How do you create cash flow with investment properties?

I’m often asked to find the best ways to deliver cash flow for my investor clients.

But in reality, assuming the client is heavily leveraged, it is quite challenging to find a property in a quality market where you can do much better than deliver slightly positive cash flow, after all debt financing is removed.

I’m often amused when a client seems disillusioned with real estate when they realize they can’t get the amount of cash flow they were expecting when they want to come in and borrow 80% for the mortgage and the other 20% from a line of credit. They tell me there is nothing left. I tell them what other business in the world can you expect huge monthly profits with nothing down and the investment paying all of the expenses.

The thing is that everyone has watched the TV shows where someone did a flip in 3 weeks and made a huge return. It was so easy, that I can do it too. The reality is that those shows don’t factor in carrying costs, realtor or legal expenses, and sometimes even labour to do the renovations in order to deliver the profits shown in the shows.

There are real ways to create some cash flow in desirable markets.

I have seen four successful ways to deliver those higher cash flow numbers. Each option has its own host of positives and negatives.

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Cash Flow Strategy #1

Rent by the room. The market can only support a certain amount of rent for one apartment. You can pretty it up, but the reality is, there is an upper limit to that rent. But by offering rent to multiple people in the same unit, the total rent received can greatly exceed that found by renting to just one party. Student rentals and rooming houses are examples where this strategy has proven most effective. The downside is the amount of work investment can take. You are essentially dealing with 4-5 tenants in one building. Multiple issues, multiple needs.

Is the cash flow strategy worth it?

I kinda put it into a cost/benefit analysis. Is the amount of extra time and effort worth the added rental income. That is for each person to decide. The potential income is what draws so many investors to this investment style. However, the amount of work involved is why profitable single room rental properties hit the market. The pain in the ass factor became just too great.

Cash Flow Strategy #2

Furnished and short term rentals. This investment style has grown in popularity with web sites such as Airbnb. But in reality, this investment style has been around for a very long time. Vacation and executive rentals have had a long history of producing higher rental income. There is no doubt that by renting your unit by the week or even day, you can generate more income.

Is the cash flow strategy worth it?

Again it is far more effort than having one tenant for a year or more. As a short term rental provider, you are essentially running a hotel, and need to offer much of the amenities offered in a hotel. From cleaning the unit after each tenant/guest has left to needing to seek out future tenants, this is a real effort, but if this is how you want to run your real estate business, it can be very lucrative.

Cash Flow Strategy #3

Speciality rental. Sometimes narrowing your focus for the type of tenant you are seeking can lead to additional profits. Offering handicapped accessible, senior-focused, or other types of rental-focused on some type of special needs. Some of these programs are government focused and the “tenant” you will have will be a government institution. If you strike into a real gap or need in the market, with little competition, you can practically dictate your price and do very well.

Is the cash flow strategy worth it?

If you are initially successful, and there is a low barrier for entry, expect your success to be replicated. In addition, the challenge with a unique product is if the need for the type of rental lessens over time, could you be left with empty units for extended periods of time? If so, the higher rents commanded might not be worth it.

Cash Flow Strategy #4

Seek out the tertiary markets. There is a reason why certain markets have property values much cheaper than the rest. No one else wants to own it. If you are willing to stay well away from pretty much any town you have ever heard of, there are communities out there with houses and rental buildings that are available at some really cheap prices. Following the mantra that everyone needs to live somewhere, you can offer affordable housing in undesirable markets to low income or transient renters. They may be in the community for work-related reasons and need to live there while the work is offered. They may be on social assistance and are trying to make their money last longer.

Is the cash flow strategy worth it?

On paper, the cash flow numbers are great. But if you have sizeable vacancy or tenants who don’t pay the rent, the actual numbers could be much worse. There is little point in doing credit or background checks on your tenant applications as the potential renter will have mediocre credit scores at best and no long term job history. You should also expect to sell the property for about what you paid for it. Unless the demand for the area sees a sizeable rise, the lack of demand will limit the amount you can sell it for. Another challenge can be property management. Unless you live near the market, finding qualified people to manage your property or building might prove difficult. Finally, for older buildings, be wary of inheriting lots of differed maintenance. Many owners put off minor and significant repairs in order to improve the profits for that month or year. They do that year after year. Then they sell the property at a discount rather than repair those deficiencies.

Traditional rentals are incredible, proven wealth builders. But if you want to invest in a primary or even secondary market, and leverage that purchase with as much debt as possible, you just can’t expect huge monthly income from cash flow.

Be realistic with your short and long term goals and you can find the real estate business can deliver remarkable results for any savvy investor.