortable in. I like C class, blue collar neighborhoods with low crime. These are perfect rental properties and have great cash flow.
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Here are actual real life examples of the turnkey properties I have purchase so far.
Turnkey #1
Turnkey #2
My goal for is to purchase probably about 4 to 5 rentals in one city then move on to a new city. This will be my way of diversifying my portfolio. By having rentals in different cities and states I can minimize the risk.
Do you want toinvest in an out of state rental property? Whats holding you back? What cities are you looking at? I’d love to hear from you on this.
Check out these other posts:
- Due diligence trip out of state for turnkey purchasing
- Turnkey Rental Property Criteria
- What is a turnkey rental property?
- My First Turnkey Rental Property Investment
- My Second Turnkey Investment Property
- A Step by Step guide: How to Buy a Turnkey Rental Property
FAQs
In general, a good average cash flow on a rental property is one that generates a positive net income after all expenses have been deducted. A common benchmark used by real estate investors is to aim for a cash flow of at least 10% of the property's purchase price per year.
What is the cash flow rule for rental property? ›
The 50% rule says a rental property's net cash flow should be 50% or more of the gross rent less the mortgage payment (P&I). Here is the formula you can use for that: Net cash flow = (gross rent x 50 %) - mortgage P&I.
How is cash flow from rental properties taxed? ›
The rental income that you receive is taxable income, but you can reduce that income by the expenses of the property. For example, if you collect rental income of $12,000 but have expenses of $10,000, you will pay tax on the $2,000 profit.
Why should an investor know the after tax cash flow of their property? ›
The after-tax cash flow of a property investment can be categorized as an indicator of profitability, since the metric measures the discretionary income remaining after the annual income tax liability has been satisfied.
How to increase cash flow from rental property? ›
- Optimize rental income. ...
- Add revenue streams. ...
- Upgrade the property and add amenities. ...
- Replace inefficient appliances and fixtures. ...
- Furnish the space. ...
- Ratio Utility Billing Systems (RUBS) ...
- Use a different rental strategy. ...
- Environmentally friendly properties save money.
In general, a good ROI on rental properties is between 5-10% which compares to the average investment return from stocks. However, there are plenty of factors that affect ROI. A higher ROI often also comes with higher risks, so it's important to compare the reward with the risks.
What is negative cash flow rental property? ›
A negative cash flow rental property is one that costs you more money than it earns each month. Having negative cash flow means that you will be paying for some of the monthly expenses with your personal income.
How do you analyze rental properties for maximum cash flow? ›
To determine cash flow, subtract the total operating costs and mortgage payment from the total rental income value. Internal rate of return (IRR) is the annual rate of growth that an investment is expected to generate. IRR is determined using the following formula: Capitalization Rate.
What is the 1 rule in real estate? ›
The 1% rule of real estate investing measures the price of an investment property against the gross income it can generate. For a potential investment to pass the 1% rule, its monthly rent must equal at least 1% of the purchase price.
Is rental property a good tax shelter? ›
Pros of a Real Estate Tax Shelter
When used correctly, they can produce substantial savings on taxes. Tax shelters can make rental properties more profitable through expense write-offs. Tax-deferred expenses can lower your taxable income and help build long-term wealth.
Active Participation: If you actively participate in managing your rental property, you may be eligible to deduct up to $25,000 in rental real estate losses against your other income, including wages. This allowance phases out for taxpayers with adjusted gross incomes (AGI) exceeding certain thresholds.
What is the phantom income in real estate? ›
Phantom income in real estate is often triggered by the process of depreciation, whereby owners decrease the value of a property over time in order to offset their rental income. Investopedia requires writers to use primary sources to support their work.
What is an advantage of investing in a property directly? ›
Pros of Direct Real Estate Investing
One benefit of investing in physical properties is the potential to generate substantial cash flow—as well as the ability to take advantage of numerous tax breaks to offset that income.
Why is cash flow important in real estate? ›
Real estate businesses often need cash to take advantage of investment opportunities, such as buying new properties or renovating existing ones. Effective cash flow management helps ensure that the business has enough cash on hand to pursue these opportunities and generate new sources of revenue.
Should investing cash flow be positive or negative? ›
Companies and investors naturally like to see positive cash flow from all of a company's operations, but having negative cash flow from investing activities is not always bad. To make an evaluation of a company's investing activities, investors need to review the company's particular situation in greater detail.
What is a good cash-on-cash for rental property? ›
Q: What is a good cash-on-cash return? A: It depends on the investor, the local market, and your expectations of future value appreciation. Some real estate investors are happy with a safe and predictable CoC return of 7% – 10%, while others will only consider a property with a cash-on-cash return of at least 15%.
Which cash flow should be positive? ›
Positive cash flow occurs when a company's cash inflows exceed its cash outflows over a given period. This indicates that the business is generating more cash than it is spending, which is essential for sustaining operations and growth.
How much cash should you have for rental property? ›
Three to six months of fixed monthly expenses
This would include mortgage, taxes, insurance, and any other reoccurring expenses like property management, lawn care, or utilities. This method ensures you have ample funds should you have a nonpaying tenant or during tenant turnover.
What is good cash flow for commercial real estate? ›
Most investors will want to look for a property that has a cash-on-cash return of at least 8-12% or more.
