Atlanta rental properties

[Paul Scothern]

Hi,

Here in the UK some realty agents are marketing Atlanta properties which they say give 12-14% of the property value back each year in rent. Normally here in the UK we get 5-6%, so this is of interest.

However, some companies selling foreign investments have been caught making misleading statements, so I’m trying to get a second opinion.

I was hoping you could let me know if these % returns are within ‘normal’ in Atlanta. They advertise the houses as being pre-let to section 8 tenants, and are recently painted / improved inside.

If I were to buy one it would be as a long term income investment.

Here are the numbers from one of their properties so you get the idea.

Bedrooms 4
Bathrooms 2.5
Build sq.ft 1252
Year Built 1973
$ £*
Annual Rent 10,200
HOA Fees 0 0
County Taxes 839
Management Fees 600
Annual Insurance 450
Annual Cash Flow 8,311
Annual Net Yeld 13.85%
Price of house $60,000
Monthly Rent $850
Net Yield 13.85%
6--- BUCKHURST TRL.
College Park, Fulton, Georgia 30349

Thanks,

Paul Scothern

[Jon Holdman]

Annual Rent 10,200
Annual Cash Flow 8,311

This cash flow number is total BS. With $10,200 in gross scheduled rent there is no chance that you will get $8,311 in cash flow. That appears to be paying cash, so there is no debt service involved here. These guys are claiming all expenses, capital and vacancy are 18.5% of gross rents. Even the most optimistic estimates aren't that low.

A more realistic estimate for cash flow is 50% of the gross scheduled rents, or $5,100. That makes you yeild (cash on cash return is the more common term here) more like 8.5%.

So, what's missing. They list:

Annual Rent 10,200
HOA Fees 0 0
County Taxes 839
Management Fees 600
Annual Insurance 450
Annual Cash Flow 8,311

Management fees are understated. 10% of collected rents is more typical, which would be $1020 a year. PMs typically charge half to a full months rent to fill a vacancy. You're being low-balled here. The actual charges will be higher.

So, all that's shown here is a low estimate for the PM, taxes and insurance. Nothing for vacancy, long term capital (even if its rehabbed, if you plan to hold for 20 years you'll buy roofs, furnaces, ACs and other pricey items), routine maintenance, make ready costs between tenants (some, but not all, may be covered by security deposits), legal expenses, lengthy evictions, accounting expenses, etc.

Now there will be some months, most months even, when you only expenses are the PM, taxes and insurance. But then you will have months when you have some of these other expenses or have a vacancy.

What you also need to watch out for in deals like this is that you're being told a higher-than-market rent. You're being told a higher-than market value. You're being sold a house that has been fluffed, that is, made to look good but that has problems that have been hidden. The seller makes so much money selling you this house they can easily afford to subsidize the rent and PM fees for the first year. At some point you discover that the rents are lower than you were quoted, that it may be hard to find a tenant, that more repairs are need (which you have to pay a premium price for since you can't actually see what's being done), and that if you want to sell, you're going to take a big loss.

Now, not all these will be true on every deal. And its possible you would find someone who would actually sell you a good deal. But those cash flow estimates are ridiculously overstated. On that basis alone I would be extremely skeptical.

Are you willing to get on a plane and spend some time in this area? And to research this area and learn for yourself the true rents, market values and rental demand? If you're not willing to get on a plane, forget about investing far away.