Return on Investment Goals (Buy and Hold rentals) 2019

[Sarah Buchanan]

I am a new investor, investing PT/evenings (still have my day job) in my second year of buy and hold investing with 2 rental properties so far. I am curious as to what ROI people are expecting and actually seeing right now. I know the podcasts talk about "2% rule", 10% min ROI, cap rate 10, etc. and those numbers sound amazing. I am sure people who are well-connected, seasoned investors investing full-time/with a team are able find those deals, but I have yet to find one in my 2 years of looking (the 2 I've bought are about at the 1% rule / about 8% ROI, cap rate 7ish. My second year in I'm doing fine, cash flowing, but I'm wondering if I should get more selective. I don't want to buy a bad deal, but I also don't want to pass up decent deals waiting forever for the "perfect" one to come along. I believe in order to find the best deals I will have to quit my day job and do a lot more hustling, and I'd like to get a bit more experience under my belt first. My goal is to quit and do more hustling by the end of this year, but in the meantime, what is a REASONABLE ROI? For those of you with more experience, what ROI and cap rates are you seeing now, and did you start with lower rates of return? Newbies like me, what is working for you? Thanks for any help you can offer!

[Joe Splitrock]

@Sarah Buchanan reasonable is relative. The podcasts that talk about the 2% rule where recorded years ago. Many markets tanked so bad that you could buy off the MLS and get 2% deals with no effort. As the market has recovered, it has compressed CAP rates so good today is different than good eight years ago.

Personally, I am happy with buying B class, rent ready properties at 0.8% rule. If I was buying C or D class in central Sioux Falls, I would need to be over the 1% rule. Those older properties in rough neighborhoods take more time and money to run. So when I say relative, I mean the type and quality of property is a factor.

The 1% or 2% rule doesn't take into account expenses or condition of the property, so it is not a complete metric. You could have a multifamily where you pay heat, electric, water, garbage, lawn, snow and repairs happen every month, with vacancy once a year. Compare that to a single family home where tenant pays everything and you have no vacancy. It is hard to use the 1% rule to compare the two. 

I prefer after expense metrics like ROI or CAP rate. ROI is nice because you can compare directly to other investments like the stock market. I like to get double digit return on just cash flow. CAP rate assumes a cash purchase, so ignores financing. You could have an 8% CAP rate property that loses money if your financing terms are bad or down payment is low. CAP rate is good to compare two similar investments, but doesn't paint the full picture when you are using leverage.