Highest profit margin deal closed. Home built in 2006. Turnkey, CAP 20.

[Ben Bakhshi]

This home is a duplex, built in 2006, each side has 4 bedrooms and 3 baths with hardwood floors. Each side is currently rented for $650/mo.

Initial price: $64,900.
We offered $67,500 and lost to a $68,000 bid. The closing fell through and they were asking for highest and best. We offered $68,500 with 1% of the agent fee going to the closing costs (I found the property myself).
And...we WON.

With $15,600 gross rents minus about $800 in taxes and $800 in insurance. Assumed takeover price of about $70,000 with all fees and closing costs.
$14,000/$70,000 comes out to a 20% return. I know these are still fairly gross numbers, but I'm comparing apples to apples.

We have come close to these numbers before, albeit, in better areas. $55,000 home rented for $900/mo for example.

The neighborhood is a bit small, but it is located within an hour of a major city and 40 minutes from a major university. In my opinion, as long as rents are stable, I don't care if I don't see any appreciation. On the other hand, I think investors (like me) will push these property values up to at least a CAP 15 price, if not CAP 10.

[J Scott]

Originally posted by Ben Bakhshi:

I think this property will perform above the 50% rule.

Given that it was built in 2006, it will almost certainly operate at a lower expense ratio for the first several years, as you won't have to deal with capital costs, your vacancy will probably be lower and maintenance costs will be trivial.

But, remember that the 50% rule is talking about long-term costs -- if you hold long enough, you're going to have to replace the roof, replace the HVAC system, replace the siding, etc. And maintenance costs will increase. And you'll eventually deal with rent loss, evictions, etc, even if only occasionally.

For example, in reality, that $6000 roof you'll need to buy in 20 years is actually costing you $25/month ($25/month * 20 years = $6000); likewise with the HVAC, siding, water heater, etc. You can either factor in the $100/month capital costs forever, or just expect that in 20 years, you may have a year where you lose $10K because you have to replace this type of stuff. Either way you do the accounting, your long-term expense ratio will be the same.

These are facts of life with rental properties long-term, and while it may seem like they'll never happen, I promise they will.

All that said, you may not be facing 50%...but don't make that assumption based just on today's numbers. For example, if you're doing your own PM, that will likely save you 10-12%, which is a real savings...though you will be trading your time for that savings, and your time is presumably worth some amount of money, right?