Realistic Return for Rental Properties?

Question

So my wife and I have decided to purchase a quadplex here in San diego. We would like to live in one unit and rent out the other 3. Does anyone have a good rule of thumb for a realistic Return we can expect in terms of cash flow? We're wondering if it's realistic to expect the other 3 units to cover all expenses and the debt service. Or is there a dollar amount anyone has found for multifamily/apartment complexes? I.e. expect a profit of $200/unit/month? I understand the concept of cash on cash, and how cap rate and your mortgage payments will effect everything. I'm just wondering if anyone has found a good rule of thumb for the profit we can expect to see so that we can know a good deal when we see it.

Dan H. · Answer

Most of my units are in Escondido.  In Escondido the amount of cash flow to be expected is related to the amount of work the units will require.  Units that have all maintenance done and look nice and should take minimal time will have worse cash flow than units that have a lot of deferred maintenance and likely require more time commitment if self managed.

My average cash flow without including maintenance and vacancies is $471/unit.  The ones that have best cash flow typically have higher maintenance costs.  The last units I bought, which were in very good shape, have cash flow not including maintenance and vacancies of $304/unit (2 units so $608 total and so far no vacancy and low maintenance costs - Purchased Nov 2014).

Closer to downtown San Diego is more difficult to get good cash flow.  I have a SFR in Claremont with good cash flow mostly because LTV is high (I owe less than 50% of value which I do not recommend - It is this way in part due to time constraints and in part that it is not super easy to get ELOC on rentals).  So this unit does not work for what should be expected (unless you want a LTV greater than 50%).  I think if you are close to downtown San Diego and can get positive cash flow from a maintained unit (one that will not require lots of time) you are doing pretty good.

Dan H. · Answer

BTW I am not afraid to still invest in San Diego (Even though my last purchase was last year - I have made competitive offers twice this year on separate quads) if the cash flow is OK.  What I experienced during the housing crisis was the rents did not fall nearly as much as the home prices (My total rent decline was $50/month).  If you are in long then I believe all will work out and regardless you have the mortgage covered with the rent (assuming any downturn is similar and does not heavily effect the rents).

Chris Martin · Answer

This kind of Rule of Thumb would be local... your answer in San Diego would be different than in Cleveland. NC or OH. A "good deal" is what you make of it, because you are a resident in your building.

Daniella W. · Answer

@Jacob Thompson Barbara G. Can't find the 1% rule in San Diego unfortunately. It just simply doesn't exist here right now.

Jacob, I do believe you can find what you are looking for, however, it's going to take time and will most likely be in El Cajon, Santee or even Spring Valley, not North Park. My marker is always that a $500,000 property bringing $4000 per month in total rents is a GREAT deal (here in San Diego) so you can adjust up or down from there.

Another tip is to be aware of the age of the property and really do your due diligence with inspections before removing contingencies to purchase once you find something. Some of the older properties can have some nasty surprises and you want to find that out before you purchase and adjust accordingly.

Good luck!!!

Mike R. · Answer

everyone has different risk tolerances and return requirements, but i dont see how a 5% cap rate (or even worse) is something worth buying.  why?  something always breaks, you get a bad tenant (even with good screening), general maintenance, etc. and 5% is a low figure to cover these costs.  another way to think about it is what other investment might earn you 5% or better and what amount of effort does that investment require.  you can invest in Calf muni bonds and get better than 5% return (tax equal yield) and do no work, not answer tenant complaints, screen tenants, etc.  i guess if you expect meaningful price appreciate you can live with 5% and hope nothing eats up your cash flow.  cash flow today, is (IMHO) better than price appreciate tomorrow (especially if you consider you have to SELL/refin in order to get access to the price appreciation) just not a trade i would make personally.

Barbara G. · Answer

I don't know if people consider the tax write off as profit?   It must mean something.  in addition you are paying down the principal on your mortgage?  What is that number and how meaningful is that?  About the rent.  Ar the rents for this quad More thenyou are paying now or  are thry less then you are paying now.  If they are less then you are paying now that would be a plus also.

Appreciation is something else.  What does Zillow say about the appreciation % for that house or that area?  Is it appreciating and if so whaat % is t going up?

Kevin Fox · Answer

@Jacob Thompson

There are definitely deals to be made in the area.  The COC return you could realistically expect depends greatly on the sub-market as well as all the nuances of how the deal is financed.  I know that you are already working with a broker, but please feel free to reach out if you do not believe the person you are working with currently is meeting all of your needs. I offer my investor clients a few unique resources to analyze each deal that can greatly simplify the entire process, especially for a new investor!

Ali Boone · Answer

Unfortunately in San Diego I don't think you are going to find a property that covers all of the expenses. You will likely still be paying out! But if you're going to pay out to live somewhere, might as well be in a building you can collect appreciation on and have tax write-offs on...

Jake Thompson · Answer

I'm not sure what those rules are to be honest. I will have to narrow down a good neighborhood and ask the broker what the cap rate is there. Right now we are looking more into north park, El cajon, and santee. Also we are looking to do a zero down VA loan so the annual debt service is usually pretty high with everything we run the numbers on. Maybe we should consider getting an outside investor to raise a  20% down payment?

Realistic Return for Rental Properties?

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