Summary: If you live in a high-cost of living market, you’ve probably been told that “it’s impossible” to find a property that cashflows. But is that true? Is it really impossible? In this article, we show you that with a little bit of knowledge and creativity, you CAN find cashflowing properties in high-cost of living markets.
[Disclaimer: We are not accountants, lawyers or financial advisors, so please consult your own team of professionals about the topics covered in this article.]
Maybe you’ve heard the adage: live where you want, invest where it makes sense.
If you haven’t, let me explain.
Many in the U.S. flock to places like New York City or San Francisco. They are the most desirable places to live for a variety of reasons. The problem is, the cost of living is high.
However, this poses a problem for real estate investors who live in expensive cities and only want to invest close to where they live.
The usual advice for these investors is to continue living in their expensive city but give up on the idea of investing locally. Instead, they should invest long-distance in a lower cost of living market. In other words, where it makes sense from a cashflow perspective.
But what if you don’t want to invest long-distance and you want to try to make it work locally? Is there any hope? Is it possible to cashflow in a high-cost of living market?
That’s what we’re going to cover in this article.
The Importance of Investing for Cashflow
Before we dive into some ways to cashflow in an expensive market, let’s first talk about the importance of cashflow.
If you’re going to invest in rental properties, you are going to want to ensure that the property cashflows. Why?
For one, if a property doesn’t cashflow, you’ve got to work to keep it afloat. Think of it as a second boss. You have to show up at work so you can pay the bills. You don’t have a choice.
Second, cashflow is a great way to mitigate risk. Imagine what happens during a downturn. Property values may drop. So if you are forced to sell, you . If your property cashflows, you can hold onto the property until property values recover.
Maybe your renters lose their jobs and it takes a while to evict them. The cashflow is what helps you stay afloat. It’s the financial cushion that keeps you from having to reach into your pocket to pay the mortgage and the property taxes.
As Robert Kiyosaki teaches in his book Rich Dad, Poor Dad, an asset is something that puts money in your pocket while a liability takes money out of it.
[If you want to learn how to analyze deals for cashflow, download our free cash-on-cash calculator]
Ways to Cashflow in a High-Cost of Living Market
So how do you invest for cashflow in a high-cost of living market? It’s all about creativity and thinking outside the box.
Find an Insanely Good Deal
One way to make the numbers work in a high-cost of living market is to get an insanely good deal. This means the purchase price has to be so low, the property still cashflows. Typically in a high-cost of living market, the purchase price is so high, the mortgage payment far exceeds the rent and the numbers don’t work.
So how do you get a great deal? One way is to buy a distressed property. A distressed property is when the owner is unable to make their mortgage payments and is facing foreclosure.
Another way is to find a property that is in serious disrepair. Of course, you’ll need to make sure that the renovation costs don’t make it so that you aren’t cashflowing in the end.
While it might seem hard to believe, these deals exist in even the highest cost of living markets. You just have to learn how to find them.
How do we know these deals exist? First, we know investors who have successfully bought cashflowing properties in high-cost of living markets. Second, you can see for yourself by searching around for newly renovated properties that are on sale and see what the buyer paid for it a few months before. In some cases, these were purchased for a fraction of the list price.
Find Space for Additional Units
One of the most effective ways to achieve cashflow in an expensive market is to find a property with room for additional units. Additional units are separate living spaces with their own entrance.
Ideally this is within an existing structure but sometimes you’ll have extra land to build a new structure. We say “ideally” because the cost to add a unit in an existing structure is likely going to be considerably less than building a new structure. We talk more about building new structures below (see the section on accessory dwelling units).
A common place to find space for an additional unit is a basement. Another possibility is an attic space. For both of these, you are going to need separate entrances. For the attic space, this is usually going to be an external staircase. Sometimes you’ll also see people turning garages into an extra unit. This could either be attached to the main structure or a freestanding garage.
Group Homes
Group homes are another way to invest for cashflow in a high-cost of living market.
An example of this is to house a group of young professionals. Many younger professionals are interested in keeping their living costs low and don’t mind living in a group setting while they are still young and single.
They often don’t mind sharing bathrooms. With that said, if each room has a bathroom, you could charge more per room than a bedroom without one. So to fully maximize the cashflow of a property, you may consider adding bathrooms.
There are other examples of group homes.
We know one couple that houses women who are just coming out of jail. They provide both housing and counseling services. They rent by the bed, so they’re able to get even more than if they charged by the bedroom. Imagine a house with four bedrooms, each with four beds. That’s a total of 16 beds! It’s an affordable arrangement for the tenants and at the same time, creates great cashflow for the owner.
Another example is sober living. These are homes for people who are recovering from addiction. You can rent these homes by the bed, which will allow you to maximize your cashflow.
Yet another example is residential assisted living. These are homes for a small group of people, usually six to eight, who require a caregiver and prefer to live in a residential setting rather than a larger facility.
All of the above examples obviously require additional services beyond just the housing so it may not be for everyone. With both of the above examples, you could rent to an organization that provides the counseling and caregiver services. This way you are only providing the housing.
Add a Detached Accessory Dwelling Unit
A detached accessory dwelling unit or ADU is a separate, independent structure on the same parcel of land as the main home.
It’s similar to adding a unit but more attractive than a basement or attic unit because there are no shared walls. As a result, you can probably charge more for an ADU and therefore, potentially cashflow more.
ADUs are increasingly popular in high-cost of living markets. The reason for this is that many Cities across the country are looking for ways to create more affordable housing within the City limits. This cuts down on urban sprawl and reduces commute time for those living in these units. As a result, many Cities make it easy for you to build one. For example, the City of Seattle has pre-approved plans for detached ADUs to make the building and permitting process really fast and efficient.
So you can look for a property with additional space in the yard for an ADU. If you have pre-approved plans like the ones described above, you will know ahead of time exactly how much yard space you’ll need.
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Convert your property into a short-term or mid-term rental
Maybe one of the best ways to significantly increase your cashflow is to convert your property into a short-term or mid-term rental. These are typically going to be furnished homes that you rent out for less than a year. Short-term rental (STR) stays are generally less than seven days. Stays for mid-term rentals are typically one to three months.
The rental revenue from these properties can far exceed what you can get from a long-term tenant. You might not think of a high-cost of living City as a great location for a short-term rental but they can be, especially if the City has more visitors than hotel rooms. Also many families are looking for alternatives to hotels because they want to have access to a kitchen and a washer/dryer.
However, it’s critical that you know what you’re doing. You need to do your numbers ahead of time to make sure that the property cashflows. You will also need to know the STR regulations and make sure that there aren’t any restrictions. We know investors who didn’t know what they were doing and bought a property in a City that restricted STRs, so they couldn’t use the property as a short-term rental.
[If you want to learn how to buy cashflowing short-term rentals, CLICK HERE to join the waitlist for our short-term rental course, Accelerating Wealth]
Key Takeaways
If you live in a high-cost of living market and want to invest locally, you’re probably going to hear from those around you that it’s “impossible” to find cashflow. Don’t listen to them. As we’ve demonstrated above, all it takes is a little bit of knowledge and creativity to find these opportunities!
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