How to Finance & Build 10K/month Cash Flow from Rentals!

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Where to Invest?

When it comes to finding great real estate deals, I am a firm believer that you can find deals in any market and any time. But what is the probability that you can cherry pick from many home run deals have little competition and multiple exit strategies? The best markets allow you to consistently find successful deals, create efficient systems and duplicate over and over. The media has a much different approach in that they look at hot markets speculatively as ones that will appreciate, our approach is much different. To identify markets to invest in it is recommended to have not 1 or 2 of the following, but all 4: Little chance of depreciation, lots of available deals, low competition, multiple exit strategies.

Probability of depreciation – If you haven’t heard of PMI, Private Mortgage Insurance, let me introduce you. PMI provides insurance to lenders to protect them from buyers who default. PMI also applies leading research, analytics, and pricing principles to manage risk concentration, and release a monthly market review and quarterly Market Risk Index report. The PMI U.S. Market Risk Index score translates to a percentage that predicts the probability that house prices will be lower in two years. Based on this report many of the hot areas during the boom such as CA, Vegas, FL, etc have a High probability of lower home values in 2 years. However, many areas of OH, TX and the Midwest have Minimal risk rank.

PMI US Market Risk Index
Risk Rank 1st qtr 2009 4th qtr 2008
Riverside-San Bernardino-Ontario CA

CA

High

99.9

99.9

Miami-Miami Beach-Kendall FL

FL

High

99.9

99.9

Los Angeles-Long Beach-Glendale CA

CA

High

99.9

99.9

Fort Lauderdale-Pompano Beach-Deerfield Beach FL

FL

High

99.9

99.9

Las Vegas-Paradise NV

NV

High

99.9

99.8

West Palm Beach-Boca Raton-Boynton Beach FL

FL

High

99.9

99.8

Orlando-Kissimmee FL

FL

High

99.9

99.6

Tampa-St. Petersburg-Clearwater FL

FL

High

99.9

99.7

Santa Ana-Anaheim-Irvine CA

CA

High

99.9

99

Phoenix-Mesa-Scottsdale AZ

AZ

High

99.9

98.8

Jacksonville FL

FL

High

99.9

98.9

Sacramento–Arden-Arcade–Roseville CA

CA

High

99.9

97.9

San Diego-Carlsbad-San Marcos CA

CA

High

99.8

97.2

Providence-New Bedford-Fall River RI-MA

RI

High

99.3

98.3

Detroit-Livonia-Dearborn MI

MI

High

98.8

86.3

Edison-New Brunswick NJ

NJ

High

96.7

89.4

Oakland-Fremont-Hayward CA

CA

High

96.4

80.7

Newark-Union NJ-PA

NJ

High

96

84.1

Nassau-Suffolk NY

NY

High

91.9

78.3

Washington-Arlington-Alexandria DC-VA-MD-WV

DC

High

91.7

88.2

Portland-Vancouver-Beaverton OR-WA

OR

High

89.8

66.4

Baltimore-Towson MD

MD

High

89.6

83.8

Virginia Beach-Norfolk-Newport News VA-NC

VA

High

89

77.6

New York-White Plains-Wayne NY-NJ

NY

High

87.8

67.6

Atlanta-Sandy Springs-Marietta GA

GA

High

80.7

55.8

Boston-Quincy MA

MA

High

79.5

56.6

San Jose-Sunnyvale-Santa Clara CA

CA

High

78.4

51.4

Minneapolis-St. Paul-Bloomington MN-WI

MN

High

74.5

58.5

San Francisco-San Mateo-Redwood City CA

CA

Elevated

66.2

31.6

Warren-Troy-Farmington Hills MI

MI

Elevated

57.9

23.6

Seattle-Bellevue-Everett WA

WA

Moderate

46

30.3

Milwaukee-Waukesha-West Allis WI

WI

Moderate

44.6

27.5

Cambridge-Newton-Framingham MA

MA

Moderate

40.6

27.3

Chicago-Naperville-Joliet IL

IL

Moderate

36.2

13.7

Philadelphia PA

PA

Moderate

30.3

27.5

Indianapolis-Carmel IN

IN

Low

28.8

9.6

Austin-Round Rock TX

TX

Low

28.1

17.4

Cincinnati-Middletown OH-KY-IN

OH

Low

27.4

12.1

Kansas City MO-KS

MO

Low

26.2

11.2

Denver-Aurora CO

CO

Low

21.2

14.2

Nashville-Davidson–Murfreesboro–Franklin TN

TN

Low

16.6

12

Charlotte-Gastonia-Concord NC-SC

NC

Low

15

5.7

St. Louis MO-IL

MO

Low

12.9

13.8

Fort Worth-Arlington TX

TX

Minimal

5.8

2.5

Dallas-Plano-Irving TX

TX

Minimal

3.8

2.5

Houston-Sugar Land-Baytown TX

TX

Minimal

3.7

2.7

San Antonio TX

TX

Minimal

2.8

3.8

Columbus OH

OH

Minimal

2.1

2.4

Pittsburgh PA

PA

Minimal

1.5

1.7

Cleveland-Elyria-Mentor OH

OH

Minimal

1.5

2.3

Lots of available deals – It is safe to say that the US economy has impacted every market in the country. Foreclosures have hit all time highs and many areas have an oversupply of opportunity. Some areas have more deals than others, but there are plenty of distressed properties out there.

Competition – Have you ever been in a bidding war? 5-10 offers and the seller counters or asks for best and final? I have experienced this many times and almost always the property sells for much more than I am willing to pay. Competition drives up prices. A perfect example is the way prices soared in hot areas like CA, Vegas and Florida. Homes would be put on the market for 15% higher than the comparables justify and still multiple offers as much as 20K over asking price. Investors are in the best situation where they are the only offer and thus have much more leverage in negotiations. My experience is that there is a lot of competition in the desirable areas that were very hot during the boom such as CA, Vegas, Florida, TX etc. Other less desirable areas have less speculation and competition which often results in lower purchase prices for distressed properties. Many smaller cities and areas of the Midwest such as OH have much less competition.

Multiple Exit Strategies – I have written about this topic in the past articles. Having multiple exit strategies is often crucial to avoiding loses. If you are unsuccessful flipping a property you may be able to rent, lease option and even get a lower payment or take cash out with a refinance. Or if you cannot find good property management or good tenants then you can flip or wholesale the property because you have plenty of equity. Multiple exit strategies give investors backup plans if your 1st exit is unsuccessful. Simply put, multiple exit strategies will lower risk, not to mention, let you sleep at night. Many high priced areas are difficult to cash flow and have multiple exit strategies. Again, many smaller cities and areas of the Midwest such as OH have an oversupply of deals with tremendous equity, tremendous cash flow and multiple exit strategies.

Summary – It is strongly recommended to identify areas with all 4. High priced areas that were hot during the boom have a high probability of depreciation based on PMI’s research, there is a lot of Competition and Multiple Exit Strategies is difficult to achieve. While there are many foreclosures in CA, Vegas, Florida, etc, they are not areas that are recommended. Many people will do well on deals, but many deals will also tank. TX is an interesting market as it is very stable. You can achieve multiple exit strategies but there is a lot of competition fighting over the available properties. Many smaller cities, areas in the Midwest and OH however hit on all 4. Minimal chance of home values decreasing, tons of available deals, low competition and ability to find deals with tremendous equity and tremendous cash flow. The success of a deal is still dependant only on that specific property and not the market as a whole, but the Midwest and OH are the areas strongly recommended as areas to invest at this time. Check out some current deals we have done in these areas with tremendous numbers here http://www.realreturnrealestate.com/index.php?option=com_content&view=category&layout=blog&id=57&Itemid=88.

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