Single family returns? 12% over a 30 year period and $200/month?

Question

After reading The Book on Rental Property Investing three times and searching daily for five months, we believe that we are close to closing on our first single family home that is 700 square feet and in very good condition in a good neighborhood.  If everything works out, the purchase price is $35,000, the current long term tenant pays $450 monthly, insurance is $700 annually and taxes are $800 annually.  We are still not clear on what the minimum returns should be on a nice single family deal.  Does Brandon recommend a 12% per year or an average of 12% over a full 30 year period?  Additionally, does he also recommend an immediate minimum $200 cash flow per month on a single family home?  Finally, we could pay cash and not need to finance anything.  Thank you, Tracy.

Brent Coombs · Answer

@Tracy Thompson, the logistics of the "50% Rule" would probably be fairly accurate in this case. ie. Half of the its $5,400/y rental return would be used up with its expenses, leaving you a return of $2,700/y ie. 7.7%!  Way short of your/Brandon's desired 12%. (But, pro formas are NEVER right!)

Along the lines of what @Eddie T. alluded to, the "sweet spot" would be if you can find property for $40-45k that rents out for $8-900/m. THERE's your 12% net return (ie. 2%/m gross = 1%/m net)!

My guess is that Brandon makes no distinction between "12% per year or an average of 12% over a full 30 year period". What would be the point? Welcome to BP. All the best...

Thomas S. · Answer

Your rents are far too low to make this a viable/worthwhile investment. SFHs are extremely difficult to achieve positive cash flow. It is not hard to see how a short term vacancy can wipe out your profits with a SFH.

If rents on this property can not be raised to the $650 + range then it is simply not worth the risk to invest.

With expenses at 50% easily and the opportunity value of $292/month (assuming 35K in equity @10%) you are deep into negative cash flow.

Tracy Thompson · Answer

Thanks Brent.  Update- with the holiday, the realtor is continuing to try to get the keys from the property manager.  IF this works out, we have no plans to use a property manager as the home is close to us and I am very handy with normal/ongoing repairs.  We also learned that the rent has not been adjusted in years, the tenant has been month to month for years and the location and neighborhood will easily allow a sizeable monthly increase.  If this does not work out, there are two SFH auctions close to us this Friday.

Brent Coombs · Answer

@Tracy Thompson, on reflection, I believe Brandon does mean "an average of 12%", but if you pay cash like you're considering, it wouldn't need to be "over a full 30 year period", but just "over time". ie. Long enough to account for the regular (even if infrequent) replacement of the roof, furnace and other big and small ticket items (including tenants).

The main point is: will it still cash flow positively once you DO borrow up to 75% of its value, so that you can use your own cash over and over again? I believe that's why Brandon recommends trying to find markets where 2%/m gross rent return is possible, but it's also why the responders above are suggesting that just $450/m rent will mean that even one big ticket item like roof replacement can wipe out ALL your profit-to-date.

Every market will have it's "sweet spot" of compromise between rent return vs likely expenses, vs appreciation / value adding potential. But, that doesn't mean that every market will get you the percentage returns you want. Welcome to the jungle...

Tracy Thompson · Answer

Thank you everyone for your quick responses as well as the valuable information.  We meet with the realtor this afternoon and if we cannot negotiate a better price as well as immediately increasing the rent, we will pass and continue looking.  Tracy.

Jay Hinrichs · Answer

AS others have stated you do not have enough gross income to support this property over the long term you WILL loose money on this if rents cannot be changed to 600 to 700 a month

Single family returns? 12% over a 30 year period and $200/month?

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