Are you a real estate investor looking for the best markets to invest in? Tired of trying to guess which cities will provide the most attractive returns on your hard-earned money? As a real estate investor, there are a lot of things to take into consideration, such as property management fees, maintenance expenses, vacancy rates, property taxes, utilities, unfavorable landlord-tenant laws, and amount of time required to evict non-paying tenants to name a few.
In this article, we’ll discuss how to find the best markets for positive cash flow real estate investing and provide you with the tools and resources you need to find those winning areas. Whether you are starting out and want to get your feet wet in your local markets or you’re a seasoned business professional in the world of real estate investing looking to expand your investments outside of your home state, you’ll be able to find just the right place.
I’ll cover the ins and outs of cash flow in relation to investing in real estate to examining the individual markets to determine which ones will offer the highest returns. After reading this article, you’ll have the knowledge necessary to make an informed decision about where to invest and get the greatest reward. This includes understanding the rule of thumb for obtaining positive cash flow and efficiently eliminating potential purchases that are not worth more careful evaluation.
Let’s get started with finding positive cash flow markets for real estate investing.
Quick Note – Market Research Tools
Researching different markets is key to finding positive cash flow real estate markets. Utilize online resources, such as local market reports and online calculators, to narrow down potential investments with positive cash flow. Real estate investors should be knowledgeable about demographic trends, vacancy rates, property management fees, property taxes, and utilities in their chosen market.
The list of links at the top of this websites includes one to Numbeo’s Gross Rental Yield Map, which gives an indication of cities where cash flow may be better than other cities. The information is crowd sourced, so should be taken with a grain of salt. It is reasonably useful though. There is also a link to Wade’s Housing Alerts. A subscription to Housing Alerts lets you find markets that have the best cash flow, the best potential for appreciation, or that are highly rated for a blend of appreciation and cash flow. Often, cities with the best cash flow have poor or even negative job or population growth. Most of the benefits of real estate investing come from leverage and appreciation (whether due to inflation or population growth). Cities with negative population growth should be avoided.
The following article from Bigger Pockets includes another map, one of rent versus price ratios, to help you locate markets that may provide positive cash flow. (It is from last year, though. Wade’s Housing Alerts provides more updated information though it requires a subscription fee.)
https://www.biggerpockets.com/blog/interactive-cash-flow-map
It is important to be careful with large rustbelt cities with many bad areas, though. When looking at such cities, if you eliminate the bad areas and consider only the best school districts, the cash flow will not be as good as for the metro as a whole. And cash flow in a declining city or area rarely makes sense.
Understanding Positive Cash Flow Real Estate
Investing in real estate offers the chance to create a reliable and powerful positive cash flow, along with leveraged appreciation. Positive cash flow (or PCF) occurs when the total income generated from an investment is greater than expenses, which include vacancy loss, maintenance expenses, property management fees (a big one with short term rentals), property taxes, and landlord-paid utilities. With positive cash flow, investors can maximize their profits and have more room to expand their portfolios. Zero cash flow properties can sometimes also make sense, if there is leverage appreciation, as more profit comes from leverage and appreciation than from cash flow.
Real estate markets vary greatly depending. Different locations have different demand levels. It is often easier to generate a positive cash flow in some markets compared to others. Knowing which markets are more likely to yield higher returns is essential for every investor. Note that there are time periods (such as after a recession) when positive cash flow is available in many places and time periods (such as rising interest rate periods) when positive cash flow is extremely difficult to find anywhere.
Some markets offer favorable location factors such as proximity to major employment centers, colleges, and infrastructure providing reliable rental demand and strong local property prices. These locations may or may not offer positive cash flow.
On the other hand, some properties may require more active management to achieve positive cash flow. These include properties (such as distressed properties) that require improvements or creative marketing strategies to increase tenant attraction and optimize rental earnings. Investing in these kinds of properties requires more effort but could potentially pay off with higher yields than the other types of properties, such as more turn-key rental-ready properties.
Identifying and understanding what kind of positive cash flow real estate market you should target requires a careful analysis based on each market’s characteristics and expected returns relative to the effort and financial resources required for investment. Repair and renovation requirements for a property may factor into these calculations as well. To properly assess a potential market, you must understand how to calculate and measure its potential profitability.
Calculating Cash Flow
For those just starting in real estate investing, calculating, and understanding cash flow can be intimidating. It is simple once you break it down and get some practice. The biggest factor affecting cash flow is the purchase price of the property, as this directly affects your potential revenue. Cash flow is calculated by deducting all expenses such as vacancy rate, maintenance, management fees, landlord-paid utilities, and taxes from the total income generated. Additionally, mortgage costs should be included in calculations to understand how much can realistically be gained in cash flow each month. To calculate monthly profit, subtract only interest, not principal, as principal reduction is part of your profit.
It’s also important to factor in operating expenses such as landscape maintenance fees or water bills, which are generally paid monthly. In single family rental properties, such expenses are often the responsibility of the tenant. In multifamily properties, the landlord is often responsible for water, sewer, and garbage, making calculations quite different for multifamily properties versus single family properties. Other expenses that must be accounted for include insurance, legal fees, and repairs. By accounting for all costs from purchase price to operations, investors can accurately evaluate a property’s potential for positive returns on their investment. Renovations should be added to the purchase price before calculating rental yields but are not part of the cash flow calculation unless financed.
The ability to properly analyze and project cash flow is critical for successful real estate investment strategies which is why it’s so important to understand each component involved in coming up with an accurate projection. As a next step in researching positive cash flow real estate markets for investing, it’s time to focus on meeting financial criteria for buying property. Skilled real estate agents can provide valuable insights and support throughout this process, helping navigate land and house deals for successful development and sale.
When identifying positive cash flow markets, it is equally important to consider the financial criteria for buying property. Investors must understand that an attractive price is not necessarily a good deal and do their due diligence by thoroughly reviewing comps and understanding the market before investing. Estimating the potential return on investment is essential for successful real estate investments and it can be a complex exercise to estimate maintenance costs.
Financial Criteria for Buying Property
Investors with large budgets often have access to better deals due to their ability to pay cash for distressed properties, whether they be commercial or residential properties. Distressed properties are often not eligible to be financed, particularly those that are not habitable. These investors often work with a broker, who can help them find investment properties such as multi family properties, single family homes, and sometimes even condos. But most investors have access to and use leverage such as mortgages with attractive financing terms that are tax deductible. This allows them to benefit from higher returns while spreading out the costs over a greater period of time.
Investors with smaller budgets may need to adjust their expectations and research areas with lower prices and higher yields. In some cases, buying fixer-uppers may be a more viable option as renovating or developing properties can provide higher returns. Whether you are a buyer or a seller, it is useful to work closely with a real estate broker to navigate these smaller markets effectively.
Interest Rates
No matter whether an investor has a big or small budget, understanding the interest rate environment is key for predicting future cash flows from rental income and estimating fill rates in competitive rental markets, be it commercial or residential. It is also important to remember that landlord-tenant laws vary throughout different counties, states, and countries, so investors should make sure they are up to date with local laws when investing in real estate markets. It can be useful to ask how long it takes to evict a non-paying tenant in a particular jurisdiction.
As interest rates go down, cap rates (annual rate of return from rent if you paid all cash) tend to go down too. Investors in low interest rate environments are willing to pay more for properties with a certain rent because cash flow may be the same, since the monthly cost is lower with a lower interest rate. Similarly, lower interest rates increase demand for real estate from owner-occupants as the same monthly payment allows them to buy more. As real estate prices go up, rents tend to lag, and finding positive cash flow in real estate investments becomes harder, particularly as interest rates increase.
This is a common problem for many real estate investors, as the cost of purchasing a property increases, but the rent that can be charged does not always keep up. This can make it difficult to generate a positive cash flow from the investment, as the monthly expenses for the property are often higher than the income generated from it. This is why it is important to have a thorough understanding of the local real estate market and the trends that are occurring in the area. It is also important to have a good understanding of the current market conditions to make an informed decision when purchasing a property. To gain a better understanding of the market, it is important to research the current market trends, such as the average sale prices of homes in the area and average rents for homes, in order to make an informed decision when buying a home. Knowing the average sale prices of homes in the area can help you determine the value of a home you may be interested in buying.
Understanding the financial parameters for investing in real estate is key to making sound decisions about risk management and evaluating opportunities for positive cash flow. In the next section, we will focus on how investors can leverage technology to easily identify positive cash flow markets with sizable return potential in commercial or residential properties, such as multiplexes, duplexes, fourplexes, and condos.
When it comes to locating positive cash flow markets, the most important element is understanding what you’re looking for and knowing your objectives. As a real estate investor, you should focus on regions that meet your financial criteria for buying property. Find markets with both long-term sustainability, local economic vibrancy, and attractive rental rates. Once you’ve defined your criteria, you can begin to search for ideal real estate locations, working closely with your broker.
- According to a study by Rented.com, the top 5 positive cash flow real estate markets in the United States in 2019 were Portland, Oregon; Chicago, Illinois; Houston, Texas; Oklahoma City, Oklahoma; and Cleveland, Ohio. Of course, crime is a big problem in Chicago, along with extremely high property tax rates. Values in 2023 are much higher than in 2019 making it harder to obtain positive cash flow even in these markets.
- On average, rental property investors in these markets experienced an average 8.4% return on investment for their rental properties in 2019.
- A report by GOBankingRates found that 71% of surveyed real estate professionals believed that investing in rental properties for long-term leases was one of the best ways to generate positive cash flow from real estate investments.
Locating Positive Cash Flow Markets
There are two approaches to where to invest in real estate. On the one hand, there are investors who focus on markets that are not highly competitive yet but offer potentially profitable opportunities. Many beginners tend to look for emerging properties in smaller communities since prices are lower and competition is often limited. Others argue that sticking with developed cities with high property values is more reliable despite higher competition levels. Both methods have potential risks and rewards, so it is up to you as an investor to weigh the pros and cons according to your own goals.
For example, a value investor may choose a smaller town with cheaper housing but will face more tenant turnover and higher vacancy rates than a larger city. Alternatively, a growth investor might buy into expensive buildings located in cities with a robust economy as they can expect steady returns on investment even though they may be at risk of becoming overvalued if the market drops. Ultimately, research your options and evaluate potential markets by studying comparable properties, projected cash flow, population growth, inventory change, and appreciation trends.
Once the decision is made regarding what markets you are going to locate positive cash flow properties in, the next step is identifying rental properties that match your criteria. With the right broker and research in place, you’ll be well on your way to finding success in the real estate market. To get the most from an investment opportunity, research relevant factors such as average rents in an area by talking to locals as well as studying current listing prices online, in newspapers, and from property managers and local real estate agents and brokers. Understanding cash flow market averages helps set realistic expectations for return on investments so that an informed decision about which properties to buy can be made. Your experience, combined with the guidance of a skilled team, can make all the difference in your search for fruitful opportunities, such as homes offering unique advantages or services.
Having successfully located positive cash flow markets, the next step will be to identify the types of rental properties you want to target.
Types of Residential Rental Properties
There are several types of residential investment properties.
- Single-family homes are the most common residential property investment.
- Multi-family homes such as duplexes, triplexes, and fourplexes, are an excellent option for those looking to invest in real estate. These properties offer the potential for higher returns than single-family homes, as they can generate more rental income.
- Condominiums are typically located in a complex with shared amenities such as a pool, gym, and clubhouse. Condos are also often located in desirable areas, making them a great option. Homeowner’s associations may forbid rentals of certain durations though. HOA fees can often eat heavily into your cash flow. And since you are paying property managers based on gross rent, you are effectively paying management fees on HOA fees.
- Townhomes offer a bit more space and privacy than a condo can offer. They often come with a small yard and often with a garage, making them ideal for families. They have the same HOA downsides as condos.
- Single-family homes are the most common residential property investment.
- Apartment buildings are also a popular option for those looking to invest in real estate. Apartment rental properties can provide a steady stream of income, as well as the potential for appreciation over time. They also offer a variety of amenities that can make them attractive to tenants. Loans for apartment buildings with more than four units are commercial loans that have less favorable terms than loans for buildings with four or fewer units. Usually, interest rates are higher and are fixed for fewer years.
Analyzing the Feasibility of Buying Investment Property
Once your target rental property types have been identified, you need to analyze the feasibility of buying it. Depending on the market and current mortgage rates, there may be a large amount of capital required upfront to get the deal off the ground. It is crucial to take into account not just the cost of the property itself but also any additional associated costs such as realtor or broker fees and legal advice. Evaluating these aspects can help you make well-informed decisions and maximize the potential of your real estate investments as well as the services your team provides.
On the other hand, there are sometimes opportunities where an investor can purchase rental properties with low money down (e.g., using FHA loans on fourplexes where the investor lives in one unit) or at levels that are favorable to cash flow. Focusing on scenarios where capital requirements are minimal can create flexibility for investors who do not have access to a large amount of working capital upfront.
During this evaluation process, it is prudent for investors to consult industry experts for additional insights and advice to ensure their approach is thorough and accurate.
By carefully considering all of these factors, investors can make more informed decisions about how best to find positive cash flow real estate markets for investing.
Considering Loan Costs and Location Conditions
It is important to consider the upfront costs associated with obtaining a loan. Mortgage loans involve many fees, such as origination fees, appraisal fees, and closing costs, which can add up quickly. Borrowers also need to be aware of the interest rate associated with their loan as this can have a significant impact on their cash flow if the rate is too high.
In addition to loan costs, investors should also consider any potential issues with the location of the property. For example, potential risks such as crime rates, traffic congestion, or poor schools can influence the desirability of a property and potentially drive down its value. Investors should look closely at nearby amenities such as retail stores, hospitals, and transportation links to make sure that the surrounding area is suitable for prospective tenants. They should consider landlord-tenant law, how difficult it is to be a landlord in a particular jurisdiction, and how long it takes to evict a non-paying tenant or a squatter.
Answers to Common Questions
What strategies should be used to successfully identify positive cash flow real estate markets?
When it comes to successfully identifying positive cash flow real estate markets, the key strategy is to focus on a few proven fundamentals. Specifically, investors should look at the overall rental market in the area to determine if there is significant demand for rental properties. They should consider average rents versus average prices. Additionally, they should research cap rates in the area, which provide an indication of how much return a particular property will yield from rent in a year after all expenses are taken into consideration. CCIM’s (Certified Commercial Investment Member) APOD provides financial rate of return projections that include the benefits of appreciation as well as cash flow, based on different expected appreciation rates that you can choose and input. Lastly, investors should also look at the average property prices and compare them to average rents for similar types of properties to identify areas where the cost of buying versus renting is more favorable. By leveraging this combination of strategies, investors will have a better chance of pinpointing those markets that provide lucrative opportunities for generating positive cash flow.
How can I maximize returns from positive cash flow real estate investments?
First, research the location of any potential investment, ensuring that you are investing in a market that has a strong potential for appreciation in property values and rents. You should also look for properties with good access to amenities, such as schools and shops.
Second, vet your tenants carefully. A tenant who can’t pay the rent on time or damages the property could ruin an otherwise solid investment. Do thorough background checks to ensure you are getting reliable tenants with a strong rental history.
Third, you should manage your properties well. Investing in regular maintenance and repairs will help ensure the property remains attractive and valuable so that it can realize top rents for years to come. Even if the property is in an area of low turnover, regular attention will bring better tenants and help avoid unexpected costly repairs down the road.
What factors should be considered when evaluating positive cash flow real estate markets?
When evaluating positive cash flow real estate markets, there are several key factors to consider.
First, it’s essential to look at the economic strength and growth of the local area. Healthy economic climates are typically some of the best places for real estate investments because they will generate more interest from potential buyers and renters. Additionally, you should look closely at future population trends in the area since they can effectively impact rental prices and vacancy rates.
Another factor to consider is local rental demand. Is there a high demand for rental properties in the area? This can help you estimate an expected cash flow now and in the future. Furthermore, consider the average rental costs in the area- this information can provide an idea of how much you may need to charge for rent on your own rental property.
Market conditions also play a key role when evaluating positive cash flow real estate markets. Take note of current market interest rates and any impending developments or construction activities in the area that could influence future market conditions.
Finally, keep an eye out for good deals – investing in distressed properties at low prices (or buying from distressed sellers) can be a great way to achieve higher long-term returns on your investments.
The Numbeo maps (gross rental yield and affordability maps) and Wade’s Housing Alerts are great places to start your research. Once you have narrowed things down to a few cities, order the Local Market Monitor reports for those cities for an understanding of absorption rates and for predictions of future appreciation, rent forecasts, and demand. Then, when considering particular properties in those cities, calculate cap rate and fill out an APOD. You may need to estimate vacancy rate (vacancy expense) and cost of maintenance if you are considering a single family home. If you are considering a multifamily property, ask, no demand, that the seller provide 2-3 years of Schedule Es from their tax returns for this property. The Schedule E’s show the actual income (after vacancies) and expenses as reported to the IRS. A real estate agent may understate expenses or overstate income on a listing. It is common for sellers to take the rent number of the highest paying tenant and extrapolate it to all tenants even if other tenants are paying less. This is an unfair overstatement of income. Just because one tenant is paying more doesn’t mean that it will be easy to raise rents on other tenants. You may need to do expensive make-readies after tenants leave because they are priced out. A seller will not under-report expenses or overstate income to the IRS. You may need to make production of Schedule Es a contingency in an offer if your MLS offer forms do not require them. Because multifamily properties have rental histories and Schedule Es, novice investors may wish to start investing in multifamily. Remember, though, that better loan terms are available for properties with four or fewer units. Interest rates and down payment requirements are lower for owner occupied properties than non-owner occupied properties, so a good way to start is with a fourplex in which you occupy one of the units.
After calculating cap rate, consider if you can get a better rate of return from a bank CD. If you can, maybe it is not an ideal property or an ideal time to invest. Be patient. Real estate is cyclical with cycles that can last many years.