Positive cash flow by John T. Reed

Just found a wonderful, reality driven article on investing in cash flow rental property here. Some of the major points included in the article are:

1) The average operating-expense ratio of residential property is 45% plus or minus 2%. This is invaluable as most sellers/brokers that I came across with either failed to provide a solid income/expense statement or they would grossly under report the expenses and/or over stated the income. Instead of relying on these inaccurate numbers I simply used a 50% expense ratio (higher than what Mr. Reed mentioned in the article but it gave me some extra head room for mistakes).

2) Think from the tenant's perspective. Most people won't pay more to rent than to own. Sure a cash flow positive property is nice, but it is unlikely to find a tenant who would pay rent that covers all your expenses and debt payment (assuming typical financing of 70-80% of the purchase price). Apartment buildings would be less of an issue in this case as the cap rate is generally higher than single family residential.

3) Investing only in cash flow properties is extremely difficult. Reason being by insisting in generating positive cash flow, one must offer a purchase price that might be significantly lower than what other buyers would offer. Most buyers are "appreciation buyers" which means they buy/invest at market/over market price and hope for future appreciation of the property value. A positive cash flow investor will always be outbidded by them and hence never be able to participate in the market.