I hear it all the time. “Well I want to invest in Real Estate but to do that you need to get a 2,3 OR 4 plex. I can’t make any money buying single family homes because they don’t cash flow.”
What they mean is that the cost of buying that home is so high that the expenses will exceed the rents that you can charge for that neighborhood.
My recommendation is change your strategy.
People think that they have this thing locked in stone that if they want to do rentals they have to buy a property, rent it out and hope on the appreciation and that is their business model.
They will make money once they sell in however many years or after the properties go up in value and the Mortgage payment gets paid down.
Refinance at a lower mortgage rate, eventually it will cash flow or they are planning on making the money at the tail end when they sell. The problem with that strategy is that you are just betting on future profits.
The way to make money is to change your strategy.
Instead of buy rentals buy for Rent To Own or for Lease Option. The nice thing about that is you are always guaranteed the cash flow.
How that works is usually in a Rent To Own you have an up front deposit but then your monthly payments or your monthly lease payments from your tenant to you is based on what the cost of owning that home is plus any additional costs or any additional amount of money that they are going to be using towards a credit.
A credit, meaning money that they are putting towards their eventual down payment. It is sort of like a forced savings program.
For example: lets say you have a property where all your monthly expenses for your mortgage, tax, insurance and all those costs come up to $1500.00. You are renting it out on a Rent To Own and your lease payment is $2000.00. So there you have $500.00 cash flow.
You hear people talking all the time that you should aim for $100-$200 a door in a rental. Now that is supposed to take into account minus additional expenses or allow for additional expenses. Things like maintenance, property management but in a Rent To Own you do not have those expenses. You do not have maintenance costs because in my case anyway, when I do Rent To Owns the tenant pays for all that.
So a lot of those expenses go down, you have a forced savings program built into the deal so they are paying you an amount of money above what the costs are. You are always guaranteed that cash flow. In that situation it’s easy to make any property cash flow.
By any property I mean, it doesn’t matter if you bought a home for $300,000.00-$500,000.00. I have a home right now for $500,000.00 I think our monthly expense are $2600.00 and we are charging $3400.00. So right there its a $600.00 cash flow based on that property.
Your lease payments do not have to reflect the market value. Now I know there is some restriction in some place, like rent control but I have never been challenged with that and the people renting from me have never challenged me. They know that a Rent To Own includes all those costs plus the credit where they are actually saving for their down payment.
In some cases where there is rent controls I have heard people will split up those payments so you get a rent payment and is documented on the lease and then they pay you a credit payment which is the forced saving.