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Do the numbers looks good for this rental in Portland Oregon?
Hello,
I have been offered an off market deal for a very nice SFH in the very hot Alberta district for $500k with 25% percent down at a 4.5% interest rate. It is rented out for $2800 a month with a 1 year lease. Not the numbers aren't quite ideal from what I have researched, they say to look for 8-12% cash on cash return, but the cash on cash return starts out around 4% but increases every year with rental increase on this property. What I am banking on is the high appreciation rate Portland has at 4.85% historically. Here is a chart I did in a calculator for the math:
Rental Property Calculator Results
Despite the low Cash on Cash return percentage. Does this still look like a good investment? I believe it is harder to get a good cash on cash return in Portland just because it is so expensive here, but it also is a hot market.
This would be my first purchase and am learning things on the fly, and don't really have anything to compare too, so I would like some second opinions. :)
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#5 Multi-Family and Apartment Investing Contributor
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@Emilia Marchetti It is very difficult to find cash flowing properties in a market like Portland, or most places on the west coast for that matter. The only exception might be a MF in bad shape from a tired old LL. My personal feeling is the current seller is capturing the appreciation. The next 10 years do not likely reflect the last 10 so I look for a lot more cash flow than appreciation.
Appreciation only counts when you sell. The fact that something has gone up 20% only means something when the money is in your bank account. Other people will see things differently, their goals won't be the same, and their use of the property will probably be different.
Property tax looks really low for Portland, I would guess house hasn't been sold in a while. Portland could bump that up real fast based on new sale price. Long play for appreciation seems ok, many people on west coast do appreciation over cash flow.
you might want to plan more Maintenance costs depending on age and condition of roof, siding/paint, furnace, water heater, plumbing ect
Property management for 8-10%, unless you will manage yourself
I wouldn’t go into a deal betting on appreciation. I don’t know when the market will head the other direction but I do know that people get themselves into trouble when they bet on appreciation. Don’t get me wrong, a lot of people win and do well playing the appreciation game but it is my opinion that we are at or near the top of the market so I personally wouldn’t gamble on continued appreciation for the win. If your property doesn’t cash flow and your half a million appreciation bet turns and goes the opposite direction, what will your plan be?
@Emilia Marchetti others have mentioned the dangers of betting on appreciation (rhymes with speculation), but another thing to remember that as your rent increases annually, so do your expenses. Have you mapped out and calculated what you'll net when you sell to understand your IRR? It's tough to do, right? You have no way of knowing what you'll sell the home for in X years. Without understanding the IRR, it's hard to say if this is a good investment or if you'd be better off investing in a different asset or asset class.
How sure are you about your expense numbers? You only have $500 in monthly expenses aside from the mortgage payment. That seems low to me.
Originally posted by @Justin Frank:
I wouldn’t go into a deal betting on appreciation. I don’t know when the market will head the other direction but I do know that people get themselves into trouble when they bet on appreciation. Don’t get me wrong, a lot of people win and do well playing the appreciation game but it is my opinion that we are at or near the top of the market so I personally wouldn’t gamble on continued appreciation for the win. If your property doesn’t cash flow and your half a million appreciation bet turns and goes the opposite direction, what will your plan be?
Good Point. Though I do believe this property is being offered below market value. A home with less SqFT and bedrooms across the street sold for 535$. And multiple houses within two block are selling in the 600-700k+ range. This neighborhood in the Portland market is very hot. And I believe Portland is set to go in the direction of Seattle or San Francisco. Though, it's true if we could be at the top and it could go down. But in that case, I would just hold, and rents should continue to cover the mortgage. I am estimating this would be an 8-10 year investment.
Originally posted by @Nels Norquist:
Property tax looks really low for Portland, I would guess house hasn't been sold in a while. Portland could bump that up real fast based on new sale price. Long play for appreciation seems ok, many people on west coast do appreciation over cash flow.
you might want to plan more Maintenance costs depending on age and condition of roof, siding/paint, furnace, water heater, plumbing ect
Property management for 8-10%, unless you will manage yourself
Good Point on the taxes. I will have to inquire more about taxes going up on new sale price.
Maintenance 'should' be minimal. As the house has been completely remodeled with new roof, hvac, electrical, paint, tankless w/h. So all major systems are new.
I like the Portland area a lot and think it will continue to be a strong area to invest. It just doesn't fit within my goals. I wouldn't want to put 25% down on a half million SFR and live without it for 8-10 years while I was betting on the asset to continue to appreciate. I like to put my money to work on value add properties with the hopes of getting it back ASAP to put it to work on another project. Everyone's goals are different. If this project fits your goals, then go for it 😀
Originally posted by @Justin Frank:
I like the Portland area a lot and think it will continue to be a strong area to invest. It just doesn't fit within my goals. I wouldn't want to put 25% down on a half million SFR and live without it for 8-10 years while I was betting on the asset to continue to appreciate. I like to put my money to work on value add properties with the hopes of getting it back ASAP to put it to work on another project. Everyone's goals are different. If this project fits your goals, then go for it 😀
That makes sense. What is the best way in the PNW to get these types of immediate returns? From what I can see, the housing market is so expensive it's hard to get rents to be significantly over the expenses and make a high positive cash flow.
Am I just looking in the wrong places? Do you invest in less expensive areas/suburbs/small towns? Or use a different strategy?
I would also consider that Portland and specifically Multnomah County are not very landlord-friendly. My very first rental property is in Multnomah County, but since then I've purchased out of state. I wouldn't buy another rental here with what's going on at the county, city, and state levels of government unless it was a sweetheart deal. I definitely wouldn't feed a property in this market. And I expect that it will get more difficult and frustrating for landlords before it gets better.
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@Emilia Marchetti I stopped reading when I saw the gross rent was $2,800/mo on a house that they are asking $500K for. Betting on appreciation can be a very dangerous thing right about now. Add to that the fact that Oregon is very tenant friendly and you can end up hurting on this one.
$500k for a place that rents for $2800/mo is pretty bad. Try using cap rate to judge your investments. Cash on cash can be misleading, the less you put into a deal, the cash on cash return gets better and better even though the purchase price and rents stay the same.
Banking on appreciation is a dangerous game. It's worked for the last 10 years because values have been constantly rising for longer than many of us remember. A lot of bad investments have turned out okay because of this, and a lot of people think they're better at investing than they really are. When this historic run ends, we all need to have a better plan than hoping values go up indefinitely, this is not going to happen.
@Emilia Marchetti
Sorry for the delay in my response. I don’t think you are necessarily looking in the wrong spot. There are probably plenty of great deals to be had is your search area. The problem is that the Portland and Seattle areas are so popular and popularity brings a lot of competition which will then increase prices of real estate and make great deals hard to find. I think one the of best ways to attempt getting some, most or all of your money out of a purchase is by adding value to a property. If you can add value to a property well beyond your purchase point a bank will allow you to do a cash out refinance. With a cash out refinance you can get some, most, all, or even cash beyond your purchase price out of the property. Keep in mind that there is a lot that goes into this process and finding a value add property in this market and in a popular spot like the Alberta area you mentioned will be very difficult. So again, it all depends on what your goals are. If you can be patient and crafty you may be able to get your hands on an undervalued property that you can add value to and get your money out in a reasonable amount of time. Otherwise, you can dump your money into a stabilized property, get your 4-5% return, and hope the market will continue to appreciate. Deals are hard now but money is easy. Give it time; deals will be easy and money will be hard to come by. It’s a fun game lol 😀. I hope this helps a little. If you want more details or strategy on value add feel free to send me a message and we can talk.