What type of profit margin on rental homes

Question

Wade Sikkink · Answer

There are a lot of different ways to determine "profit"

Short lesson here....Real estate makes money in 3 ways: cash flow, appreciation and mortgage paydown.  The potential profit you make depends on how you structure the deal and what your goals are.

For example, you could buy a SFR, and rent it out such that it doesn't produce any cash flow, but 2 years later you sell it and make a nice profit due to appreciation.  In contrast, a multi-family property may have a good cash flow, but might not be likely to appreciate much if at all.

There are many different measures that people look at: cash flow, NOI, cash on cash, etc.  A given property with a given NOI can have different cash flows and cash on cash returns based on how you structure the deal.

So really the answer is, it depends.  Clear as mud, right?  Sorry, if this makes it less clear, but how you measure profitability and what is an acceptable level depends heavily on what you are looking for and how the deal is structured.

Good luck.

JT Spangler · Answer

Your research isn't very good if that's what you found about Nashville.

Brandon McCombs · Answer

My theoretical profit is $164/door/month for a SFR that has a garage apt so I have 2 rents for the same mortgage in eastern Ohio.

I pay water/sewer/garbage utilities each month. The property cost $87500 and I rolled closing costs into the loan. I had to put 20% down. I retain 10% in gross rent per month for repairs. Currently gross rents are $1450; class B. Any large capital expenditures can reduce that $164/door but I haven't had any yet that can't be paid by the 10% in repairs that I reserve given enough time to get that reserve collected in rent each month.

I have a 7 unit apt building (plus 2 commercial units)  that is undergoing casualty repairs due to a fire earlier this year. Once fully rented (and with 1 unit donated to a non-profit organization) my theoretical income per door per month is projected to be about $270. Prior to the fire we didn't have every until rented (we were still working up to that point since the purchase in oct 2014) but income per door was about $180. I expect higher rent with the renovated units after the fire, hence the higher income per door. I pay no utilities for this bldg. It cost $243k, financed 100% of it. It's in north central WV.

John D. · Answer

I target $1,000 per door/tenant, and 30% cash-on-cash returns.  I'll take $500 per door and 20% cash-on-cash returns.

Jeff B. · Answer

hmm; I've had one of the worst years do to an eviction and damages but --

Year-To-Date net income is $377 per door per month.  This is Calif and rents are significant, whereas when researching Nashville, rents were in cash, week-to-week, and low.

When I was looking for my MFU, I learned how to calculate NOI (an annual number) as a means to make a go/no-go decision on the purchase

Chris Sukala · Answer

@Robert M. thanks for the info

@Wade Skink I didn't think of it that way. Some much info I need to learn. We are doing SFR. My thought process is if we had too, we could sell them off individual versus MFU.

@Jennifer Lee Thanks for the info. We feel the same about Location. We look for SFR in areas that have all needs in a walking or biking distance. Grocery, cafe's, hardware, etc. We may pay little more but I feel in the long run it works out better for both getting Long term renters and or Selling with profit.

NA Beard Thanks for the info. I would have thought Nashville may have a market interesting.

Glenn McCrorey · Answer

My bench mark is $500 per SFH per month.  I manage them myself and that does not include vacancy or maintenance.  I don't usually buy "fixer uppers" but prefer houses that are in good shape that have the big ticket items like roof, siding, etc. already in good shape but maybe need some cosmetic updating.  My cash on cash return goal (not counting vacancy and maintenance) is 40%.  I live in Iowa and invest locally.

Scott Mardle · Answer

I go on about $120/week. It would be different in each area tho

Jennifer Lee · Answer

i second what @Wade Sikkink said ;)

as a investor friendly Realtor, my job is to figure out which one of those three my client is looking for. and for the same client it may be all three depending on location.

for myself its all three too depending on location and type of Real estate.

But buying right is key and more important then "profit". Having multiple exit strategies is also up there in my priorities before profit

Robert M. · Answer

@Chris Sukala, If you search the site you will find many comments on "cash flow". Not as many on "profit" as that is usually a term used after tax calculations and it is not readily available early on.

Consensus appears to be $100-$150 per "door".

What type of profit margin on rental homes

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