When I started out in real estate investments, over the course of the first few years, I bought and sold two properties in Phoenix, AZ. I wasn’t satisfied with the pace. And I needed better cash-flow. My initial strategy or approach was “Equity Appreciation”.
In the first property I bought, it was at the near-bottom of the housing collapse after the economic downturn and recession post-2008. I purchased the Single-Family-Residence (SFR) for $40,000 which was seller-financed, with only $3k down, in 2011. I couldn’t find seller-financed deals like that a couple years later. The property was at 80% off from the peak of the housing bubble. It had once been valued on Zillow for up to $200k. I sold it 10 months later in October 2012, the following year, for almost double — at $78k.
After paying off debts, down to my last $10k in cash, I purchased my second house in Phoenix for $198k with $7k down, the minimum 3.5% requirement on an FHA mortgage, closing in February 2013. I was hoping the market will go up and I will pocket anywhere around $100k this time when I sold the property. That didn’t happen.
I rented it out and towards the end of about 3 years holding that property, the value didn’t appreciate much. When I sold it for around $225k, after transaction costs I barely made what I put into it.
With water damage, and other maintenance hassles (I didn’t have a property management company in place, since I was barely breaking even every month with the $1,495 rent minus $1,350 mortgage and $75 HOA): needless to say, it was a horrible investment.
I spent a couple thousands, about $10–15k in credit card debt fixing issues that weren’t covered by insurance, since the water damage happened over time, and wasn’t sudden. It took me over a year to pay off the debt. A year later, the tenant wasn’t paying rent, and I had to do an eviction. Then I sold the house after another $10k in repairs. I had about $10–14k in cash after the sale of the home.
I finally decided the market wasn’t moving fast enough and you can’t predict it. So I pivoted to a monthly “Cash-flow” strategy: where I invest for the long-term, with no intention of ever selling the house. Instead, I rely on the monthly cash-flow as passive income.
I also wanted to have every property I owned be managed by a third-party from now on, who would collect rent and send me a direct deposit every month, and also handle evictions if needed. This approach can scale easily, you only have to provide the capital and acquire properties with the best “cap-rate” (net return on investment, that is: yearly cash flow / purchase price, as a percentage).
My first purchase, with this newfound strategy, was a single-family house I bought in South Bend, IN — it was listed for $17k and I acquired it for $10k cash (with the proceeds of my last sale). It was rented for $400/month, and is still now rented for $415/month.
I typically look for the ones that are tenant-occupied, so it can be as turnkey as possible. After a few months, you start seeing the money deposited into your bank account. This one was over 20% cap-rate (return on investment) and has already paid itself off in returns.
While I was searching for rental properties even on LoopNet, I noticed that multi-family units perform better than SFR, especially if you were to finance. However, occasionally, you come across a SFR that is low enough in listing price, that you can purchase in cash and not have to worry about mortgage/financing requirements, etc.
When looking for these types of properties, I search on Zillow and I built a web app to help me manage the portfolio: investor.smallplex.com – after a term for two- to four-unit multifamily rentals which you can get residential financing on (whereas 5+ units require commercial loans).
With a cash-flow strategy, multi-family generally has higher cap-rates. But there are also SFR with really high cap-rates at more affordable prices. I was hoping to use financing on multi-family e.g. Fourplexes when I started looking, for the highest cap-rate.
In comparing properties that I would want to buy in this strategy, the highest cap-rates are usually in the Midwest. Within a couple of years, I should attain “financial freedom”, in essence being able to pay not only all of my living expenses but having in excess of that, with monthly cash-flow from real estate investments.