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We have several rentals and our return is about 5.5-6.0%, not including appreciation of the properties. If you figure that in as well, say at 3% per year, then its around 8.5%-9.0%.
That is only counting HOA, property taxes and insurance without factoring in maintenance and vacancies. We have had a very good experience so far with our properties and renters and I attribute that to properties that are a bit newer, nicer, and being selective on the renters (price points between $200k - $250k per property). Of our 6 properties, 3 are townhouses, 2 are patio homes and 1 is a small single family home. They are all in the NW Valley and 4 of the 6 are newer than 10 years - the other 2 we did a full rehab of before putting them up for rent.
I agree with the above on the cash vs mortgaging. Is mortgaging potentially more rewarding financially? Sure, but with a lot more stress in my opinion. Having them paid off is nice, if they sit empty for a month or two, sure you're not making income but at least you're not stressed about making the mortgage payment.
As long as you're honest with yourself that you're making the move for peace of mind and not because it is the best move mathematically, because it is far from a smart move.
Using your numbers of 8.5%-9.0%, you could have made much more than that in the US stock market. So why invest in Real Estate if that rate is acceptable. In my scenario where it is leveraged (say 20% down), the investment in a $250,000 house is only $50,000, whereas in yours it's $250,000. Using your numbers of 3% appreciation, that's $7,500. In your paid for cash house your gains are 3%. In my leveraged property, the gain is 15%. The annualized return in the S&P 500 since 1973 is 11.59% so in essence, the opportunity cost exceeds your return, you are losing money essentially that you would have made in the stock market. BTW the past 12 months the S&P has increased 16.91% and the Dow 23.12% and this doesn't include some significant gains at the election in 2016. In the leveraged scenario, you get to reap the rewards of both. In a scenario where the value of the house doubles over a 15 year period of time, the numbers get ugly in my favor.
I don't understand the argument "well I don't have to worry about making payments if it's vacant". Vacancy is something that is considered and worked into your Operating Income Statement. And how would you not be able to make a couple months of mortgage payment if you put LESS cash into the investment and kept more to yourself.
I'm sorry, I get the feeling of peace of mind, but if you're looking at paying cash the math doesn't work out in the investors favor.
The other part aside from the peace of mind is monthly income. With something like the the stock market, you typically do not pull out cash on a monthly basis, right? We wanted a scenario where the rentals are providing actual monthly income.
Regarding leveraging, we are doing something similar. We recently purchased a new high end home, which we are mortgaging, and using the income from the rentals to pay the mortgage of the new house...when it's paid off in 10 years (or less), we'll have a ~$2 Million home paid off and 11 rentals earning monthly income (turning our current primary home into a rental as well once we move into the new house).
The other part aside from the peace of mind is monthly income. With something like the the stock market, you typically do not pull out cash on a monthly basis, right? We wanted a scenario where the rentals are providing actual monthly income.
Regarding leveraging, we are doing something similar. We recently purchased a new high end home, which we are mortgaging, and using the income from the rentals to pay the mortgage of the new house...when it's paid off in 10 years (or less), we'll have a ~$2 Million home paid off and 11 rentals earning monthly income (turning our current primary home into a rental as well once we move into the new house).
That's great, but the reality is you could have so much more in 10 years. I have the cash to pay off all of my properties many times over but I understand that's a bad financial move. That's Dave Ramsey type conservative advice and his advice is best suited for a novice not someone with some business savvy.
I understand you'll be fine financially either way, just pointing out the advice is bad mathematically. BTW I have positive cash flow as well, it's not just for paid off houses.
Fair enough and I dont disagree that we could make more on our money, I guess we are just more conservative when it comes to it...that and not "in the know" enough probably, so we go with what we know. We paid our of primary home a while back (~$300k) that only had a 3.25% mortgage...not the smartest use of $300k, but it feels great knowing its paid off.
Fair enough and I dont disagree that we could make more on our money, I guess we are just more conservative when it comes to it...that and not "in the know" enough probably, so we go with what we know. We paid our of primary home a while back (~$300k) that only had a 3.25% mortgage...not the smartest use of $300k, but it feels great knowing its paid off.
I understand that, and to an extent I don't take my own advice or I would be refinancing my properties as the equity in all are well above 50% and that would free up MORE cash to invest (I think that's going too far). I am just a fan of leveraged real estate as an investment but mine will all be paid off by the time I'm 50 and I wouldn't plan to add mortgages to them after the fact either.
If anyone would care to share, I am considering in the near future either buying a rental outright with no mortgage or investing in the stock market. I'm looking at condos ranging from 100,000 to 150,000 that would rent between 750 and 1000. My other option would be to continuing investing my returns have been between 7 and 10 percent, I manage my own funds so no investor fees. I do have a 401a, so the real estate money would not be withdrawn from that, this would be more to diversify and because I want to have a regular relatively maintenance free (thus condo over house) income to supplement my medical insurance. I know I could buy more than one with the money if I got mortgages, but I have an extremely low risk tolerance.
So what is your relative profit?
Any mistakes you made that you would have done differently?
How do taxes affect your profit?
Thanks as always to anyone who replies.
We own 3 houses in the Phoenix area that we rent out. We have a property mgr that manages the properties. After all costs including mgmt, prop taxes, maintenance, down times, etc. we probably are getting a 3-4% return which sounds not great but the properties have also appreciated on average about 50%-60% so I guess you could say we are average a return of about 15% counting rent and appreciation. That's a better return than we are averaging on stocks but you have to consider real estate a long term investment and not so easily sold like stocks are. By the way, our returns are starting to increase with increased rents.
I think you need to do some research on rental rates in this town. It's hard to find anything for $750. $850-900 is an average starting point for one bedrooms in decent areas/condition. Two bedroom units, however, seem to be more reasonably priced and on a per sqft basis, are cheaper than one bedrooms. You may be underpricing yourself in your calculations.
One or two rentals isn't enough to spread the risk out, or to justify the time investment. The wife & I made crazy money on two rentals because we bought at the right time. Even so, if I had to do it over, I wouldn't. Too much dealing with unreasonable, irresponsible people & at today's prices, there isn't anything worth the effort & risk, unless you're looking to make acquisition a full-time job. I'd be very surprised if you could match your 7-10% investment return in the market with a rental that you bought today, without donating a bunch of time you don't have to the endeavor. If you hire a property manager, you're gonna get soaked. If you do it yourself, you just gave yourself a job that you don't want.
Hey guys, im new to the forum, but am a real estate investor and have been for several years.
I initially purchased all of my properties with cash until I recently refinanced three of them years later to increase capital for my main business.
My personal opinion is to try and always buy your rental property with cash. When all of my rentals were paid for, I was actually interested in my rentals and the cash flow they brought in. Now that I have a mortgage on 3 of them, the income is chump change & I often think about selling off and being stress free.
For example - I have 9 buildings currently, my primary residence, my commercial property that houses my main business, and 6 rental properties. My best producing income property specs are as follows
Total rent = $29,400
Taxes - $5,500 per year
Insurance - $600 per year
Mortgage (new) - $9,600 per year
--------------------------------------
5% Vacancy - $1,470
5% Misc - $1,396
I went from netting $20,434 a year to pretty much HALF that.
$20,000 is not bad for passive income, $10,000 doesn't sound bad either until it takes 4 months to evict your first tenant, replace your first roof, have a vacant unit for three months while repairing the damage caused by your last tenant, ext. It's honestly rarely hands off unless your willing to invest an additional 10% (going rate) for a property manager. Keep in mind, with a property manager, not only are you coughing up 10%, but for the most part, your also giving giving them the authority to sub out repairs to partnering third party companies who are rarely a bargain to put it in nice terms.
I USED to say im going to finance 1-4 unit properties (residential) with the banks money with only 3.5% down. Im going to MAKE money every month while paying down my debt with my tenants money while increasing my net worth month after month. Well... It doesn't exactly work that way. On a 30 year mortgage, unless your paying substantially MORE then the unit is bringing in, for the most part, all your doing is paying interest... for YEARS. Keep in mind that the unit above, is my BEST performing unit. For a condo/single family dwelling, all it takes is a roof, plumbing, heating, septic ext issue to put you in the red...for the entire year. Not to mention, when a tenant moves out, your almost always reconditioning it for 1-2 months before its rented again. On a single family, you are paying the mortgage on that rental unit during vacancy until its rented again.
In my opinion, the only thing that makes it worth while is the appreciation of the asset itself. Im 28 years old and went from living in an abandoned building to a 1.4 million dollar net worth with much of it as a result of appreciating real estate.
I paid $40,000 for the unit mentioned above, put about $15,000 into it and its currently worth about $160,000. I am a real estate broker however and stalked the mls for months and months to find the deal.
You're talking my language. I like buying cash outright. For the OP I bought a nice condo 2/2.5 cash for $110k and clear about $720/mo (after paying hoa, tax, insurance) - tenants are great and that is what's important to make sure you get good tenants!
The next property put 20% down and got a mortgage - bleckh- you pay an investor interest rate (higher). It's paying for itself but not cash flowing - granted it's a home in a great location with again great tenants so happy with it - building equity and may want to move into it in about 10 years?
Do I like single family homes - absolutely but the rate of return is low - but if you do have enough cash to buy a home, I would buy, fix it up a little and then sell with a carryback (hold the note) - now that's leveraging your money and you would be completely hands-off! Balloon payment due in 5-6 years whatever you decide and you collect a good interest on your property - win-win.
Last edited by smoochaz; 11-29-2017 at 08:36 PM..
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