The foundation of my real estate investing is rooted in buy and hold investment property for the long term: otherwise, known as Landlording. While I have wholesaled & rehabbed property for short term merchandising of real estate not to mention provided hard money loans to real estate investors in Charlotte, North Carolina, it is my rental portfolio that has provided the slow and steady upward growth in both equity and cash flow during both the good and challenging real estate cycles we’ve faced over the last two decades.
I’m often approached by real estate investors seeking my real estate advice that want the secret answer to financial independence. You will hear me discuss how wholesaling, rehabbing to (sell) retail, and private money loans create cash and cash flow streams, I often will refer to rental property as long term retirement packages. I say this for a reason. To build a reliable positive cash flow stream, one has to either have a low debt level (on the rentals), buy right (on multiple properties), and/or let the compounding of debt reduction (via principal payments on a loan) or rent income (and valuation) appreciation occur over time. It is hard to create any of this with volume in the short term.
I’m not saying it can’t be done -just that nothing comes easy!
There are many variables that can make a good rental real estate investment. Often one will hear the mantra: Location, Location, Location…. I will say that a good rental location can be like a McDonald’s franchise. It doesn’t need to be in the wealthiest area of town -heck one certainly won’t see positive cash flow on that investment unless its paid for in cash (and if that’s the case then one could argue the Return On Investment (ROI) is paltry and certainly not worth the sweat and tears it takes to run a landlord business). Nor am I a solid fan of the lower income rentals were “positive cash flow” is a requirement because the appreciation component is hampered (the exact opposite correlation of that wealthy rental thought).
So what do I focus on that has created my greatest returns from both a cash flow and appreciation standpoint over many years of letting the power of compounding work its magic with rentals????
I seek neighborhoods that are the above average appreciating neighborhoods in Charlotte, NC. In my opinion these are older neighborhoods that surround our downtown metropolitan city -where gentrification occurs with a radically changing social-economic demographic. I find properties that are run based on the old neighborhood model. Typically they are a bit run down, rented on the old pricing, and thus priced on the old model. I freshen up the homes and make them affordable for my new target tenant. I call them a ‘creative loafer’. Typically a 20-30 year old starting out in life or comfortable with themselves. They can be a yuppie, deadhead, tattooed or pierced, head shaven or in dreads, conservative or liberal -not sure how to explain it other then a mindset. They don’t need granite nor the Starbucks drinking neighbors; however, they require secure, clean, rehabbed, and efficient homes that meet their needs. Often small multi families work well here too. However, key in on separate utilities, ability to provide washer/dryer hookups (or at least provide stack units if space is an issue), and off street parking.
These are other points I look for:
- Invest in area’s with a high concentration of owner occupied homes
- Stay in area’s that are primarily single family homes – area’s of high density multifamily (note: this is locally as a highly populated metropolitan area certainly is an exception) tends to be commodity housing.
- Invest in area’s where additional land for building doesn’t exist -otherwise, valuations on rent demand and pricing is contingent to the cost of new construction and what is built.
- For multifamily: always count electrical, gas, and water meters -the more that match up to the units available the less monthly expenses that you’ll absorb.
- Avoid carpet -at least in high traffic areas. Hard surfaces simply last longer. Hardwoods, ceramic tile, and vct have lasted the test of time for me.
- Focus on schools.
- Ease of in/out gress of the neighborhood.
- Use commonsense. What types of homes do home owners prefer?
- Houses that sit above road grade tend to be of greater value while those below are the opposite
- Parking
- Dead Ends and culdesac’s maybe great once your there; however, less traffic correlates into a greater challenge for filling the rental.
When I follow this model, I find that I will sell off some of my single family homes (as I mentioned in “Rinse & Repeat: 1031 and the power of rentals over time….”) at a far faster pace (simply due to appreciation & and costs (property taxes) out run rent appreciation) while my multifamily’s become powerful low maintenance, low turnover cash cows. Yes, part of my philosophy is selling some long term rentals at times to actually accelerate one’s growth in rentals -but that’s another time, another story.
Regardless, it is following this method that has created my greatest returns (both in cash flow & appreciation) in the world of landlording.
by Tyler McCracken -a Charlotte, North Carolina Real Estate Investor
