Making the numbers work. Some of your thinking, please.
Wethersfield, CT · Member since 2015 · 27 posts · 1 vote
I'm looking to invest cash in a single family home or two and use them for rentals. My goal, like all of us, is to try and make more money doing this then letting the money sit in a mutual fund. This is where it gets a bit cloudy.
I'm trying to wrap my head around some of these articles and podcasts where folks claim they have X amount of monthly income from X number of properties. There is very little discussion about what their actual costs are for things like taxes, repairs, accounting, maintenance, legal fees. Always "I'm making $5000 a month in income and you can too".
Can someone give me some honest, true numbers for a property or properties they own. What they actually clear (net) on any given single family home after all expenses for a given year or, say, after 5 years of ownership?
Hi--here in DC, the properties are very expensive to begin with. The 2% rule that we've all been reading on BP, this rule surely doesn't work in a market like DC. We have 2 rentals (row houses) in very good locations--both a few blocks from the metro, in very safe locations, renting to young professionals. It is very easy to find tenants and thus, we're able to more carefully pick and choose the tenants. We keep the rent a little lower than what's out there so our tenants' never moved out because of the high rent. We put a lot of $$ down for each, upgraded the homes, and have refinanced a few times, now with 15 yrs. mortgages and a very good rate. For us, after all that's said & done w/each of properties after the mortgages which includes payments for insurance and property taxes, after all these costs, as long as we are making a positive cash flow even small (a few hundred $$ each month, to cover stuff that breaks/maintenance) we are building equity and long term, once we sell, the property value will go up. Specifically, with the total rent received, the take home $$ that's left per month after these above expenses: approx. $500+ on 1st property, approx. $200 on 2nd property. So you can do the math and see how much we take home total each yr. Of course, we will need to pay $$ for maintenance & stuff that breaks, needs to be replaced on the properties this yr. Our properties are both in very good condition (as we already put a lot of work into it when we 1st got them. Overall, so far this yr approx. less than $1,500 for 1st property & $3,000 on 2nd property --($2,000 which was spent on getting the attic better insulated). We manage our properties ourselves, so that cuts out the property manager expenses, even if it means dealing w/tenant issues. Hey no one's going to care more about these homes than you the owners! No way are we experts in RE as we are just buy and hold investors (we have full time jobs trying to save the world, not at all related to RE), we just look at doing this as a way of diversifying our investments, get a little passive income, not worry too much about $$, and hopefully will allow us to retire a little earlier. : )
Sara nice work on your rental. In your example you suggest you spend about 1000-1500 in maintenance only costs per house, which is about what most put aside for repair reserves each year. In 8 years for example, you might need to replace a water heater on each, so you should mentally be putting aside $125 each year in capex expenses for replacing a $1000 water heater (example cost) and $x/ remaining years left for HVAC replacement for example etc. so your ultimate cashflow might be 1000 less than the 6000 annual cashflow you get. 5000 annually is pretty good however. Also, others should note that you put significantly more down to acquire the unit, so your ROI might be lower than others that don't have multi six-figure DC townhouses:) Finally, vacancy can and will happen so you might not necessarily have accounted for this in your cashflow figures. Just an educational aside for others reading this.
I have two different metrics that I follow to help guide you determining your own criteria that identifies what is worthwhile for you.
I want at least 10% cash on cash return on my rentals for it to be worthwhile to me. This is after all expenses, vacancy and Capex/maintenance reserve is met. This is the minimum amount I want that also beats the rate of return in the market via index funds/mutual funds or ETFs. I also want a minimum monthly/ annual cashflow that makes it worth my while for managing tenants or headache of managing a rental (even if it includes managing a PM). I wouldn't buy a 10,000 house for example for $1000 cashflow/ 10% annual return (just to make my point about cashflow also being a criteria to investors). The total cashflow on this example is too low and I want an actual income each year of $4-5k to make it worth my time dealing with another unit. Others might be ok with $2400/year per unit.
My SFR rentals average about 333/month cashflow financed. I clear 4-6k on my financed rentals each year. When financing comes in, it changes the ROI. You could be 100% financed and have no out of pocket investment and limitless ROI, or have 20% down on a 100k property with 5000 in annual cashflow and have a still healthy 25% cash on cash return. If these were not financed, I would still earn about 10% cash on cash return on these properties if I were to pay cash in full and all rehab costs. My properties are all between 40k-100k rehab cost included.
one caveat is obtaining 10% ROI might be difficult to reproduce in certain parts of the country due to high acquisition costs. Another factor you'll find is due to my high criteria, I'm looking for the 1-3% of the properties on MLS that DO meet my criteria and you might have to spend significant time hunting for a property that meets your criteria. This could be easier certain parts of the year as well (like winter for example).
These also have some good feedback on your approach and how others evaluate:
Thanks Jeff.
A point you made, and one I was also considering, is the maximum cost of the homes you have acquired. Between 40k and 100k ready for rent. I take it there is a limit, then, to what you will pay for a home in order for it to make that 10% ROI as a rental.
Can I ask you what size home these would be? That is, how many bedrooms is best for easier rental to, say, a family with kids... if that is your best customer.
Hi--here in DC, the properties are very expensive to begin with. The 2% rule that we've all been reading on BP, this rule surely doesn't work in a market like DC. We have 2 rentals (row houses) in very good locations--both a few blocks from the metro, in very safe locations, renting to young professionals. It is very easy to find tenants and thus, we're able to more carefully pick and choose the tenants. We keep the rent a little lower than what's out there so our tenants' never moved out because of the high rent. We put a lot of $$ down for each, upgraded the homes, and have refinanced a few times, now with 15 yrs. mortgages and a very good rate. For us, after all that's said & done w/each of properties after the mortgages which includes payments for insurance and property taxes, after all these costs, as long as we are making a positive cash flow even small (a few hundred $$ each month, to cover stuff that breaks/maintenance) we are building equity and long term, once we sell, the property value will go up. Specifically, with the total rent received, the take home $$ that's left per month after these above expenses: approx. $500+ on 1st property, approx. $200 on 2nd property. So you can do the math and see how much we take home total each yr. Of course, we will need to pay $$ for maintenance & stuff that breaks, needs to be replaced on the properties this yr. Our properties are both in very good condition (as we already put a lot of work into it when we 1st got them. Overall, so far this yr approx. less than $1,500 for 1st property & $3,000 on 2nd property --($2,000 which was spent on getting the attic better insulated). We manage our properties ourselves, so that cuts out the property manager expenses, even if it means dealing w/tenant issues. Hey no one's going to care more about these homes than you the owners! No way are we experts in RE as we are just buy and hold investors (we have full time jobs trying to save the world, not at all related to RE), we just look at doing this as a way of diversifying our investments, get a little passive income, not worry too much about $$, and hopefully will allow us to retire a little earlier. : )
I think looking back, a 3/2 SFR is the best marketable rental. 3/1s are harder to appeal to a family with kids. 2 bedrooms don't command as much rent, but might cost incrementally more around the same as a 3 bedroom in acquisition. But this again is neighborhood specific and you should absolutely ask local landlords which rentals rent fastest and command the best rent/ value. I have a 1 bedroom DC rental that gets $1400/month in rent and a 2 bedroom in PG county MD suburbs that is $1375. I can get away with 1 and 2 bedroom rentals because one is in the city and the other is in the DC Area suburbs. They still cashflow and meet my criteria but these may not work in less urban areas or create the same cashflow in midwest for example.
First of all, this price range is my niche and I choose to operate in this price range by niche and limitations of my funds and also by the fact that my ROI criteria dictate my units be at this range in order for me to get that ROI. My other niche is condo investing, so that represents the 40k low side of the range while 70-100k represents the SFR townhouse/ detached units in my farm area. Try getting 10% ROI on a 200k house once you calculate all expenses and maybe a incrementally higher rent, its difficult to do unless rent is super high like 2k or higher and you will get tenants willing to pay that much. It gets difficult in my mind to find returns on properties over 100k and I can't buy as many, so I just stick to 100k or less range...
In CT, you'll be dealing with higher tax rates and those expenses will really bleed your cashflow potential as you evaluate higher value properties, so you'll want to practice for your area to see what is possible.
Hi--here in DC, the properties are very expensive to begin with. The 2% rule that we've all been reading on BP, this rule surely doesn't work in a market like DC. We have 2 rentals (row houses) in very good locations--both a few blocks from the metro, in very safe locations, renting to young professionals. It is very easy to find tenants and thus, we're able to more carefully pick and choose the tenants. We keep the rent a little lower than what's out there so our tenants' never moved out because of the high rent. We put a lot of $$ down for each, upgraded the homes, and have refinanced a few times, now with 15 yrs. mortgages and a very good rate. For us, after all that's said & done w/each of properties after the mortgages which includes payments for insurance and property taxes, after all these costs, as long as we are making a positive cash flow even small (a few hundred $$ each month, to cover stuff that breaks/maintenance) we are building equity and long term, once we sell, the property value will go up. Specifically, with the total rent received, the take home $$ that's left per month after these above expenses: approx. $500+ on 1st property, approx. $200 on 2nd property. So you can do the math and see how much we take home total each yr. Of course, we will need to pay $$ for maintenance & stuff that breaks, needs to be replaced on the properties this yr. Our properties are both in very good condition (as we already put a lot of work into it when we 1st got them. Overall, so far this yr approx. less than $1,500 for 1st property & $3,000 on 2nd property --($2,000 which was spent on getting the attic better insulated). We manage our properties ourselves, so that cuts out the property manager expenses, even if it means dealing w/tenant issues. Hey no one's going to care more about these homes than you the owners! No way are we experts in RE as we are just buy and hold investors (we have full time jobs trying to save the world, not at all related to RE), we just look at doing this as a way of diversifying our investments, get a little passive income, not worry too much about $$, and hopefully will allow us to retire a little earlier. : )
Sara nice work on your rental. In your example you suggest you spend about 1000-1500 in maintenance only costs per house, which is about what most put aside for repair reserves each year. In 8 years for example, you might need to replace a water heater on each, so you should mentally be putting aside $125 each year in capex expenses for replacing a $1000 water heater (example cost) and $x/ remaining years left for HVAC replacement for example etc. so your ultimate cashflow might be 1000 less than the 6000 annual cashflow you get. 5000 annually is pretty good however. Also, others should note that you put significantly more down to acquire the unit, so your ROI might be lower than others that don't have multi six-figure DC townhouses:) Finally, vacancy can and will happen so you might not necessarily have accounted for this in your cashflow figures. Just an educational aside for others reading this.
If you have cash, have you considered being a lender instead of a landlord. You may make excellent returns and less work. I do own rentals but also do private lending. I like both but the lending is typically less work and there are no tax advantages like owning rentals would offer. As to returns, each property will be different and there is no one size fits all answer to how much an investor makes. I have some that do very well and others that make quite a bit less. I hold them for several reasons: cash flow, tax benefits, and appreciation.
My concern with lending is I have no real control over what happens. If it's just me and my two little houses I know where the $$ are. Lending to (potentially) someone who knows less than me, if that's even possible, sounds scary... but maybe I'm just not up to speed on how it all works.
There is a small home for sale just a mile or two from mine. Asking $69K. Impeccably maintained by the same owner for the last 40 years. It's small (2 bedroom, 1 floor) but perfect for a retired couple or a single adult on their own. Taxes are low. Less than $1000. This is probably the kind of place I'd want to take a look at... if, as Jeff says, I can make the numbers work.
I'm local so I can keep an eye on it. Heck, I walk by it several times a week with my little terrier. Buying local seems a wise move if only for it being easy to take care of things as they come up. Show the place, fix the toilet, etc.
Comments?
That sounds like a promising lead worth taking a second look. Check out rentometer.com and try to estimate how much rent you can command, then put together all known expenses and come back and share those figures. The BP community can help you determine if it constitutes a good deal and worth doing a deeper dive based on initial rough analysis. Also factors like year house was built will be helpful. I'll be sure to chime in if I can.
Well here is what I can tell you as of now.
Built: mid 60's
Size: around 750 square feet
Price: $60K (my mistake stating 69K)
Taxes: $650/year
Sewer: $350/year
Water: says "city" but I think those homes have wells. If so free water.
Association fee: $400/year
Trash: $420/year
Rentometer says average for the area is $1225/month as does Zillow
This is a narrow, longish home. Kind of looks like Airforce One inside in that you walk through to get to the various rooms. All wood paneled. Maybe a bit too much on the wood but they must have liked that look.
RE: Rentometer... I do not see that they adjust rent by home size so $1225/month "average" may be too high for this small home. Might be more like $1000 or perhaps less. What do you folks feel is correct?