[Calc Review] Is 5.97%ROI good enough for a rental property?

Real Estate Deal Analysis & Advice
7yFollow

[Calc Review] Is 5.97%ROI good enough for a rental property?

Katie Huynh
Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes

Hello BP Community,

I did a data analysis on this property as for potential rental property. But I'm a newbie and I don't know if my calculation correct and reasonable, so I'm asking for your expertise here if you can help me figure out if it is a good deal.

Info on the property:

This is a 3 beds 2 baths 1,112 sqft property in Portland, OR built in 1979.

It is foreclosed and recently on the market asking for $270K. I was told that never offer the listing price and always go with 80% of it. So hypothetically I'd offer $220K. The house looks still in good shape so I estimate $5K for TLC. Property in this area is worth $1700 - $1800 rent.... so long story short, I ran the number and it shows $201.58 monthly cash flow with 5.97%ROI. I heard that we should not make a deal for rental property if ROI is under 12%. Is it correct? or it's just a preference number?

Also, is my offer insane? How likely that the buyer would accept offer that way below what they're asking for?

Please review the report below and give me some advice.

Thank you!

View report

*This link comes directly from our calculators, based on information input by the member who posted.

0Reply
23 views

Most Popular Reply

Dennis M.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
7y
@Katie Huynh No ,The numbers sImply don’t work for a rental . You don’t pay 270 , 250 , or even 220k for only a 1800$ rent . You will have negative cash flow when it’s said and done if you do this
5Reply
See this reply in the discussion

24 Replies

Jump to latestLatest
  • Austin Youmans
    Investor · Vancouver, WA · Member since 2014 · 359 posts · 143 votes
    7y

    I don't see repairs and cap-ex in your report and that would kill all of your cashflow.

    The ROI number is prefrence but you have to look at what else you can do like the stock market on average has made 8% which is less work than rentals so if you can't get better than that you could just put it in the stock market.

    That being said Portland is a hot market, although tapering off, but still hard to find a good deal. 

    0Reply
  • Kevin S.
    Accountant · Tulsa, OK · Member since 2018 · 312 posts · 349 votes
    7y

    @Katie Huynh Like @Austin Youmans said you didn't budget anything for CapX or repairs. I'd probably go 10% for CapX and 5% for repairs, but it all depends on the condition of the property. Also your vacancy rate is low, you probably want that at around 8% since 1/12 = 8.33% (so you'd have one months rent set aside ever year). Your management fee seems a bit low as well, typically those are closer to 10% but can depend on the company.

    And yes, $220k on a $270k home is low, but that's the game we play. That's why you have to make so many offers, you are purposefully coming in low in order to try and get a good deal and those don't come around too often. Good luck!

    0Reply
  • Katie Huynh
    OP
    Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes
    7y
    @Austin Youmans Thank you for your advice. I have estimated repair cost $5k since the property looks good, it just needs some cosmetic repair and most of them like paining, gardening,... I plan to do it myself which would save some labor cost. What is the Cap-ex you are mentioning? I'm not familiar with this term yet.? You are right, Portlannd is growing rapidly and it's hard to find a good deal. And if there us one, it's gone really quick if we don't act quickly. Alternatively, I'm looking to shift to Vancourver WA area. Since I see that you are in the area, how is the market wide there? Thanks for the response!
    0Reply
  • Katie Huynh
    OP
    Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes
    7y
    @Kevin S. This is a good overview. Thank you for the tips. As I am a newbie. I'm very concern about the property that needs lots of repair. I choose the one that I can do some work on my own. The percentages you mentioned are a good starting point to concern. Thanks a lot !!!
    0Reply
  • Austin Youmans
    Investor · Vancouver, WA · Member since 2014 · 359 posts · 143 votes
    7y

    @Katie Huynh That is the initial repairs bus you will have on going repairs like a toilet leaking etc. I generally use 5% of rent to cover this. 

    Cap-ex is short for capital expenditures which is bigger things that will need to be replaced over time like the roof, furnace, appliances. You want to save a little each month for this so it isn't coming out of your pocket. Generally 10%.

    Vancouver is not much better. Less expensive but not as much rent either. Good buys go quickly so you want to be ready to put in an offer the minute that something comes up.

    1Reply
  • Katie Huynh
    OP
    Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes
    7y
    @Austin Youmans Great info! I've learned something new today. Thank you!
    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y
    @Katie Huynh No ,The numbers sImply don’t work for a rental . You don’t pay 270 , 250 , or even 220k for only a 1800$ rent . You will have negative cash flow when it’s said and done if you do this
    5Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    7y

    Numbers do not work. As Dennis points out $220K for a rent of $1800 is not enough income.

    Hopefully you are only asking for advice as part of your learning process since your posts clearly do not indicate that you are fully educated on real estate or finances to be seriously considering investing.

    You also need to study your state landlord tenant regulations before you start you business.

    Plenty to learn, you are a long way from begimnning to invest at this time.  

    1Reply
  • Alvin Sylvain
    Los Angeles · Member since 2018 · 464 posts · 471 votes
    7y
    @Katie Huynh I have not looked at BP's calculators, but I have used "dealcheck.io" which also has a linked app. (eg, when login to the app, you can see the deals you entered in the web, and vice versa) It already defaults to including most of these sort of expenses like CapEx and Vacancies. And you can change the defaults. Run your deals thru it, and you may be surprised to find when a deal isn't as good as you first thought.
    0Reply
  • Scott Morongell
    Investor · Charlotte, NC · Member since 2017 · 791 posts · 479 votes
    7y

    @Katie Huynh I think you can receive a higher yield than that. 

    0Reply
  • Katie Huynh
    OP
    Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes
    7y
    @Dennis M. So what number would you suggest that would be ideal to be considered? As I know, the rental price in my area is vary depend on the property itself. For example, a 3bd 2bt single family like the one I'm looking at is around $1700_$1800 vs same size brand new condo would be over $2500 and people still accept to rent. The housing development of condo type in my city has been increasing in the last few years. They are strong competitor. What do you suggest? Thanks!
    0Reply
  • Katie Huynh
    OP
    Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes
    7y
    @Thomas S. Yes. I'm pretty new in the real estate area and so excited to jump in investing but I'm glad that I reach out and ask for everyone's opinion. I learned quite a lot of things that I don't know. Thanks for you advise!
    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y
    @Katie Huynh The deals in Oregon are not going to be especially great from a cashflow perspective. That does not mean they are not out there on the west cIast it’s just going to be a much different return on investment compared to say the Midwest and the appreciatIon factor wIll be hIgher In hot markets . As an example where I live I can get 1500-1800 in rent income on only around 40 grand investment . That probably sounds ridiculous to you but it’s possible in much of the country particularly in c class or d class neighborhoods
    1Reply
  • Katie Huynh
    OP
    Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes
    7y
    Originally posted by @Dennis M.:
    @Katie Huynh

    The deals in Oregon are not going to be especially great from a cashflow perspective. That does not mean they are not out there on the west cIast it’s just going to be a much different return on investment compared to say the Midwest and the appreciatIon factor wIll be hIgher In hot markets . As an example where I live I can get 1500-1800 in rent income on only around 40 grand investment . That probably sounds ridiculous to you but it’s possible in much of the country particularly in c class or d class neighborhoods

    I can see that different area would have different expected number. It could be easily to get a single home for under $100k in the midwest probably still in good condition whereas in Northwest area, specifically Portland, housing market increases rapidly. In fact, I have done some analysis around this area. In the last 7-8 years the market value increases approximately 47% and the medium price of a 3/2 property is around $270K whereas the rental price has not gone up much. This is my big concern about investing in a rental property to generate passive income here. Population in Oregon is growing, people are moving from everywhere and they're bringing capital in state and can afford to buy. So I think it makes more sense to fix and flip than investing in rental in northwest region.

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    7y

    Just invest out of state to make your money work harder if cash flow is your big concern . The market is leveling off

    0Reply
  • Jordan MoorheadBusiness Member
    Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
    7y
    @Katie Huynh you didn’t account for capex, repairs and the vacancy is low. Also in my experience 7% for PM is low. Who’s going to mow the lawn, shovel snow, etc? Not trying to be negative but this is going to be a tough deal to make work. I’d look for something that’s a rat hole and needs work or look in a different asset class or market.
    [email protected]512-888-9122
    The Moorhead Team5140 Reviews
    WebsiteView Page
    0Reply
  • Sunday Nguyen
    Real Estate Investor · OAKLAND, CA · Member since 2017 · 24 posts · 30 votes
    7y

    @Katie Huynh Base on my recent experience with making an offer for foreclosure property..

    Asset manager will review offers and usually will only discount $10k-$15k at a time and pick the highest offer that are closet to list price. Did you submit your offer yet ?

    0Reply
  • Dustin Hickey
    Rental Property Investor · League City, TX · Member since 2018 · 14 posts · 12 votes
    7y
    @Katie Huynh Grab a copy of “The Book on Rental Property Investing” by Brandon Turner (Bigger Pockets). Best book I’ve read on the subject. You will learn a lot.
    1Reply
  • Katie Huynh
    OP
    Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes
    7y
    @Dustin Hickey yup, I just added the book in my library. Thanks for suggestion
    0Reply
  • Katie Huynh
    OP
    Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes
    7y
    Originally posted by @Sunday Nguyen:

    @Katie Huynh Base on my recent experience with making an offer for foreclosure property..

    Asset manager will review offers and usually will only discount $10k-$15k at a time and pick the highest offer that are closet to list price. Did you submit your offer yet ?

     I heard as investor ideally to offer 80% of the market price or like you said at discount $10k-$15k, whichever higher. I'm still looking at other different properties and alternative plans, so no offer yet.

    1Reply
  • Danny Webber
    Real Estate Broker · Austin, TX · Member since 2016 · 834 posts · 449 votes
    7y

    Do your numbers include: vacancies, repairs, make readies, prop mgt, good insurance, etc..

    That is a small margin and will probably be negative once all costs are taken into account.

    0Reply
  • Steve Milford
    Lender · Vancouver, WA · Member since 2015 · 482 posts · 316 votes
    7y

    @Katie Huynh

    I think you are making this too hard. The %s are a guide, not a end-all-be-all. You need to get comfortable enough with the numbers to be able to go with your gut. And everyone's version of what is acceptable is different. Here is my recommendation:

    1) Secure your financing first; not what online calculators suggest. This will tell you what you have to work with. Get a real insurance quote for a rental, not a owner-occupied home.

    2) Become friends with a contractor or someone you know/trust whom has taken apart a house (preferably many) that "look fine". Then ask them their opinion on it. Buy them lunch at their favorite restaurant if needed.

    3) Go see the house. Remember that pictures never tell the whole truth. Ideally, take your new trusted friend with you when you go see the house. PM-me if you need help to access.

    4) Who says it is a great starter property? A better question to ask is, would you or do you know anyone that would be OK with living there?

    5) Look at rents realistically in the area, not what you hope for and focus on why people would rent this property. Take a survey.

    6) Make an offer on it, with the numbers you are comfortable with and run with it. Offering onto a property is a lot different than getting that offer accepted. Just remember, the "deal" is made on the purchase side. 

    If all this seems like too much work, here are 2 options.

    1) Put the money into the stock market, or 

    2) PM me the address, so I can go and visit it and if it pencils out, I will buy it, and make it cash flow just fine for my taste.

    2Reply
  • Katie Huynh
    OP
    Rental Property Investor · Portland, OR · Member since 2018 · 25 posts · 4 votes
    7y
    Originally posted by @Steve Milford:

    @Katie Huynh

    I think you are making this too hard. The %s are a guide, not a end-all-be-all. You need to get comfortable enough with the numbers to be able to go with your gut. And everyone's version of what is acceptable is different. Here is my recommendation:

    1) Secure your financing first; not what online calculators suggest. This will tell you what you have to work with. Get a real insurance quote for a rental, not a owner-occupied home.

    2) Become friends with a contractor or someone you know/trust whom has taken apart a house (preferably many) that "look fine". Then ask them their opinion on it. Buy them lunch at their favorite restaurant if needed.

    3) Go see the house. Remember that pictures never tell the whole truth. Ideally, take your new trusted friend with you when you go see the house. PM-me if you need help to access.

    4) Who says it is a great starter property? A better question to ask is, would you or do you know anyone that would be OK with living there?

    5) Look at rents realistically in the area, not what you hope for and focus on why people would rent this property. Take a survey.

    6) Make an offer on it, with the numbers you are comfortable with and run with it. Offering onto a property is a lot different than getting that offer accepted. Just remember, the "deal" is made on the purchase side. 

    If all this seems like too much work, here are 2 options.

    1) Put the money into the stock market, or 

    2) PM me the address, so I can go and visit it and if it pencils out, I will buy it, and make it cash flow just fine for my taste.

     Steven,

    Thank you for your recommendation. I did make a tour to see the property. It seems need some fixing and the price is high in the area. I'm gonna pass this time. The reason I'm interested in this property is that because it's closed to my area and I'm familiar with the neighborhood.

    If you're interested, you can check it out. The property is in SE 103rd Ave, Portland OR price $270,400 (I don't remember exact address but I think you can find it from this info.

    0Reply
  • Steve Milford
    Lender · Vancouver, WA · Member since 2015 · 482 posts · 316 votes
    7y

    @Katie Huynh

    Ok I took at look at this...here is my 2 cents, and my evaluation (a little differently).

    Considering the area and going rents, a lesser decent rent at that property is about $1,800, minus (-) $272 per month for taxes, -$200 per month for minimum profit, - $83 per month for expected insurance = gives me a budget of $1,245 in loan + other costs to work with. 

    I use standard costs for property management fees of 10%, vac 8%, cap repairs 8%. If I don't have those same costs, i.e. if mine are less, then it is just more profit in my pocket. To me it it is a cost of doing business.

    Now let's look at the current price. Considering other homes sold recently in the area, ARV is $285k-$300k, so a price of $270k is already discounted from a Realtor/listing perspective.

    I don't toss in repair and rental business costs, until the very end, because that just cuts into my profit. I call them "get up to speed" costs.

    Break-even purchase price vs loan costs including PM, vac, and cap rate work out (for me) @ $240K with 25% down, @ $225k with 20% down, @ $210k with 15% down.

    If I consider $5k for get up to speed costs (and that the roof is good), that still means I break even in 2 years +/-. 

    Evaluation result (took me about an hour): Just looking at the numbers, it's a no-go if I cannot get it for $240K or less without using contractors to my advantage during the inspection phase. How could we make it better? Since I am Realtor, depending on the purchase price, I would use that income against my repair costs. Then I would break if I rented it the first month I owned it. And if I got a even higher rent, that would help too.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free