How does the ROI for real estate decrease every year. I wish we had the ability to post images.
As states in many posts, you don't get rich collecting rents and having tenants pay down the mortgage.
According to the charts I cannot post:
Purchase an average property for $140,000
The value at the close of escrow is $140,000
Down payment $40,000
Closing costs $3,000 and add to $40,000 = $43,000 down payment
Cash flow is $338 per month
First year return is 0.65%
In this deal the ROI actually increases every year. 1st = 0.65% 2nd = 5.41% total average over 30 years = 9.82%
Now I will show how the ROI decreases every year. The first property was a dog because you don't get rich from rental income.
I did calculations for the same house with several different down payments. My business model is to double my investment capital every year, or earn 50% to 100% on my investment capital every year. Of course, these numbers do not include many factors. Some factors are in your favor i.e. credit for interest payments, depreciation, or whatever and some factors are not in your favor i.e. your cost to sell the property. So, maybe the good and the bad are 'a wash'.
Purchase the same property for a discounted price of only $20,000. I like $40,000 better, but I will go low for the purpose to show the numbers.
Purchase an average property for $140,000
The value at the close of escrow is $140,000
Down payment $40,000
Costs $3,000 and total down payment is $43,000
Cash flow is $338 per month
First year return is 50.69%
In this deal the ROI actually decreases every year. 1st = 50.69% 2nd = 30.41% total average over 30 years = 11.49%
Now, if we increase the rents every year, the average ROI for the first property over 30 years is 11.56%
The average for the 2nd property over 30 years is 13.23%
The problem is; we don't live in an ideal world. Investors who think they are going to purchase just any property with a $100 to $200 positive cash flow are in for a big surprise after a few years. I purchase every single-family property with cash and no financing. You would think that I am making bank, but for me average home, with no financing, in Idaho and Las Vegas, I net $4,000 to $5,000 per year. Don't forget. NO FINANCING! In January of this year, I drove from Los Angeles to Idaho to clean a 20-year old home. I did only the normal things that every homeowner has to do to every home. This was a 4-bedroom e bath home. I had to replace 3 20-year old bathroom sink bowls, put in imitation granite kitchen counter tops, new stove and dishwasher, new doors and drawers on the kitchen cabinets, paint the ceilings and walls, plastered and painted the garage, repaired fences, cut and trim three huge trees, go to the dump with a large trailer 3 times, paint portions of the outside the house, cut and repair a cracked concrete sidewalk, replace screens, level the yard. repair a lot of plumbing and the list goes on and on.
I gave this house to my son about 6 years ago. So, after spending 13 days working on the house from 5 am to midnight every day my son sold the house. My cost for the repairs was $18,000 not including any labor. I gave my son a very legitimate bill to be paid through escrow for $34,000 when adding the labor.
So, take your $100 to $200 per month, add your costs for financing and tell me how many single family homes it will take while earning $100 to $200 per month to break even to pay for this one house.
I purchased 10 homes in Boise and Meridian Idaho about 14 years ago and figured that if the property values increased only 5% per year I would be living on Easy Street. I did the math before I purchased the homes and never did it again. I paid an average of $130,000 for each home and each home increased in value by about $100,000, but don't forget that I paid cash. Had I financed the properties I think I would have earned an average ROI of less than 5%.
I think the investment advice on BP is one-sided. I love the real estate business, but I don't think people should be taught with such motivation that they think they can walk on water. I would like to see a balance with success and horror stories for the sake of teaching investors to calculate their risks and to be aware of the pitfalls. I am not embarrassed to say that I lost $1 million two times. Once, investing as a limited partner in a syndicated property for two K-Mart shopping centers and the 2nd time was in the stock market. Those two losses hurt and sent me 10 years backwards. But, it made me stronger to the point I ponder over every purchase I make. I look at hundreds of properties before making a purchase. I crunch the numbers 10 to many times over and over. I never make decisions bases on a broker's or another person's advice. It is not their money that is being risked and it is too easy for someone else to tell you to pull the trigger.
Purchase an average property for $120,000
The value at the close of escrow is $140,000
Down payment and all closing costs $3,000 and your equity is already negative $3,000
Cash flow is $338 per month
First year return is 0.65%
In this deal the ROI actually increases every year. 1st = 0.65% 2nd = 5.41% total average over 30 years = 9.82%
