Longterm rental IRRs

[Wesley Bryant]

What's a realistic IRR to expect on a long term rental in the current market? I found a house in Atlanta that comes out to an IRR around 11% when I run the numbers, is that good or should I look for better? That's with 20% down, a 7.5% interest, and assumes I own it for at least 15 years. Any advice is much appreciated. Thanks!

[Arn Cenedella]

@Wesley Bryant

I’ll be a contrarian here…

Based on 46 years in the industry…

Any proforma or projection of returns are by definition based on a whole slew of assumptions the investor has little or no control over. Minor tweaks to the assumptions can cause wild variations in the calculated returns.

The proforma is NOT God.

If one steps backs and considers the notion any of us have a solid accurate idea what the world national local economy or interest rates or the real estate market in general will be like in 5 to 10 to 15 years are a heck of a lot smarter than I. 

Here is how I’ve invested successfully for decades:

1. Does the property make sense to buy today? - ie can one structure the acquisition with fixed rate debt where the property will be “self-supporting” - produce enough income to pay all operating amd debts expenses with a little left over as cash flow - as a protective layer for the inevitable downtown.

2. Does one have logical rational reasons to be optimistic about the future of the property and location? - is there some quality to both the property and location? Is it in a growth market for the foreseeable future?

3. Does one have the operational skill to efficiently and professionally operate the property?

If the answer to all three is Yes, I buy.

And let life unfold.

I have NO IDEA what the ultimate return will be….NONE….

And neither does any other investor if they are honest…..most crystal balls I find are broken.

But if one acquires the property is a solid long term manner based on fundamental investing principles and is never forced to sell…

History indicates the long term trajectory of price and rents are up.

In my experience, real estate follows cycles……. 6 or 7 years of a bull market, 1 or 2 years down (though the up is always larger than the down), 1 or 2 years of flat which then sets the floor for the next run up.