Return on Investments in your area?

Question

I live between Dayton and Cincinnati OH where I've just recently gotten involved in wholesaling.  I look for properties where I can get my buyer at least 12% ROI, is that a descent number?  What kind of returns does everyone else strive to get in their respected areas?

Larry Fried · Answer

@Jason Truesdale It depends on how you come to that 12% ROI figure.  Is that from rental income alone? What are you factoring in for soft costs - vacancy, maintainence, capex, as well as hard costs for PM, taxes, insurance?

Dan H. · Answer

I agree with @larry fried but will go One further.  10% will not cover cap expenses on properties in these cities.  I suspect that cap expense will be at least $200/month (I use a much higher number where I invest).

Good luck.

Jason Truesdale · Answer

Thank you to everyone that posted, you guys really shined some light on things that I didn't take into consideration or even think about.  I'm very new to all of this and it's nice to be able to have a discussion where you can learn something new from seasoned investors.  I look forward to hearing more from you guys...Thanks!

Michael P. · Answer

I would never consider % my reasoning to purchase a rental.  So many other factors need to be taken into account.  For example you could purchase a rental in a war zone and get 20% return but you would be dealing with theft, having to bring a gun, and subpar renters.  Is that really worth 20%?  For me, no freaking way.

I would rather have a house with great bones in a great area and my return is less.  I know many probably don't factor in appreciation but you should.  A house of this nature over time will appreciate more and have less headaches.

Goodluck...

Andrew Johnson · Answer

@Jeff B.  I think we just differ in our assumptions.  If someone uses an ROI-based valuation to induce/convince/persuade a cash-buyer (at their uneducated peril) to unknowingly pay 120% of fair market value then I think they're going to have an exit strategy problem.  After all, who needs that pesky appraisal?  It's a cash-deal and therefore it's a needless expenses (hyperbole intended).  If you buy at fair market value and have an ROI you'll actually improve your exit strategy prospects vs. the equivalent process.  If the buyer paid $60K (based on 12% ROI) when FMV based on comps was really $50K that's where I think a buyer would have a challenge.  Regardless, as with all deals, it's up to the buyer to do the due diligence.

Jeff B. · Answer

But we agreed that SFRs are not evaluated on ROI -- so it's a non-issue -- the sale WILL occur at the current MFV for similar SFRs :grin:

All the time there's lots of smoke-n-mirrors discussions here and how someone approaches a deal is their problem.  Many attempt to lead them to where the water is located, but we can't make'm drink.

IMO, there is no exit strategy issue selling an SFR with an ROI.  Obviously you differ.

Andrew Johnson · Answer

@Jeff B. I think we pretty much agree that an SFR w/ ROI is better than an SFR w/out ROI.  But that assumes that the prices are the same.  If ROI is used to derive an artificially higher value (not based on comps) that's where I have to challenge.  That's where I think someone could get stuck in terms of an exit strategy.  Granted, it will be easier for them to exit but they'll be exiting at a lower price than they thought because they didn't understand that ROI isn't how SFRs are appraised.  As with all things, it's on the buyer to determine if it's a good deal and to actually think through an exit strategy.  I also believe there are also a lot of new investors that (mistakenly) think that they can appraise/sell/assess value of an SFR based on ROI.

For what it's worth, I'm in your same "commercial multifamily" investment boat where even gently nudging rent rates over __ units can make a noticeable difference in GSI.

Jeff B. · Answer

As you note, the  SFR sells on COMPS, not NOI // ROI as do MFUs.  That being given, then an SFR with an ROI still competes with other SFRs in the local area.  The MFV -- Appraisal will will not be based upon that ROI - - SO --- There's no problem selling an SFR w/ROI.  If the potential buyer is savy, it out to be a big plus and have a very low DOM.  I make no assumption on how the seller got to a nice ROI and the buyer's financials eg all cash or w/mortgage, as ROI is ROI.

Personally, I'm all MFUs for the economy of scale, increase GSI with similar expenses AND I can force appreciation by increasing rents - - but that's another subject all together.

Andrew Johnson · Answer

@Jeff B. If it's an SFR it's going to have to appraise if you want to sell it to someone that isn't a cash buyer and doesn't care about an appraisal.  So if it doesn't appraise you're going to push owner-occupants off that list leaving only investors.  You're right, maybe there are a plethora of investors out there that would happily pay for a 12% ROI.  However, if I'm buying an SFR one aspect that I like about it (more than commercial properties) is that it's more liquid, in part because you have a broader buying pool.  If you narrow that buying pool because you have an above-market valuation based off of ROI that certainly it doesn't help.  And the next posit might be that if ROI valuation yields a valuation that's above "market" then I (as an investor) can just buy an equivalent property at market price and achieve a better return.  Now if you show me an appraisal or comps that show me I'm buying the property for 90% of appraised value (let's say @Jason Truesdale got it under contract for 80% of value) and I'm getting  a 12% ROI that's a different story.  In my book, that's a win-win.  If you want to sell that same SFR to me at 110% of appraised value because of 12% ROI, I'm not your buyer.  But, hey, maybe there are other investors out there that would be happy to pay that premium.

Side note, I know I'm just making up numbers to fit my scenario and that's not how real life works!  The irony is that I could drop my personal residence (SFR) value in San Diego by 50% and if an all-cash investor bought it to rent out he's probably probably barely be able to squeak out a 10% ROI.  So, based on ROI, it's a worse investment than Jason's properties.  But because SFRs are valued by comps that cash-buyer would have instantly acquired ~$600K in equity.

Regardless, I read your posts all the time @Jeff B. and you make great points so there's a chance I'm missing the boat with my opinion on the matter.

Larry Fried · Answer

Jason are calculating 8-10% total for those soft costs, or 8-10% for each?  If the former, I'd say that is not really adequate, if the latter than probably more than enough.

Return on Investments in your area?

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