suggestion for seeing positive cash flow in not so cheap areas

[Ryan Dickson]

Hello all,

I have just started considering investing in rental properties. Before asking the question I think it is better to describe my goal or what I am looking for from real estate investment. I do not want to be a real-estate champion managing many properties. I have a very busy job (which I love) and also busy family life and hence I think it will be difficult for me to manage/maintain more than 2 properties (or a maximum of 3 properties). So I think I would prefer to start investing in just 1 or 2 properties in metro areas with higher appreciation potential. So I am not looking for typical cash-flow areas (for example MidWest US states) where I can buy more properties with less downpayment. Rather I am looking for investing in established or emerging metro and its suburban areas (for example Austin, Atlanta, Raleigh, etc) because I only intend to acquire just 2 or 3 of them.

But the dilemma is that most of the properties in those areas show negative cash flow with a traditional downpayment model. As the prices of those properties (I am looking for typical single-family homes) are typically 400, 500K, etc the mortgage is close to rental income. But I also need to add other expenses on top of the mortgage like the fee of the rental management company, insurance, tax, vacancy factor, so all in all it comes with negative cash flow, and seeing negative cash flow I started rejecting the property upfront, which I think probably a not good idea considering the current market and those areas where real estate is hot.

I thought of an easy solution to fix this problem is doing a higher downpayment to keep the mortgage low, like if I do 40% or 60% downpayment (which I can) then cash flow can become positive. This will also allow me to capture the larger equity upfront. So I am thinking to increase downpayment till the point where I see some positive cash flow. That will give me some peace of mind to consider the property.

Any comments about this increasing downpayment thing to see positive cash flow? Any other tips for investing in those types of higher appreciation potential metro areas but still having some positive cash flow? Any specific area suggestion is also welcome.

Thanks a lot,

[Theresa Harris]

There is more to investing than how many properties you have-ie quality vs quantity.  Some of the cheaper homes may look good on paper, but in reality they can be more time consuming and have higher turn overs and costs.

By increasing your down payment, you do lower your mortgage payments, but then the cash flow is artificial in a way as you put more money into it up front to make it that way vs lower down payment but no cash flow and you doing smaller amounts of money each month (or when repairs happen).

Expensive areas can be a problem. Look for units that have legal secondary suites whether that is an inlaw suite or a duplex.  For duplexes you may pay a little bit more, but overall you should get more rent and if one unit is empty, you haven't lost all of your rent.

Make sure whatever you get, the rent covers the basic monthly expenses:  mortgage, property taxes and insurance.  I had a place in an expensive area where the rent initially didn't quite cover those and I had to put in $25 a month or something like that.  I was fine with it as the tenants were paying down the mortgage.  Over the last 8 years the rents in the area have gone up significantly (increased by $350/month) along with house prices (almost doubled).  So keep in mind if you are close with expenses that rents do go up (as will expenses).