Is Your Real Estate Market A Good Place To Start?

Blogger’s Note – The son of a good friend of mine is looking to get started in real estate investing.  He would like to become a landlord and find properties that offer positive cashflow to replace his current income.  His goal is to ultimately become a full time real estate investor.  I have been giving him some advice as he tries to liftoff his real estate investing and I thought it would be interesting to share some of his questions and my answers on this blog as I’m sure there are others out there who have the same questions.  I hope to publish more questions and answers in the future.

Question – How do I know the area I’m looking in is even a good place to start?

Answer – By doing some research.

My friend’s son is wondering if his local real estate market will provide positive cash flow.  This is a very astute question to ask as every market is different and not all markets will provide positive cashflow.  The only way to get to an answer of his question is by doing some research on his local real estate market.  This post will hopefully serve as a guide for him in that research.

What Is Positive Cashflow?

To start, let’s define what positive cashflow is so everyone is clear. Positive cashflow is what remains after subtracting all expenses from income.  It equals gross rents, less principal, interest, taxes, insurance, repairs and maintenance, utilities, vacancy credit and reserves credit.  It is your profit.

To determine if the market you want to work in will provide positive cashflow you need to do some research and put all of those numbers together.

What Types Of Properties Are In Your Market?

First, look around to see what types of properties are in your particular market.  Does it consist only of single family homes?  Perhaps there are townhouses and duplexes available or even small apartment buildings.  Whatever properties abound in your area, these are likely what you will be investing in, so focusing on that type of property is a wise place to start.

Next, determine what those properties are renting for in your market.  What will a 3 bedroom/ 2 bath home rent for per month?  What will a 2 bedroom/1 bath unit in a duplex rent for per month?  What about a one bedroom apartment?   Look at whatever happens to be a typical property in your market.  Search websites like Zillow.com and Rent-o-Meter.com to get an idea on these rental rates.  Then look for websites of local property managers as they will often have local listings as well.  As you are out and about, also call and inquire on for rent signs.

You will likely find that there is a range of rents for particular properties in your market.  Drill down in your research to try and find out why that range exists.  Is it the property location?  Is it the property condition?  Look at pictures on the websites you research to examine property condition.  You will often find that better looking and updated properties command more rent.

What Are The Sales In Your Market?

Once you have an idea of the rent range in your market, the next step is to examine what these types of properties are selling for.  Try to look at recent sales, say the last six months or so, as well as what is currently on the market.  Again Zillow.com is a great resource here as is Realtor.com.  To find recent sales, you may need to dig a little deeper but the information is out there.  Keep in mind however that you are looking at listed prices on the retail market and they are often the highest prices out there.  But they are a good place to start to get to know your market.

Once you have these two numbers, rent range and retail selling prices, you can begin to determine how your market will fare in terms of cashflow.  So grab pencil and paper and let’s put things together.

Putting It Together

On the top of your paper, write the property address and then the expected amount of total monthly rent you have determined from your research.  From there, subtract your expected expenses to determine if there is any cashflow.

• Subtract the monthly principal and interest payment based on the projected sales price, how much you will need to borrow and interest rates.
• Subtract the monthly property tax payment which can likely be found on your local property tax assessor’s website.
• Subtract a monthly property insurance payment. Find this out by talking with local insurance agents in your market.
• Subtract repairs and maintenance which are typically 10% of total monthly rents.
• Subtract any utilities you may need to pay (these will be unlikely on a single family home and more likely on multiple unit properties).
• Subtract a vacancy allowance of 10% of the monthly rent.
• Subtract a reserve credit of at least 5% of monthly rent to set aside for future repairs.

Hopefully after all of that subtracting there is some money left over.  That is your positive cashflow.  If there is no money left over then the property, at that price, will have a negative cashflow.  Play with the price, and thus the principal and interest payments a bit, to determine what price will generate positive cashflow.

Now repeat this process again and again and again for other properties.  Once you do this process several times, you will have a pretty good idea of the potential for cashflow in your market.

Remember though that you are looking at retail prices of what is listed on the market.  If you do not find any properties with positive cashflow that does not mean you cannot get it.  You may have to search for it in properties that are not on the market.  But that is a topic for another post.

For now, go do some homework and research the numbers I have discussed.  See what you find and then go from there.

Does anyone else have some advice for someone wondering if their market is a good place to start?  If so, please share it with a comment.