The "8 Pillars" That Make Up An Easy-To-Invest-In Cashflow "Linear" Market!
Oct 19, 2020
If you are wanting to buy rentals right now, but you’re fed up with the overly competitive and expensive real estate market…
This post is for you.
Today we’re going to talk about how you can STILL buy cashflow rental properties with EASE during the craziness that is 2020.
First off, let me start by saying who this is NOT for:
* Flippers
* Wholesalers
* Developers
* Househackers
* Land Investors
* Rent To Own/Lease Option Investors
* People investing primarily for appreciation
This is for people who want to:
* Invest in single family or multifamily rental properties
* Are open to the idea of investing long-distance/out of state
* Are planning to buy and hold for the long term
* Are investing primarily to create monthly positive cashflow
I recently wrote a part one to this post, explaining my story in detail and the many shifts I’ve had to make to be able to continue to find good deals throughout this surging real estate market….
The long of the short is that I acquired a few dozen rentals and achieved the proverbial “financial freedom” (cashflow covers expenses) but I had to shift to many different markets to be able to continue buying at the right prices.
The biggest epiphany I had is that I should have stuck with what is called a “linear market” to achieve maximum scale with ease in a market like the one we’ve been in over the last few years.
If you haven’t read Part 1, go back and read that before you read any further, or the rest of this post won’t make nearly as much sense.
OK, so if you’re ready to choose a linear market to invest in, but you have the question of:
“how do I go about finding a market like this? What does it look like?”
Let’s dedicate the rest of our time to answering that question.
Cheap Properties
One thing is for sure...we want cheap properties. When properties get past 100-150K in purchase price, they typically don’t have positive cashflow.
This is because as prices rise, rents don’t follow. At least not for long. Rental rates flatten out a good bit as prices continue to go up.
The good news is, the same thing happens as prices go down.
As house prices go down, rents go down as well. But, the curve eventually flattens out as you get lower and lower.
There’s a “sweet spot” for rental property investors, and it’s C class properties.
A house you can buy for 40K, put 15K into it, and rent it for $800/month.
You’ll get your $200+ in net monthly cashflow, have 20K equity, and you can do it BRRRR style and leave little to no money in the deal.
(By the way, Brandon Turner recently released some excellent content on the best cashflowing markets in each state. You can find that here:)
https://www.instagram.com/tv/CFwol_AhP77/?hl=en
(And here:)
https://www.biggerpockets.com/blog/best-cash-flowing-real-estate-markets-50-states-bpinsights
Now, just because a market has cheap properties does NOT qualify it as a good rental market.
There are a lot of larger markets (let’s say 600K population size or greater) that have a ton of cheap houses for sale.
What I’ve noticed is that most of the time, the majority of those cheap properties are in D class neighborhoods.
I have a theory on why this is, but I can’t prove it.
My gut tells me that a larger town will have a broader spectrum of socioeconomic classes. This means there will be a lot more D class neighborhoods by default.
A small town, on the other hand, should have a “tighter” socioeconomic spectrum. More middle class and less rich versus poor.
This seems to lead to a higher percentage of cheap properties being in C class neighborhoods.
Smaller towns also tend to have a lower cost of living, lower average incomes, and thus lower house prices.
Smaller towns also have less eyes on them, thus less demand.
But, if the small town is growing, it’s been discovered. And as I’ll share with you in a minute, that’s something I want you to steer clear of for now when selecting your rental market.
You’ve probably heard the mantra that goes something like:
"Look at what everyone else is doing and do the opposite”
This is one of the times to heed that advice.
But, before we look at what criteria makes a great linear market, let’s examine the “old criteria” (that I used to recommend) and exactly where it went wrong.
This will help you get an even better understanding of why we’re going with the new criteria moving forward.
Typical (Old) Market Recommendations:
Find A Market With 1% Rule Deals On The MLS
1%’er = a house where the rent divided by the all in price is at 1% or greater.
Example $700 (rent) / $70,000 (all in price) = .01 or 1%.
This is typically the bare minimum ratio that a rental property investor will accept. (I look for 1.5%’ers myself)
1% deals ON THE MLS is a good sign for your market. It suggest that when you go deeper to the "off market"deals you’ll find even better deals.
The issue with this is - a lot of markets have these types of deals - BUT they are not in good neighborhoods.
We need to find the markets where these 1% deals are in C class neighborhoods or better.
100K Minimum Population Size
This was my old criteria, because I felt that larger towns had more room to scale and a larger selection of tenants, contractors, property managers, wholesalers, lenders, etc.
These things are true, but right now bigger cities have a lot more competition and they also have more variance on neighborhood and house quality. So we need a tighter range for population size.
Economic Diversity & Strength
We want economic strength, but too much is linked with growth, which is linked with rapidly rising prices and competition, which means you get no deals!
Population Growth
I used to strongly recommend markets with a growing population. Now I suggest avoiding these areas because of price and competition.
OK, those are the main “downfalls” to the criteria I used to use. Now, let’s move on to what I feel is the “right”criteria to use moving forward.
NEW Market Recommendations:
1- Population Size between 50K and 250K
I feel like markets of this size are the sweet spot right now. Just large enough to where you’ll find a decent amount of other professionals you can work with to reach your goals. But not so big as to have a large percentage of the market in D class neighborhoods, or to have attracted a lot of attention.
2 - MLS Starting Price Point Under 50K
I want you to see a “grouping” of houses at or below $50,000 on the MLS. Not just one house, but at least 7 or 8 around that price range. 3 bedroom houses, and in decent looking areas (check out Google street view). This will give you a good idea of what you’ll run into if you decide to invest somewhere.
Seeing houses in that price range on the MLS means you won’t have a hard time finding deals where you can meet or beat the 1% rule, especially off market.
3 - Flat Population Curve
I want you in markets where the population is neither growing or declining. Declining is bad, people are leaving the town. This points to economic weakness. Growing means that if it isn’t already too expensive to invest there, it will be soon enough.
No one is looking in the towns that stay flat, and that’s the best part.
4 - Flat Average House Prices
House prices not going up or down, but staying flat. This part isn’t sexy and appreciation investors (aren’t we all after the last 10 years?) will say I’m crazy.
That’s fine, we’re all a little drunk on appreciation right now. But it won’t last forever, and you can’t spend appreciation without selling and paying taxes and then turning a real asset back into cash (trash).
Look for a market with flat house prices in order to be able to scale your cashflow more easily in 2020.
5 - Economic Diversity & Strength
For diversity, look for a market that is supported by multiple economic sectors. Not a one horse town.
Find somewhere that has tech, a college, healthcare, retail, and automobile. Or something like that.
Just not a place with only one or two of those. You’d be rolling the dice, because if that industry crashed, so would the entire city.
For strength, just make sure it’s stable. Growing is likely to mean population growth. Declining is not good for obvious reasons.
6 - Landlord Friendly
Pick a state that is considered landlord friendly. This will protect you in the event that you get in a sticky situation with some tenants. You want to invest somewhere that has a healthy level of respect and fairness toward the investor herself.
7 - Vacancy Rates
Make sure that vacancy rates are not exorbitantly high. Great vacancy rates are like 5%. 15% would be too high for my taste.
High vacancy rates can be worked around by offering a better product than what’s currently available in that market, but make sure to work that into your numbers.
8 - REI Activity
There should be at least a small to medium amount of REI activity in your market of choice. The fastest way to “get plugged in” to a new market is to network with existing investors who are already successful there.
Also, if practically nobody is investing in a market, there’s probably a reason for that. I don’t believe there are markets out there that “absolutely nobody has discovered yet”.
(And please don’t show me the deal you found in a city with a population of 5,000 as evidence that I’m wrong!)
A lot of you may say I’m running from money by avoiding growth and appreciation. I’ll admit, I feel crazy even suggesting these things.
But if you’re a cashflow investor, the truth is this:
If you‘re in a growing market, it’s either already too expensive or competitive to find positive cashflow, or it will be soon.
This doesn’t mean you can NEVER find a deal. It means that it’s HARD to find a deal, and when things are hard we tend to run away from them.
How many would-be investors would never have quit if they would only have chosen an easier market to do their first few deals in?
Also, it’s not worth it to me to have to completely rebuild in a new market every time the one you’re in gets too hot, just to capture a handful of deals there that are likely to appreciate more.
Moving forward, I’d rather keep things simple and scale in one place and master that market.
That’s it. I hope this list has been valuable for those of you who are looking to scale your single or multifamily portfolio.
If you simply want to do some deals in 2020 and create more cashflow on your bottom line, this criteria will take you a long way towards achieving that goal.
If you want some help picking your market, as well as every other part of the process to scale to 12 rentals fast, book a call to talk to us at:
