Longterm rental IRRs
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!
Most Popular Reply
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.
at 7.5% interest I would suspect 11% is high unless you are an excellent manager of class C properties. Real estate in general averages around 7-9%.
- Chris Seveney
#2 Market Trends & Data Contributor
Atlanta's ZHVI is only 2% YoY So expect Atlanta real IRR is net net 5%-7% IRR.
@Wesley Bryant how are you calculating your terminal value for the IRR? Are you assuming sale of asset on the last year,cash out-refi, or continued cash-flow with some multiple? I know this is a slightly different question than you are asking, but I want to ensure we're using the same basis for IRR. The terminal value can change your result significantly.
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.
#2 Market Trends & Data Contributor
The problem lies in whether it makes sense to invest in a market where future price appreciation is only 2% and negative -$300 cash-flow; or invest in fixed CD 5% ; or invest in a market where appreciation is 10% this year, 3 percent after that LOL.
With 2% future price vs 5% CD it's obvious the CD has better IRR.
The best part of being an investor is that investors get to make decisions where they place their capital AND then benefit or suffer from the consequences of those decisions.
I can say NO ONE has ever become wealthy investing in CDs.
I can say MANY folks have become wealthy investing in real estate.
I can’t predict what the future will hold but the long term trend (unequivocally) is the price of real estate both sale and rent increases over time.
I’ll keep my capital in real estate not CDs.
#2 Market Trends & Data Contributor
well yea except local real estate performance vary greatly when CD is 0% and when CD is 5%.