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Updated almost 11 years ago, 01/15/2014

User Stats

8
Posts
2
Votes
Matt M.
  • Rental Property Investor
  • Sarnia/Port Huron
2
Votes |
8
Posts

How are you all achieving such high returns?

Matt M.
  • Rental Property Investor
  • Sarnia/Port Huron
Posted

I'm in Canada. Cheapest places in the city I live in go for about 170k, and you couldn't get them for much lower than that (no distressed housing of any sort). Now, what you get for that 170k isn't much (an old townhouse, in a not-so-great part of town). With 20% down, and a 25-year mortgage (max Canadian banks will allow), monthly mortgage at 3.7% = $700. Add on insurance, property taxes, and repairs (bound to be high), and the cost to the landlord should be in the range of $900-1000/month. Meaning, to fulfill the 50% rule, a landlord would have to rent such a place for $1800-2000/month. No way that would ever happen. A renter would expect much better for that kind of money and wouldn't pay much more than 1200/month for such a place.

I think this makes a lot of sense. Why would anyone rent when the cost to own is SO much lower than the cost to rent? And why aren't investors flooding into the market, causing market prices to rise and rental rates to fall?

Think about it. First of all, most businesses would be quite content if they could sell a product that costs them $500 for $1000. That's a pretty good markup, maybe quite typical in retail. But that $500 is for the product alone. That business then has to pay employees, rent, utilities, insurance, etc...

If it costs you $500 a month for mortgage, insurance, property taxes, and repairs, and you can rent out such a place for $1000 a month, then you're doing a lot better than that business. Especially because a good portion of your mortgage cost is principal. That's an exceptional return. And it's significantly less work to manage a rental than to manage a retail business.

When something sounds too good to be true, it usually is. But, obviously, given the success of a lot of you (such that there is a 50% rule); this is a case in which it sounds too good and is true. Haven't you ever wondered why? I'm just curious because I know there's no way you could satisfy the 50% rule in my market. 80% at best. And, you know what, I think that is fair and still a pretty good investment.

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