Achieving 1% in North Dallas

[Scott Thompson]

Hi all,

I'm looking at getting my first property and cash flow is my priority right now, not appreciation. So, using the 1% rule as a guideline it seems that really targeting low cost condos is the way to go. I can find several condos/townhomes (1-2br/1-2ba) between $50-75k that could rent in the $750-950 range. I know there are HOA fees, but in my mind that pretty much covers the cost of property management as well as some of your general maintenance costs. As you go up in price from there, you get a little more in rent but it doesn't scale 1:1 and you quickly start to lose returns. It seems that's the sweet spot from a numbers perspective from the looking around I've done. Would you agree with that assessment?

The other question is, if that's the route I decide to go, what concerns do you have with that strategy? The biggest thing that sticks out to me is quality of tenant at that price point as well as the area it is in. Obviously at that price point it's not in an up-and-coming area and appreciation should not be counted on, but I'm purely thinking cashflow so that's a non-issue for me. The other thing is that I think several of these would just be cash purchases. At that price point, I think there may be some leverage to being able to move quickly and take something off someone's hands and get a better deal, then go take out a HE loan to get some leverage. If that's possible at this price point anyways. 

[Philip Postel]

Depending on how many units in a particular complex you can acquire, I have a client that has turned Erik and William's problem around by buying up a handful of units and then eventually taking majority control of the complex.  It took them a few years in each of the two cases (so far) and took two different routes.  

1) They were then able to control the assessments and restrictions to protect their long term hold.

2) They actually started forcing assessments and other restrictions in a way to get the remaining owners to sell.  They then sold the complex as a whole to someone who wanted to tear it down and re-build a bigger property.  

We thought they were jerks in option 2 until they tripled their money and paid off the loan they had on the units in complex one and now have that property free and clear and have started the process again on another couple of complexes with the remaining proceeds of the sale.  

From the properties I have owned in that price range, the biggest challenge was what you said.  Quality of tenant and the maintenance.  However, I have done really well on cash flow.  If you find a good tenant (I have one in a house that has been leasing since 2004), it is easy money...