Dave:
If you’ve been analyzing deals or trying to get into the real estate game for the last year or two, you already know this, but I’m gonna say it anyway, strong cash flow is getting harder and harder to find. And a lot of people are saying that the 1% rule is dead, or that it’s just impossible to find cash flow today. But harder doesn’t mean impossible. And today we’re gonna prove it to you with real markets, real deals and real numbers. I promise you all great deals do exist. You just need to know where to find them.

Dave:
Hey everyone, it’s Dave, it’s Friday, which means it’s time for bigger news. And we’ve got a great one lined up for you today. My friend and on the market co-host Henry Washington, is here to talk about the best markets for finding cash flowing deals right now. And we’re actually not just gonna talk about what markets are great, but we’re gonna actually analyze real deals from the MLS in the markets that we’re talking about. So you can see what kind of returns you can expect. Henry, man, it’s good to have you back on the show. Thanks for being here.

Henry:
Hey man, thanks for having me. You know, I love doing shows where we’re talking about finding good deals. That’s my jam.

Dave:
Yes. Well, we have the, the, uh, expert in the house. So thank you and I do wanna hear what you’ve been up to recently. And in order to do that, we’re actually trying something new. Everyone after this episode records, Henry and I are gonna record an after show. It’s gonna be exclusively on our YouTube channel where we just casually talk about what he and I have been up to in our portfolio. ’cause we don’t always have time for that on these shows, but we think it’s gonna be helpful for you to just see the challenges, the successes that Henry and I are both having in our real estate investing. So if you’re listening to this, go check out the YouTube channel and check out our new, uh, idea that we’re testing out the after show.

Henry:
Yeah, it’s cool. So guys, I just snagged a couple of cool deals that I want to talk about, so that’ll be fun.

Dave:
Oh, I’m very interested to hear more about this. I’m having the opposite, uh, right now. . So at least we’ll hear some successes from you . Great,

Henry:
Great. Well on this show we are gonna talk about which metrics investors should use to project future cash flow. We’ll also talk about what regions pop when you start running the numbers and seeing where you can actually get some cash flow and which markets in those regions are our top picks for cash flow right now.

Dave:
Awesome. This is gonna be a lot of fun. Before we get into it, I should just correct something. I said that after show that we’re filming, it’s happening, but it’s not coming out till next Tuesday. So I know you all are gonna be waiting all weekend furiously refreshing your set, your alarms, set your alarms for Tuesday because you could hear more of me and Henry on the BiggerPockets YouTube channel. But with that, let’s get into our episode today talking about cashflow markets. All right, Henry, so today we’re obviously talking cashflow, but before we get into specific markets and the specific deals, let’s just define the term for anyone who’s new to real estate investing. When we talk about cashflow for property, how do you think about and calculate cashflow?

Henry:
Uh, isn’t cashflow just any money that’s more than the mortgage payment?

Dave:
Oh yeah. All you gotta do is you just take your rent, you subtract your biggest expense, and then just ignore all the other expenses. You don’t need to think about them.

Henry:
Absolutely . Absolutely. Yeah. So when we talk about cash flow, what we’re really saying is net cash flow. That is what you net after all of your expenses. And a lot of investors like to leave off certain expenses to kind of make the numbers work. Mm-Hmm, . But the truth of the matter is, in this market that is very difficult to do because people, everybody thinks, oh, well interest rates are higher. So it’s hard to cash flow, unfortunately. It’s not just interest rates now that are higher. So when you are calculating your net cash flow, you take your total rent amount for the month, you subtract your debt service. So that’s your mortgage, uh, your mortgage payment, and whatever your interest is, you also need to subtract your expenses. And we’re talking all expenses. And these are gonna vary based on your market, but one expense people always forget about is vacancy, right?

Henry:
Mm-Hmm. . Because you’re never going to have your place a hundred percent full all the time. It will be vacant, there will be turnover. And so in order to calculate this correctly, you need to understand what vacancy rates are in your market. You can get this by doing a little research yourself. You can get this by talking to an investor friendly real estate agent. I’d urge you to talk to several of them to make sure that the data is accurate. So you subtract your vacancy, you subtract your maintenance, everybody knows about maintenance, right? Normal wear and tear things are gonna break. Um, we typically do about 5%. If it’s an older house, we’ll do a little higher. We may do eight to 10%, uh, for vacancy.

Dave:
When Henry says five to 8% you’re talking about of rent, right? Yes. Like you take five to 8% of your revenue and set that aside, uh, as an an expense. Even if you don’t need it every month, you just put it on the side.

Henry:
We have a rental expenses account that we automatically set up draws to come out of our rental income account every month based on those percentages. So we didn’t have to think about it. And then if we need it, great. If we don’t, it’s there. So five to 8%, depending on the age and how much maintenance you think it’s gonna need. And then capital expenses because there are things that just go bad over time. HVACs don’t last forever. Water heaters don’t last forever. Roofs don’t last forever. They’re big capital expenses. You need to be budgeting a little bit every month for when they do fail. You can’t afford to replace them. So you got your capital expenses and then you have to budget for property management. Even if you are managing properties yourself.

Dave:
Yes.

Henry:
Because you may think, I’m never hiring a property manager. And then you grow your business or something terrible happens and you’re like, you know what? Property management isn’t for me and you want to turn your portfolio over to a property manager and you didn’t budget for it. Well, all your cash flow gets eaten up by this new 10% expense you have to pay. So budget, 10% property management when you’re doing your cash flow. So then make sure that your insurance budget is accurate because insurance has gone up over time. If you have been investing for a year or two now and you haven’t adjusted what you’re budgeting for your insurance, you need to take a look at it because they have gone up over the past year and you wanna make sure that that’s accurate. And so your cash flow for this very long-winded answer, your net cash flow is what is left from the rent every month after you subtract all of these things.

Dave:
Well said, Henry, thank you for putting it so clearly and actually using the right metrics and the right categories here for expenses. I, it just makes me so mad, honestly, seeing people on social media, honestly being like, I get a 10% cash on cash return. I get a 15% cash on cash return. And you ask what expenses they’re taking out. They’re like principal insurance, taxes and maybe maintenance. But there are things like vacancy, property management turnover costs for when you eventually do have to do it, do. And when we talk about cashflow during the, for the remainder of this episode and for the future of this podcast, we are talking about underwriting using all of these categories. And this, some people may say that you’re being overly conservative. Fine, I’m fine with that. Yeah, exactly. Like I would rather invest in a deal that has a 5% cash on cash return that is underwritten with all the things you just said it than just pretend that I’m gonna get a 12% cash on cash return and hope that everything goes extremely well.

Dave:
So just keep that in mind as we’re talking about this, that we’re talking about fundamentally sound conservative underwriting so that the cash on cash return that you get at the end of this analysis is hopefully the worst case scenario, right? Like that’s how I always think about is like if I’m looking at 5%, that’s if everything goes wrong, hopefully not everything’s gonna go wrong, I get eight, nine, 10% cash on cash return. But I think that can be confusing for people when you see other educators in the real estate space talking about these massive numbers that maybe aren’t underwritten with the same degree of scrutiny.

Henry:
And to be fair to people, like you could be a little wishy-washy about your numbers two, three years ago, right? Because values were going up so high, insurance wasn’t as high, taxes weren’t as high interest rates weren’t as high and rents were going up. So you could underwrite a deal, miss a couple of these expenses and look at the end of the month and still say, man, I made some good cash flow. You probably did.

Dave:
Yeah, , but it’s

Henry:
Not like that anymore. You really this, this, this new market with the interest rates and the taxes and the insurance all being higher, it will eat your lunch if you are not prepared. And if you’re a new investor who doesn’t have other cash flow properties helping to carry a portfolio, or you’re not sitting on cash reserves that you can use to fund your portfolio, when you miss one of these, uh, expenses, then you’re gonna find yourself in a world of hurt. It’s really the new investors who don’t have that cushion yet. Mm-Hmm, that really, really need to pay attention to this episode.

Dave:
That’s such a good point. I, uh, yeah, I’ll talk about this more when we catch up later, but I had this, uh, rough week as a, as a property manager, but it was okay because I’ve owned this property forever. So the cash reserves have just like, you know, built up a lot over time. So I’m fine, like I had cash reserves for it, but if you’re brand new to it and you hadn’t allocated for some of the things I’ve gone through in the last week, you’d be in a a, a tough uh, situation. Alright, time for a break, but we’ll be back shortly. Thanks for sticking with us. We’re back with bigger news. Okay. So we’re going to get into our list of top markets and then actually analyze some deals in those markets just to show you what type of returns you can expect. But before we do that, Henry, let me just ask you, what type of cash on cash returns do you normally look for?

Henry:
Yeah, I mean, obviously a 10% cash on cash return is great. I’d love to underwrite it and see a 10% cash on cash return. That doesn’t always happen, quite frankly. It’s, uh, pretty rare that I’ll see them. Now, if you’re truly underwriting deals properly, like we just talked about, um, we’re typically seeing somewhere near half of that. And I’m okay with that right now.

Dave:
Mm-Hmm,

Henry:
For a couple of reasons, right? Again, guys, I am a seasoned investor, which means yes, I want cash flow, but there’s other parts of how real estate pays you that are important to me as well because of the tax benefits. Because how much equity am I walking into on day one? There’s other things that I’m also looking for, but um, sure, I’d like to underwrite it at a 10% cash on cash return, but typically we’re seeing probably closer to five.

Dave:
Yeah.

Henry:
Six. And I like those deals. Those are solid deals. ’cause that’s telling me that in the worst case scenario, this property is paying for itself, uh, and still paying me a little bit of money every month. And, uh, given all of the factors working against me right now, I think that’s pretty solid.

Dave:
Totally. I don’t wanna go on a whole resource allocation tangent here, but it really, you have to think about how you’re allocating your money. And a five or 6% cash on cash return is so much better than any cash that you can get anywhere else. Mm-Hmm. even a, a high yield savings account, they’re at 5% right now. Probably this week in the middle of, you know, Fed’s gonna cut rates, that means savings account rates are gonna go down. So you know, you’re getting 4% there, bonds aren’t as good. So you are getting better cash than you can get in pretty much any other type of investment asset. Plus the amortization, the appreciation, the tax benefits. And so, like to me, that’s still a great deal. And again, we’re underwriting these deals that that is the worst case scenario that you’re gonna get for the deal.

Dave:
So just keep that all in mind as as we are, uh, talking about this deal. All right, let’s start talking about, uh, just some of the ways that we look for cash flow. So you’ve probably all heard this term or this metric, the RTP or rent to price ratio, if you’ve heard of the 1% rule that is applying this metric called the rent to price ratio. And it’s basically this very frankly, pretty crude metric that looks and helps you estimate cash flow. It basically looks at how much a property costs and compares that to how much rent that you can generate from it. And when you divide one month of rent by the purchase price of a property, the closer you are to 1% the better. If you’re above 1%, that’s generally seen as really great. Now, I don’t know about you, Henry, but I gave up on the 1% rule a long time ago. Is it so something that you think about?

Henry:
I’ve never used it as a hard and fast rule. For me, it’s always just been a, a rule of thumb or a measuring stick to know if I’m actually considering or looking at a what could be a good deal?

Dave:
Mm-Hmm. .

Henry:
If I get a lead in my inbox and I do some quick math and go, well, if I rent it for this and if I buy it for this, will I hit 1%? Yeah. Then I know that I can pursue that deal and then I’m gonna try to get it cheaper than that so that I can get more than 1%. But I’ve never thought, oh, well it hit 1%, I’m buying it. That’s not what it, that’s it’s not a hard and fast rule for me. It’s always just been a measuring stick to know, am I looking at what could potentially be a good deal here?

Dave:
Yeah, that’s a perfect way to put it. I I think it’s a good way to compare two similar assets, right? So if you are looking at, in the same neighborhood where taxes and insurance are likely to be the same and two different properties, one’s better, you know, one has a higher enterprise ratio than the other, you can say, okay, this one probably is gonna generate more cash flow. Or if you’re doing, comparing markets, for example, that one, it works as a proxy, but it, it’s not a be all end all because, you know, different markets, like you might have a really high rent to price ratio in Texas. Texas has some of the highest property taxes in the country. Mm-Hmm. It has really high insurance costs right now. So those are things that you obviously have to factor in as well. But it still can be useful. It’s like as long as you take it with a grain of salt, uh, it’s still useful. But I also just think the 1% rule at this point in the investing cycle does more harm than good because Right, because more people are saying like, oh, I can’t find a deal that’s 1% rule, I’m not gonna get into real estate. You’re like, well, the deal at 0.8 or 0.9 is still better than anything else that you would do with your money. So you should probably reconsider that rule a little

Henry:
Bit. I agree.

Dave:
Anyway, I wanted to talk about rent to price because just to help people understand where regionally in the country cashflow is generally easier to find. You find the highest rent to price ratios right now in the Midwest. Uh, so you look at places like Indiana, Ohio, Michigan, Illinois, those places tend to have better rent to price ratio. It’s been like that in the southeast a lot, but Southeast has gotten more expensive over the last couple years. But I still think, I mean, you know better than me, I still think there are places there that offer cashflow in the southeast

Henry:
When I was doing research for this show, uh, it’s pretty much you just draw a circle around the Great Lakes. It’s like the, it’s like, you know, they have lake effect snow, you have lake effect cash flow, . That’s what, that’s what, that’s where you get it right now. , that

Dave:
Is such a good term. You should, you should trademark that Lake Effect. Cash flow is great. . Yeah, you definitely see a place like Milwaukee or a lot of Ohio or Michigan.

Henry:
There’s like a sweet spot right in between Milwaukee and Chicago where it’s like cashflow heaven.

Dave:
Yeah, it’s great. And just so everyone knows, like there’s usually trade offs. A lot of places that offer the best cash flow don’t appreciate as much right now. A lot of those markets are appreciating, but historically that relationship does exist. Um, I will just tell you that I did put out a list of top cashflow markets earlier this year, and they’re not all in the northeast. ’cause I did sort of some other metrics other than rent to price ratio. I looked at job growth, population growth, and number one was in the Great Lakes. It does have lake effect cash flow in Peoria, Illinois. Uh, but then you see places like Shreveport, Louisiana, which I know our colleague, uh, Tony Robinson on the rookie podcast is much maligned to admit he is invested in. Um, but you see places like Pittsburgh, Pennsylvania, which has a great economy up there, um, places like in Texas, like Lubbock, Texas, Corpus Christi, so they really can be found all over the country. But I thought it’d be fun, Henry, to just pick two markets that have decent rent to price ratios and just walk through one of the deals. Are you, uh, wanna do this?

Henry:
Dude, I’m a deal junkie. Let’s do it.

Dave:
Let’s do it. Okay. So the first one I picked, I think I picked this on, I went on the rookie show recently and it asked me to pick a market I would invest in, and I picked Pittsburgh.

Henry:
Mm-Hmm. .

Dave:
So the things that I like about Pittsburgh is one, it has a, it’s a big population, 2.4 million people. It’s growing, but the median home price is $200,000, which means that it is half the national average. So it’s super affordable, but it’s like the epicenter of the robotics industry in the United States. And so there’s a lot of really high paying good jobs. There’s great price growth, uh, and from what I read, there’s decent quality of life and quality of living. So, and just for the record, Pittsburgh’s rent to price ratio on average is about 0.7, which might sound terrible, but by rule that means of the deals in that market are better than 0.7 and half of them are worse. So I went on the BiggerPockets deal finder and just poked around for honestly two or three minutes and found this deal. It is on the market MLS, it’s a four bed, two bath, 1800 square foot house. It looks really nice. It’s like one of these brick buildings. It looks like it’s recently had a cosmetic update. Are you looking at these pictures?

Henry:
Yeah, man. No, it looks clean.

Dave:
It looks pretty nice, right?

Henry:
Like it’s ready to go.

Dave:
Yeah, it’s on sale for 1 75 and the rent estimate from the BiggerPockets deal finder is $1,737. So it’s not quite 1% , but it’s like the 0.99% rule, which is great. So when I analyze this deal, full purchase price, no rehab, paying VMs, CapEx, maintenance vacancy, everything that you said, this deal is a 5% cash on cash return.

Henry:
That’s a solid deal, bro.

Dave:
Right

Henry:
Rick? All the way around final windows and a couple of them like, it looks like this is, this is pretty solid, man.

Dave:
I know, right? So I, it got me excited because I felt like I spent almost zero time looking for this. And this is an already renovated turnkey property. Like this is one that you wouldn’t have to do any work for. If you wanted to do more work than this, you probably could get even a better cash on cash return if you’re willing to do some of the cosmetic rehab yourself.

Henry:
Oh yeah.

Dave:
So I just wanted to show you this just as an example because to me it showcases the fact that cash flowing deals on the market are absolutely still possible if you just look in the right places. Is this a kind of deal that you would see in your market, Henry? Like, could you think you could get cash on cash return, 5% turnkey, turnkey like this?

Henry:
Yeah. No, no, definitely not.

Dave:
So when you were saying 5% earlier, that’s after a little bit of work, right?

Henry:
Yes, absolutely. This is, that’s after buying value add. Like what’s cool about this deal you’re showing is this is 5% cash on cash return day one.

Dave:
Day one,

Henry:
Right? And so in my market, I’m getting 5% cash on cash return, takes me six months to renovate it. I mean, uh, three months to renovate it, another month or two to throw somebody in there. And then they’re paying rent and deposit. And so by the time that happens, you’re six months down the road before you’re actually starting to see some of the fruits of your labor.

Dave:
Yeah.

Henry:
And so this is a, a day one property. And what’s also cool about it being a day one property is you can go ahead and start getting the tax benefits because the property has to be in operation before you really get a lot of those tax benefits,

Dave:
Right? Yeah, absolutely. That’s so true. That’s a great point. And of course, there’s a benefit to doing what you were talking about in doing a rehab because you know, you’re increasing the value of the property and building equity at the same time. But if you’re the type of investor who just wants low headache, easy type of deal, like do go do this. Go buy real estate in Pittsburgh. , I don’t understand ,

Henry:
But it just, it it squashes that. ’cause everybody’s saying it, you can’t find cash flow. It’s too hard to get cash flow. You can’t find any good deals. You found one in five minutes,

Dave:
Dude, it was so easy. Yeah. And I, I started investing earlier this year in a market with a little bit of lake effect cash flow. And I’m finding these kind of deals as well. Like in my mind, the best one you can find is somewhere that has like a three to 4% cash on cash return. But after a cosmetic rehab, you can get like a seven or eight cash on cash return, which definitely exists in a lot of markets. This was just one I I picked up out of nowhere. Okay. We have to take a quick break, but I first wanted to remind you that if you’re looking for deals right now, the BiggerPockets deal finder can help. This is actually what I used when I was doing research for this show and I picked these markets and just wanted to find a deal as an example of what you could find in there. It took me just a couple of minutes to find cash flowing deals, and you can check it out by going to biggerpockets.com/deal finder. We’ll be right back. Welcome back. Let’s jump back in with Henry Washington. So the other market people tell me about a lot is Augusta, Georgia. Never been there. I just know the masters. Is there you ever been?

Henry:
No, never been. But I obviously would love to go watch the masters.

Dave:
I tried. I I put myself in the, uh, the lottery and that was like seven years ago and I’ve never heard a single peek about it. . I don’t think I’ve ever going , but it looks so fun. And apparently, have you heard this thing about the masters where the food is like extremely cheap?

Henry:
Dirt cheap? Yeah.

Dave:
Yeah. What is that? So it’s like they make you wait nine years and pay a thousand dollars for a ticket and then you get a $2 cheeseburger.

Henry:
Yeah, it’s totally worth it.

Dave:
That works. That kind of marketing works on me . So I would go . All right, so in Augusta, just a couple stats, again, I’ve never been there, so I don’t know that much about it, but I could tell you that the median home price is about 230,000. Rent to price ratio is lower at 0.6%. But something I like about it is that it’s still relatively affordable. Uh, when you, for, for the average citizen there, it’s easy to relatively easy to pay rent compared to a lot of more expensive places. It seems to have a growing economy. Population is growing low unemployment rate. So a lot of things that you look for in a city. Um, and again, at 0.6% rent to price ratio, I thought I would take a look and see if I could find a deal. So instead of spending three minutes looking for this deal, I really, I dug deep and I spent maybe seven minutes looking for this deal. Whoa. Yeah, it was pretty intense. Uh, and this one, what we got here again on the market, another four, two, it’s about 2000 square feet. It’s built in 1957, which is pretty good. I think a lot of, one of the things about the Midwest, I’ve noticed investing there is a lot of the houses are super old. Yeah.

Henry:
Like

Dave:
You find houses in the 1890s, 19 hundreds. So that comes with some, some challenges. But this place, to me, the outside exterior is nice. The inside it needs a little bit of love. So I actually went to the BiggerPockets calculator and ran the analysis. I still plan to buy it for full purchase price, which, uh, it is listed for 185,000. But I said that I was gonna spend, i I just really roughly estimated this. So take this with a grain of salt, 20,000 bucks on repairs. Mm-Hmm. . I don’t know if that, do you think that’s like a reasonable estimate? Just looking at the pictures?

Henry:
I think that might be a smidge low. I’d say this is probably a 30 K or

Dave:
Okay. 30 k know what? I’m gonna use a BiggerPockets calculator. I’m gonna just change this right now. 30 k tell me Henry, it’s listed for 180 5. If we put 30 K in, what do you think the after repair value is?

Henry:
Two 30.

Dave:
Two 30. All right. I like it. Obviously everyone, this is not how you should underwrite deals long term, but honestly this is how I do a lot of like preliminary analysis. Like if someone sends you a deal, I just use estimates, rules of thumb to see if you’re in the right ballpark and then start refining your estimates from there. So if we do this, I assume that I’m gonna be able to, uh, raise my rent a little bit. I’m gonna hit next expenses, update my analysis here. Okay, dude. So if we did this, even putting in 30 grant, this property would generate $446 a month in cashflow and for a 6.6% cash on cash return. That’s right. In your wheelhouse.

Henry:
That’s solid.

Dave:
Yeah. And in addition to that, you were improving the value of the property, so you were also gaining equity in this type of deal.

Henry:
Yeah, man.

Dave:
Now I obviously, we don’t know if this deal is exactly right. You might walk into this place and say, there’s foundation issues, there’s structural issues. This is gonna cost 70 grand, 80 grand. But my hunch is that if in seven minutes of looking on the MLS, I could find a deal that sort of makes sense just by the eyeball test that if you spent some time doing what your job is as an investor to go in and analyze and look for these deals,

Henry:
Diligence

Dave:
That you will be able to find them. Yeah, exactly. Right.

Henry:
I mean this is solid. Like this is, and to kind of echo what Dave was saying here is you, you do this eyeball test and this will tell you, you get a handful of properties like this that you can now dive deeper into and you can get somebody out there to get eyeballs on it, to walk it, to tell you the things you can’t see in pictures. And then you can select from those 3, 4, 5 properties, the one that’s actually gonna work, uh, that, that you’ve had physical or had somebody do put physical eyeballs on. And then you can make offers. And also Dave is analyzing this saying he’s going to pay what they’re asking.

Dave:
Yep.

Henry:
But guess , you don’t have to do that. . Yeah. This is as conservative underwriting as you can get. Yes. You can pay less than they’re asking. I tell people all the time, like, what if I told you that every deal cash flows, every single one cash flows at the price that it cash flows at for you . Like you can make whatever offer you want. You don’t have to pay what they’re asking.

Dave:
Yeah, exactly. That’s, that is the whole job, right? Like we’re just showing you that there’s opportunity. You as the investor have to go and figure out and sort of design the deal in a way that works for you and for some people that might be offering less. For some people that might be maybe looking at a property that’s not as in good as condition. Like the property I picked in Pittsburgh was like turnkey. That place was nice. If you want higher cash flow, uh, you might need find something that needs some work. Uh, or maybe you go the opposite direction. If you just wanna break even, you just find something that’s even nicer. But it’s totally up to you. I think my goal is I looked at these two markets and I said, what kind of deals would I personally just given my preferences, my investing style, what would I look for in these markets? And I was able to find deals like instantly. And these aren’t just two markets in the whole country. There’s has to be dozens of them. If these two that I sort of just picked based on some analysis, but they weren’t the only two options I had,

Henry:
I can hear it already. People are like, yeah, but I don’t live there. Right? Mm-Hmm. And so I get that you don’t live there, there are trade offs, right? So if you don’t live there, but you want to find a market that has cash flow, congratulations. These are some markets that have cash flow. The trade off is you’ve got to do the hard work to build a team in that market to help you get your deals to the numbers you’re looking for. So if you’re gonna, like for example, if you’re gonna buy this deal in Augusta, Georgia, well you’re gonna have to do the hard work to find the contractor that’s gonna do the work. Mm-Hmm. , you’re gonna have to do the hard work to find the property manager’s gonna manage the property for you. Right? It’s not as easy as if you could do it with people who are in your backyard.

Henry:
You’re right, it is gonna be a little harder, but not impossible. There are people who invest out of state every day. There are people who own properties outta state who’ve never seen them. If they can do it, you can do it too. It does take more work if you live in one of these places. Congratulations. You probably already know everything we’re talking about with these markets, right? . Yeah. Like, uh, uh, and, and so that’s just, that’s just part of it, right? But there are tools that are, that can help you do this. There’s technology that can help you do this and there’s good old fashioned buy a plane ticket and carry your butt over there that can help you do this too.

Dave:
Yeah, absolutely. And if you are one of those people who don’t wanna invest out of state, I would question why, first of all. But then second of all, it’s to say if you don’t, that’s fine. You should just invest where you live locally, but you’re probably not gonna get as good cash flow. Like if you live in a place like Los Angeles, like it’s just gonna be very difficult. There’s still ways to invest in real estate, but you’re probably gonna be investing for equity

Henry:
Yeah.

Dave:
In that market by doing flips or burrs or something like that. The topic of this show is cash flow. And the reality of the market right now is that unless you wanna do heavy rehab or maybe an owner-occupied strategy like house hacking in really expensive markets, it is going to be hard to find cash flow. Absolutely. Like that is gonna be very, very difficult. So your options are to not invest for cash flow. And that doesn’t mean that they have to be risky strategies. You just have to use other strategies or consider investing in some of these markets like the ones that we’re talking about here. So last question here, Henry, before we, we go, once you find these deals, you know, you’re fi making five, 6% in year one, I should say, because hopefully your cash flow is growing, uh, over time. Um, what, like what’s your philosophy about it? Do you hold onto these deals forever?

Henry:
It depends, right? So it depends on location. Let’s say you buy one of these deals and you buy it in a phenomenal location, right? Then that’s probably one I’m gonna look to hang onto for the long term. Let’s say I buy this deal and it’s cash flowing well, but then I realize I’m not getting the equity or the appreciation that I want over time. As I become a more seasoned investor in this market and I buy more deals, I might look to sell one of these deals to invest in a neighborhood I understand more that’s gonna get me the equity in the appreciation as you start to learn the market. So it really truly does depend on what your investing strategy and how sophisticated are you in that market. Uh, because I bought deals in my market, uh, in my first couple of years of investing that made great cash flow sense.

Henry:
But we’ve since sold because, um, the, uh, taxes have gone up Mm-Hmm. or they’re not appreciated like we want them to. And as I’ve become a more seasoned investor in my market, I know where I can find those. I’ll sell those and buy in better areas. You also have to consider your tax implications. So if you’ve bought these properties and you did a cost segregation study on that property, uh, that means you accelerated your depreciation, well then you probably have to sit on that thing, uh mm-hmm. for at least seven to 10 years, or you’re gonna end up having to pay back what you were able to write off in that depreciation in the front. So you really do have to have a strategy. What you and I have talked about this before, you need to be doing an analysis of your portfolio at, at at least on a yearly basis, but you should probably do it quarterly and just take a look at, are the properties producing the income that I underwrote them to produce? If they’re not, why are they not? And then what should I do about it if they’re not? Like, that’s something you should be asking yourself so that you’re evaluating your portfolio and you can make decisions along the way.

Dave:
Exactly. I know I’m beating a dead horse here, but it’s resource allocation, right? Like you, you might be getting great cash on a deal, but is that the best place to put your money? I don’t know. Your life changes, your, the rest of your portfolio changes. It’s like always shifting and changing. It’s not as simple to say like, I’m just gonna buy assets and hold onto them forever.

Henry:
Yeah.

Dave:
In fact, that was probably the biggest mistake I made early in my invested career as like, I bought an asset, it was going up, it was cash flowing, and I had so much equity that I could have, you know, grown way faster, but I was just so enamored by the cash flow number that I didn’t reallocate quickly enough. So just hopefully that you, everyone just continues to think about that and to look at it holistically. Cash flow is important, but it’s not the only thing that you should be looking at. And did wanna just call out something you said earlier, Henry, about depreciation and that, uh, if you do a cost seg, you need to hold onto a property longer. That’s another potential trade off with turnkey properties. Uh, you know, if you buy a, you know, a stabilized nice asset like the one I I found in Pittsburgh, you know, it’s making 5% cash on cash return.

Dave:
That’s a great cash on cash return. But the way that real estate works is the transaction costs are heavy. Mm-hmm, , right? If you’re gonna sell that, we’ll see how NAR changes things. But as of right now, you’re still paying 6% in commissions, plus marketing fees, staging, all that stuff gets you to eight, 10% transaction cost. And it takes several years of cashflow equity amortization on a stabilized deal to build up enough money to even turn a profit if you were going to sell it. So that is just something to think about. You have to hold onto those properties longer than if you did, uh, that second deal, like a value add. You can overcome some of those transaction fees by forcing appreciation. So last diatribe here. Well, Henry, thank you so much. This was a, this was a fun episode.

Henry:
Oh, this was great. This was like the fundamentals of real estate in this episode, man. Like, it seems like boring stuff, but man, this is the stuff you gotta do right, right now.

Dave:
This is, has everything you and I love is finding deals, talking data, talking numbers. This was a good one. Well, thank you so much Henry, and thank you all for listening. And again, if you wanna check out and learn more about what’s going on in Henry and my portfolio, make sure to head over the BiggerPockets YouTube channel. We’ll put a link below and that will come out this coming Tuesday for BiggerPockets. I’m Dave Meyer. He’s Henry Washington. Thanks for watching.