Cash Flow Principals and Real Estate Investing Fundamentals

In my conversation with Russ Gray, who is the co-host of The Real Estate Guys radio show, one of the top real estate podcasts in the world, pushing 6 MM overall downloads, he provided a list of what he looks at when he evaluates a potential real estate market.

Always Stick to the Fundamentals

Russ believes that evaluating “where” to invest is the same way you look at any type of investment. You have to understand that when investing, there are always bubbles and hot money and all kinds of deformations. Therefore, it is important to always stick to the fundamentals.

The fundamentals will tell you everything that you need to know about a market. For example, ask the question: what is the cap rate trend? If you look at cap rates in multifamily and see that they are becoming compressed, that means that people are bidding more for exact same income. In turn, that also means that it will be more difficult to find deals that make sense. Or, what is the interest rate outlook? If you see that interest rates are rock bottom low, you won’t be able to count on refinancing down the road to save a tight cash flow situation.

Fundamental Questions

Besides the cap rate and interest rates, here is a list of other fundamental questions that Russ asks when evaluating a market:

• Tenant
  • Who is your tenant pool?
  • Who do they work for?
• Economy
  • What drives the local economy?
  • Is it business friendly?
  • Tax friendly?
  • Is it the kind of market that a CEO that is making decisions to survive in a tough economy will tend to gravitate towards, rather than away from?
  • What is the affordability index?
• Infrastructure
  • How solid is the transportation infrastructure?
  • Education infrastructure?
  • The labor pool?
• Stability
  • Do the market’s industries have a strong tie to the geography, so that jobs cannot be exported to China, India, Mexico, etc?
  • Is it a distribution hub or energy-producing town? (Russ finds that these type of jobs are safe from relocation)

When Russ says, “investing comes down to the fundamentals,” he really means that “investing comes down to cash flow.” Therefore, the questions above will give you an idea of whether or not the market will be a good fit for a cash flow investing model. When you are investing for cash flow, you may not be getting rich, but cash flow keeps you stable. Although, the upside, besides stability, is that if you discover a good cash flow market, then it will likely eventually attract the “hot money,” and you will get to see benefits on the equity side too!

Advice in Action

Follow Russ’s advice. Stick to the fundamentals. Ask the questions that will gauge the markets cash flowing prospects. And eventually see the equity benefits of the inflow of “hot money.” Then, since you initially invested for cash flow, you will be prepared to “ride it out” when the hot money recedes!

Advice in Action: Answer the list of “fundamental” questions for your current investment market and see how it performs according to Russ’s standards.