Buying cash flow properties is a lot like finding your ideal mate. Ideally, you’ll put together a list of exactly what your looking for in your ideal mate. Then you go to work trying to find that person. The good news is that finding your ideal cash flow property is a whole lot easier than finding your ideal mate. The types of rental properties to buy are those that are easy to manage, low maintenance, single family home, and have a cash flow that makes sense. I break down each of these points in this article.
One trap to watch for is that you may be tempted to start buying the lowest priced properties in your city. Just keep in mind those properties may be more difficult to manage depending upon the people who want those properties and the level of demand for housing.
2. Low Maintenance. Buy properties that are durable and not prone to on-going maintenance problems. For example, brick houses are preferable to wood sided houses because you have to scrape and paint wood sided houses perhaps every 5 years. Certain types of properties are difficult to maintain, such as properties with an old water well, two story houses with upstairs plumbing, and houses with very old plumbing, heat and air, and/or electrical. There are a number of other particular things to look for when inspecting a house that will be covered in Chapter 6 on renovations.
Be on the lookout for properties like the one that Goldie Bucks found. Many times the construction of houses in a particular neighborhood is very similar, so when you find that type of house, concentrate on finding more of those same types of houses in that neighborhood.
3. Single family homes versus multi-family dwellings. We recommend that you start out dealing with single-family homes. They are generally in highest demand in terms of residential properties. Another big reason is they are also easier to manage than multi-family properties in general.
The type of tenant you will attract with a house tends to be a family that will stay in the property. The type of tenant you will likely attract with a multi-family property is many times single (multi-family will have a lower rental rate than a house). Tenants do not tend to stay as long in a property like a duplex as they stay in a single-family home.
Depending upon the situation, multi-family properties can have a better cash flow than single-family homes. For example, in my market you can find about a 1,200 square foot duplexes and houses both for $40,000. The house will rent for $500 per month, but the duplex will rent for $700 with both sides full. The downside of the duplex is you will have higher maintenance (two of just about everything instead of one), and higher vacancy. The right duplexes, four-plexes, and small apartment buildings can be a great investment under the right conditions. However, we recommend that you get experience with single-family homes before you start buying these.
4. Cash Flow that Makes Sense. One rule of thumb is that the monthly rent should be 1.5% to 2.0% of your total investment in the property. Avoid negative cash flow. If you consistently buy cash flow properties with these things in mind, you’ll wake up rich one day.