However, if your property depreciates so much that you are forced to charge less rent, you would see a decrease in income from the property. You would have a negative cash flow – but only for the period of time that the rents were down. However, as we have learned in recent years, rents may go down for a significant period of time. Can you withstand a prolonged downturn?
Although the geographic location should not be the sole basis for your decision, some geographic areas are predictably influenced by the economic conditions there. These are characteristics that you can capitalize on if you are aware of them.
For example, geography and the economy make a difference in certain areas of the northeastern United States. In some cities, you can purchase a duplex or two-family home for as low as $30,000. Property values are not increasing, and income levels are dropping. Many people are even moving away. However, properties still rent for $500 to $800 per unit. By plugging these numbers into the calculation chart, it is easy to see that buying property in this area can bring in decent returns.
Another entirely different example is shown by the property values throughout California. At one time certain areas were increasing by 20 percent or more per year, showing great appreciation potential. However, the rents could not keep up with this growth, so it was not easy to bring in positive cash flow on such properties. Recouping negative cash flows with annual appreciation gains worked until the merry go round stopped. Many investors were caught, and not only in California. Make sure you analyze your area’s economic patterns when investing in rental properties and research area rents.