Rental Properties: They Could Be Your Cash Flow Machine

Unlike in other real estate deals, the key with rentals isn't location, location, location; it's cash flow, cash flow and profit.

House for rent
Getty Images
After the real estate bubble burst in 2007, and property values in most areas of the country collapsed, many investors soured on real estate. But rental markets remained strong, thanks to all those people who needed places to live after they had given their homes back to the banks. In some areas, you were able to buy solid properties at prices from the 1960s while rents stayed at their modern prices or even went higher.

Most of these properties had strong positive cash flow, which made them solid deals just based on the rent-to-value ratio. Imagine buying homes in the suburbs of Detroit for $25,000 to $35,000 while renting them out for $850 per month. You could also buy homes or condominiums in Florida, Arizona, Nevada and Texas for prices not seen in decades. It was a bonanza if you had guts, access to cash and someone local to run the properties.

After several years of decline and stagnation, many areas of the country have experienced double-digit rebounds over the last few years, but there are still some great opportunities in to create your own cash flow machines. According to ABC News, the top five markets to own investment property are Detroit, Chicago, Houston, Minneapolis-St. Paul and Boston.

The rent-to-value ratio is king, in my opinion; the prospect of having nice appreciation in your resale value is strictly secondary. Remember, buying a rental property is about cash flow, not speculation about growth. To successfully invest in rental real estate, adhere to these rules:
  • The three most important things in real estate are not location, location, location; they're cash flow, cash flow and profit. That location mantra? It's for homeowners raising families, not for investors.
  • Location is still important because quality tenants will gravitate toward quality homes in solid blue-collar areas. Buy where the tenants you want, want to be.
  • Buy properties only in areas where a significant percentage of the homes are owner-occupied.
  • Make sure the property is in good repair and is clean to attract the best tenants. You (or your management company) pick the tenant. Quality tenants will fight over solid homes in nice areas.
  • Complete background checks are mandatory -- not just credit checks. Just because someone has had a one-time financial bump that led to a foreclosure doesn't mean they won't be a solid tenant. Judge people by their overall background, not just by a credit score.
  • Offer small discounts on the rent for timely payment and enforce late fees. Set the tone early and often. Be fair, but firm.
  • Don't over-leverage your investments. Doing so puts your empire at risk of crumbling during the next real estate downturn. Many investors are paying cash in the less expensive markets (such as Detroit, Buffalo, Indianapolis) or putting large down payments on their investments in the more expensive markets. Leverage can be a great thing, but has been over-taught and overused. Use leverage wisely or not at all in your next round of investing
A lease with an option to buy can be a very effective strategy if the property is in a solid location. The rent you charge will be more a month, but a portion of it might go toward the credits on the purchase price for the tenant/buyer. In return for an option to buy the home and the credits, the tenant might agree to handle small repairs, thus relieving you (or your management company) of some of the upkeep duties.

There are still big opportunities out there for people who would like to invest in rental properties, but it will take education and a strong team to help you become a successful real estate investor.

John Jamieson is the best selling author of "The Perpetual Wealth System." Follow him on Facebook and Twitter.

How to Invest in Real Estate

Increase your money and finance knowledge from home

Portfolio Basics

What are stocks? Learn how to start investing.

View Course »

Finding Stock Ideas

Learn to do your research and find investments.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

'll do business with anyone in a heart beat mainly for the capital. Already got more than 15+ worthy houses in NY. 35000- 65000 range. close to a big university and community college in NY. so finding students and residents won't be a problem. I already have 2 houses and it's going great. I went to college in the area so i know what i'm talking about btw. i'm 23 and business not scamming.

May 23 2014 at 11:21 AM Report abuse rate up rate down Reply

What they fail to tell you is these properties were foreclosures that were left abandoned for years and were completely destroyed. They need lots of money to fix up just to rent out. So by the time you fix them up to rent would take years to recoup your money. There are a few out there that could be rented out immediately if you wanted too. I'm talking about Florida real estate here. Oh and one other thing...the home insurance alone down here in Florida makes renting out houses NON PROFITABLE. You simply can't raise prices enough to keep up with the ever rising costs of property insurance, home insurance and sales tax increases. Where I live we're about to get a 1 cent sales tax increase now up to 7%.

May 23 2014 at 4:54 AM Report abuse +1 rate up rate down Reply

Ya, I inherited a duplex, thought I was being nice and let a friends nephew move in next door, ya he stole all the copper pipe out of my basement and 13 grand worth of jewelry when I wasnt home. Now I have these tools trying to avoid eviction because they pay rent whenever they feel like it- I handed them eviction notices, and then had them sent certified mail 2x. They then hired a lawyer saying their were complaints etc., I then had a letter delivered via sheriff. I was then told by our blatantly protenant, antilandlord resource office, that because they filed a complaint and didnt recieve my certified copies because they refused to get them, that I cannot evict them for 6 months because it would be considered retaliatory and also cant increase the rent. I am hiring a lawyer, and have decided that when I get to court, if the court wont evict them, I am packing my stuff, leaving, and shutting off all the utilities. Im DONE- I will never be a landlord because they can do what they want, when they want, and to hell with what the owner of the property wants. Why ANYONE with a brain would want this headache is a mystery to me. Id rather work 3 jobs than deal with this crap!!!!

May 23 2014 at 4:05 AM Report abuse rate up rate down Reply

What a joke.... after awhile your rental property will start to cost YOU, the owner. This is why when we owned our homes, we sold them instead. I now live in an apt. complex where they just finished painting several building and renovating inside and outside. They won't be able to the side I live on til next year due to cost. Which means, they will be cutting back even MORE, and looking for ways to raise my rent. Its funny how apt. leasing places think the right to thing to do is to raise rent. When the better thing to do is to lower it to KEEP your tenants happy AND to replace things inside the apt.. Where I live, people are constantly moving OUT, not IN. They don't care about the tenants. Have let the place go,etc. If you move out, you must give 60 days notice. If your rent is even a day late, you fork over $100. I have never been late. They ignore complaints. But are quick to send letters out to all about those who throw cigarette butts out and leave dog poop on the grounds. Accusing those who don't do that kind of stuff. I have had to call or email them and tell them that they better come look at my place. Do you see an animal, do you smell cigarette smoke? I can not wait to move out of this place and when I do, I will let ALL know NOT to move here! Right now, I discourage it to those considering it.

May 23 2014 at 2:47 AM Report abuse rate up rate down Reply

Another great idea. I have a couple of friends that thought this was simply a wonderful idea. They spend their time, and money, trying to put their rental properties back together after the renters destroy them. They can't give them away.

May 23 2014 at 1:22 AM Report abuse rate up rate down Reply

I have owned many rental properties for a long time. I live in a Suburb of Detroit and the last place I would want to buy a rental in would be in Detroit or a cheap place just outside Detroit. That is where those cheap deals are the article is referring to. Many Detroit residents are moving just outside the city limits to get into better schools, etc and the areas are declining fast. Might look good on paper, but with the people you will be renting to, you might as well wipe your a... with that paper.

May 22 2014 at 10:45 PM Report abuse rate up rate down Reply
1 reply to vlady1000's comment

Detroit city limits is what I was referring to, when said Detroit.

May 22 2014 at 10:46 PM Report abuse rate up rate down Reply

after a while, it would cost more to maintain a rental home than the profit you think you would be making, barely enough to pay for insurance, repair, tax etc. If you are a professional carpenter or a handyman, it would help but the way the cost of repair is now days, it's not worth handing out the home/renting to people who would wear out and destroy it faster than you. Security and deposit fees aren't enough to cover it.

May 22 2014 at 7:59 PM Report abuse -1 rate up rate down Reply
1 reply to cristoba1's comment

Being a professional appliance repair person or plumber would be better then a carpenter.

May 22 2014 at 8:04 PM Report abuse -1 rate up rate down Reply

I am in a niche rental market where the better the location. the better the cash flow. And areas where there are more owner occupied, the worse the ROI and cash flows are as they are not as good of locations for the tenants. In 14 years, a 99.99% occupancy rate, no lost RENT REVENUE days on turnovers (leases structured that the tenants pay for that dead time), no trashing the places (some minor damage at times), only been stiffed for $350 in $3-4 of rental income in that time. Buying ANY rental that rents for $850/mo is crazy. How much can you possible clear on that? Maybe $250 range, not worth your time, unless you are a speculator, but is NOTnot a good cash flow for all the work involved. The typical house I buy rents for $3,500 to $5,500/mo and clears $1,500 to $2,200 after ALL costs (PITI, maintenance, etc). Like anything, depends on what you get into and how you manage it.

May 22 2014 at 7:20 PM Report abuse -2 rate up rate down Reply
1 reply to vlady1000's comment

Stiff for $30 in $3-4 "Million" of rental income

May 22 2014 at 7:21 PM Report abuse -1 rate up rate down Reply

Had a rental property for years. One big headache until we sold it. Would NOT advise doing.

May 22 2014 at 6:45 PM Report abuse +4 rate up rate down Reply

This is a pretty amateurish article. I own 5 properties, all investments. The only thing that rings true is that location is not an issue.
First: DO NOT hire a management company for a property unless it is a trouble property. If you hire management, you are no loner an active participant (unless you do property rentals as a career) and you lose your tax writeoff.
Second: When buying a property, spend a little money idiotproofing the property. Laminate floors or tile and good plumbing.
Third: Have an IRON CLAD lease agreement with reminders that if they break something, they will pay for it.
I do agree with the late fees thing. If you establish early on that they can't be late, you will get a better response than letting them slide all the time.
Fourth: Understand your local landlord tenant laws and use them to your advantage.
Fifth: My best tenants have also been my most pathetic tenants. Sometimes terrible credit scores but no criminal records and no evictions. They want to find a place to live and stay for a long time. The tenants that have flawless credit and good jobs never stay for more than a year or two.
You can still turn a good profit even with taxes and utilities if you know what you're doing.

May 22 2014 at 5:25 PM Report abuse +1 rate up rate down Reply