Monthly cash flow dead?

[David Lund]

I am having trouble finding any properties that cash flow after considering mortgage, insurance, cap ex, vacancy rate, etc. Have you had any luck in your areas? It's starting to become a pretty big concern as a new investor wanting to get into the market. 

Any advice or insight is appreciated!

[Leo R.]

@David Lund you're correct--cashflow is tough to find (it has been for a while in most markets).

However, in my experience, cashflow is rarely "found". Instead, cashflow is created.

This is similar to the RE saying "deals aren't found, they're made."

So, the obvious question is: "ok, how do I create cashflow?"

It often comes down to learning to see something in a property that other buyers don't see. For instance, being able to spot an easy opportunity to add a bedroom or a bathroom to a property...if it's an easy conversion, and it's on the right type of property in the right market, 10-20k spent to add a br and/or bathroom can pick you up an extra 500-1000 per month in rent...do the math, and you'll find that that is some incredible cash on cash return. 

All sorts of rehabs/conversions can turn a total loser into a cashflowing property. ...another example: I've built ADUs in previously unfinished basements, which turned properties that were $500/mo negative into properties that now cashflow 1000/mo ...the power move was rolling the construction debt into refis on other properties at lower rates, which more than negated the construction debt...in other words, I got paid to build the ADUs (these days, this isn't usually possible--or at least, it's a lot less likely--now that rates are rising...but who knows, rates might decrease again at some point...). 

...Although certain rehabs/conversions can force cashflow, there is real skill and art to spotting properties that are good candidates for these types of rehabs/conversions. ...an effective rehab/conversion is often a lot trickier than HGTV would have you believe, and choosing the wrong property to do this can completely blow up the financial model.

Another approach is to learn to find properties that have something that turns off other buyers, but which is irrelevant to cashflow, and irrelevant to your business model. For instance, I've bought properties in A class neighborhoods where EVERYONE wanted to live, but they were on relatively busy streets, which turned off retail buyers. However, I knew the streets weren't so busy that they would impact the rentability of the properties... I picked up the properties for a heavily discounted price (because they had sat on the market), and had no problems finding highly qualified (and high-earning) tenants that made the place cashflow right out of the gate.

Another example: I once bought a property in an A class neighborhood that had an awkwardly-placed stairwell inside the front entrance, which turned off other buyers. However, I knew that the stairwell had zero impact on the actual functionality of the property, and that it would have zero impact on its desirability as a rental. Once again, the property sat on the market for a long time, I bought it at a heavy discount, and it's been cash flowing ever since.

By the way: every property I own cashflows well, and every property I own was bought on the MLS between 2016 and now--during what was probably the toughest buyer's market in American history! (I didn't have to look for off market deals, do weird business arrangements, or do anything unusual at all to get these properties, even in a tough buyer's market...shocker, I know!).

So, in summary: it is possible to get cashflow, but it's just not something that can be had without some effort and sacrifices...you have to go where others aren't going, and do what others aren't doing.

If it were possible to succeed at RE investing by buying turnkey, A class, perfect properties with no flaws, then everyone would be doing it!   ...but, the reality is: RE investing takes creativity and flexible thinking, the ability to see opportunities others miss, the willingness to acquire properties others don't want, and the willingness to do what it takes to force cashflow.

Good luck out there!