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My point was SFH's (excluding appreciation well above inflation) is bad math. Again, if a stole house because someone wanted out or you bought something cheap because it was outdated and rehabbed it, that's the big and fast gains. When you spin them quickly or under 6 months, there is less risk of an economic downturn where you get hurt because it normally takes a year for housing to catch up with a slowing economy AND the cost of money has been minimized. So if you borrow to rehab or flip and you really know you stole something, leverage away! Of course, based off of hindsight being 20-20, we have observed that the market over corrected and it came back much faster than any single expert predicted. Hence, everyone who bought in 2010 to 2012 at market got lucky. Not because you were a genius or your years of developing, an RE agent, etc etc. That's the reality and there is no way around that.
If your point is I have to pay for windows and you have to pay for windows, that's incredibly flawed logic. When you have multiple SFH's, your profit leak could be massive on your (yes) normally 4-5% gains. My house is for shelter and never tried to figure ROI. The bottom line is in a typical market, houses go up 3-5% which of course is overwhelmingly related to inflation. If you borrow at 4-5%, nearly all of your income pays the leveraged mortgage. Over time, you pay multi thousands for windows, air, roof, paint, updates, etc etc. If you don't, they you turn into a slumlord and it's all about putting in the least $$'s that you can which is all about the "rent". That's not your model. So the mortgage, HOA fees, and property tax eats nearly all of the rent payments. With cash, you get your 5% with all kinds of tax advantages that we both know how to work (which is another big benefit; nuff said on that one).
Spin it how you like but here is how I calculate things. If a house goes up $100K, both people make $100K! Well... Not really. The guy who borrowed didn't make as much as he had to pay this thing called interest. And neither profits are $100K. Hence, you are over simplifying things because it depends on how much he had to put back into the property including damage, advertising, selling costs, depreciation etc etc. Yea. you get that. But maybe the OP might be missing those details.
Now if you want to discuss the fast turns, again, I see the advantages of leveraging. But you wouldn't want to compete with the guy who has cash. Because with cash, I'm going to offer him $50K down non-refundable and that's how I'm going to win the bid. But I digress...
My point is, I lucked out when I bought my place. Yea, a lot of it was skill in the form of knowing how to negotiate, seeing gems in homes that need extra work (buyer are normally able to sign-on for one or two problems; after that they all run and the deals can be had), etc etc. In other words, I propose you are up in SFH's for one key reason: fast appreciation which ties into luck. So IF there is a big correction, it is easy to be in a world of hurt if you are leverages. Not "bankrupt" but tens of thousands of (yes) hard earned money gone. And personally, I don't want to work for 1-5 years and walk away under the spirit of "my risk was reduced because I can stick it to the bank". Because that's the opportunity cost I could be making on the business that I own. Hence, I don't do what you do because it takes my focus away of being able to make much more.
Furthermore, I didn't mean to insult your intelligence. Obviously you are a smart and aggressive guy and 5 paragraph discussions can easily miss all kinds of details. But I'm here to tell you that there would be no way in H_ll I would have ever leverage on a bunch of SFH's. But as luck would have it, you are up and count your blessings. So timing is nearly everything on SFH rentals and the bulk of your gains is the luck of your timing plus buying right SFH's. Of course there is all kinds of ways to make money in RE. Generally speaking, SFH's that you borrow money on and rent out is THE lowest on the food chain.
Nor can you calculate "50% gains versus 250% gains" in your example above. That's get-rich seminar speak. But that's another chapter on math. Anyways, I wish you all the best. Considering you bought at the right time, you are 100X better shape that the OP. Hence, as normal, Zippy's post and advise was spot on; run for the hills! He gets it. So that's my story and I am sticking to it!
So my free advise is to sell a few with the highest gains and pocket the proceeds. I predict when the economy slows and the gains disappear (AGAIN, SFH's are always about appreciation over inflation), I predict you will see what I just typed ^^. All the best!
C'mon man that's a very wordy post, I don't have time to read all that. You finally wore me out. I will respond to a part I did read where you say the guy who borrowed had to pay this thing called interest. Exactly, a leveraged investor has to pay interest but it is worth it when rates are low. This is calculated into the mathematics that favor leveraging. The cash investor has to pay this thing called "opportunity costs", your math was too simple.
Hence, as normal, Zippy's post and advise was spot on; run for the hills! He gets it. So that's my story and I am sticking to it!
You missed the point Zippy was making, there are good rentals to find but you have to make it a full time job. I picked up two this year and I earn way more in cash flow than you guys are talking about but this is my only job.
Quote:
Originally Posted by MN-Born-n-Raised
So my free advise is to sell a few with the highest gains and pocket the proceeds. I predict when the economy slows and the gains disappear (AGAIN, SFH's are always about appreciation over inflation), I predict you will see what I just typed ^^. All the best!
Then you aren't in the business. I've been following this discussion chuckling at the odd opinions being tossed around. The reason to leverage is to aquire more in a shorter period of time. The reason to pay cash is to add income without needing to spend time as you have more monthly cash coming in you can more easily afford to give it away to a manager. OP was asking about how much money rentals make and you guys went off on this weird tangent.
I buy and leverage because I buy several houses a year so I need my cash; or I used to but interest rates and prices have gone up too much my target return of 14% (strictly cash flow) are nearly impossible to hit. Anyone looking for returns in the form of mortgage reduction and appreciation isn't buying rentals they are buying long term flips and that wasn't the question asked.
Now I own 26 SFH rentals, 1 home that was turned into an office/maintenance residence, 2 personal homes (main/summer), and my sister's house. All but 1 is here in the valley, summer home is outside of Flagstaff, and over half we're picked up during the recession or shortly after and are now paid off but all of them were leveraged at one time. Each and every rental purchase I spent 70+ hours on (this was Zippy's point) looking at available housing stock to determine which one would hit my return target. Now to find a good buy for my targeted return I'd need to spend over 100 hours on.
If I wanted to buy all cash I could do it in a much shorter time frame and still see great returns which is what I will likely do in the future but I kind of want to finish paying off what I have and stop buying altogether. My goal was to have enough my family would never have to work again and I've done that so any more is just me being greedy.
OP, I look to make 14% on my cash spent. That is strictly cash flow money so rent - mortgage/HOA/whatever on all the money spent in the purchase (down and closings) and what it would need in repairs/updates (paint, carpet, AC, etc.). They are very hard to find at my returns but they still exist, as I said I picked up two in the first half of this year. When I started out I was only looking at 9% which is more easily hit these days though not a breeze to find.
Then you aren't in the business. I've been following this discussion chuckling at the odd opinions being tossed around. The reason to leverage is to aquire more in a shorter period of time. The reason to pay cash is to add income without needing to spend time as you have more monthly cash coming in you can more easily afford to give it away to a manager. OP was asking about how much money rentals make and you guys went off on this weird tangent.
No need to chuckle. I grasp why people leverage themselves to buy a business and why they want to pay cash. My point isn't a weird tangent what-so-ever.
I too have bought and sold plenty of properties. But my personal choice was always on water (CA, MX, and MN). I subdivided too and I was in and out fast. If I kept it, I intentionally rented exclusively short term furnished. As an example, a $600K 4,000 sq foot home rental made $57K less overhead ($00.00 management fees). A $330K condo in MX brought in $42K in income (a misiscule 10% management fee). I used them when they were not rented. So my motivation for SFH rental was to have someone else pay for my toy all the while they were paid for. For me at least, I do what I do best by not being distracted. So I sold them. Both were newer and I would NEVER contemplate hanging onto them long term. I wanted out before the big $$ repairs started.
And yes. I read Zippy's point. It's a PITA to have long term renters. I rented to people with a buck in their pocket. Still, re-renting was a PITA too.
So give me an example. So what are you going to buy in PHX today? What are you going to spend on a property (size and BR's please) and what is your anticipated rent? I expect your gains are pretty much up front by getting the steal of a deal which has nothing to do with ROI on renting but rather buying lower and selling higher (what I did by subdividing or flipping). In other words, educate us on why you are chuckling and how you are making 14% with a loan without heavily counting on future appreciation.
With PHX area SFH's in 2017, I'd love to see your math.
In other words, educate us on why you are chuckling and how you are making 14% with a loan without heavily counting on future appreciation.
With PHX area SFH's in 2017, I'd love to see your math.
I'm not going to give a current house on market but I will show you my math on a recently sold home, link to it at the bottom. This house is one I was looking at earlier this year but decided against it, mostly due to HOA issues.
I look for 14% and may accept at 12% depending on location. I always ask for sellers to pay closing costs and I only put 20% down. In April the rate was 4.5% so that is what I was using when I was considering this house, don't have a clue what current rates are but 4.5% on a 30 year investment should still be about right.
$177k purchase price, I would have offered $170k - $175k but lets use $177k
$35.4k down (20%)
$500 credit and appraisal
$2200 additional closing costs if I can't get the seller to pay
$36k - $38k cash in so 14% ROI would be $5k - $5.3k a year strictly cash flow, this particular house is in good shape it wouldn't have needed any immediate work just some landscaping issues out back and paint after 2 years or so.
HOA was $58 (this neighborhood has $48 monthly plus $126 annual though they have very low reserves and private roads/parks which was my issue), taxes were $935 at the time, and homeowners insurance is about $400. A 14% return, seller paid closings, is $419 a month positive cash flow after the mortgage so rent would have to be $1,306 OR with me paying closings it would be $445 or a rent of $1,331 and $1300 would be a reasonable rent for that neighborhood. If I were to paint it and pay closings that would bring it up to $1352 and I could see getting about that in rent on a freshly painted home.
This is great, I always like looking at other investors numbers, Taxes will go up because it will be not-owner occupied. I also don't see how it can support 1300, a larger 3 bedroom is 1275, and it doesn't look like it has much interest. There is also a 4 bed that has only one picture that is 1300 with no interest
to me I think that this would rent for 1250-1200 depending on shape. You could probably get it for 1300 but I think it would sit killing your cashflow.
719 + 33 + 77 + 58 ~ 877
1250 - 877 = 373 - 323, so 9.8% - 8.5%, still good numbers
My taxes on my now 250k property that rents for 1400 are 1,800 and insurance is 600. Those low tax/insurance numbers do help with your cash flow.
it looks like they paid 170 for it, 4 bedroom and they completely remodeled it. Probably put in 30k-20k of updates (new flooring, granite counter tops, Appliances, pretty much everything). Rented for 1300 around may of this year.
Interesting numbers in this area at that time, don't see anything now though.
I had a property in 2011 (Foreclosure) that I paid 90k for that now rents for 1300. Where are those deals
Last edited by outsideliving; 12-01-2017 at 07:39 PM..
Reason: Wrong Zillow URL
Can't compare winter vacancy prices with the rest of the year, I have given December discounts or shorter term leases in order to get leases signed if I run into a long vacancy with no interest Nov to the end of the year which is what that guy should do. Also, IMO not using a property manager helps me find tenants; as I mentioned above in post 4 my Nov 15th early termination I gave keys away on today.
I pulled $1300 off of several available in the area when I was looking, don't have them saved but there are 30+ registered rentals in that neighborhood of 360+ homes, yes I dig through that data when looking to buy. First link is a couple doors down was listed for $1300 and the second link was $1395 with a pool and neither of them were in that much better shape.
Those super cheap deals are basically gone and wont come back soon with things like Opendoor giving decent prices with little hassle; my cousin sold his through Opendoor and they jerked him around I had to get involved but one of my neighbors said they had a good experience and so did his daughter. Next time the market crashes I'll be ready to buy again though for sure.
I'm not going to give a current house on market but I will show you my math on a recently sold home, link to it at the bottom. This house is one I was looking at earlier this year but decided against it, mostly due to HOA issues.
I look for 14% and may accept at 12% depending on location. I always ask for sellers to pay closing costs and I only put 20% down. In April the rate was 4.5% so that is what I was using when I was considering this house, don't have a clue what current rates are but 4.5% on a 30 year investment should still be about right.
$177k purchase price, I would have offered $170k - $175k but lets use $177k
$35.4k down (20%)
$500 credit and appraisal
$2200 additional closing costs if I can't get the seller to pay
$36k - $38k cash in so 14% ROI would be $5k - $5.3k a year strictly cash flow, this particular house is in good shape it wouldn't have needed any immediate work just some landscaping issues out back and paint after 2 years or so.
HOA was $58 (this neighborhood has $48 monthly plus $126 annual though they have very low reserves and private roads/parks which was my issue), taxes were $935 at the time, and homeowners insurance is about $400. A 14% return, seller paid closings, is $419 a month positive cash flow after the mortgage so rent would have to be $1,306 OR with me paying closings it would be $445 or a rent of $1,331 and $1300 would be a reasonable rent for that neighborhood. If I were to paint it and pay closings that would bring it up to $1352 and I could see getting about that in rent on a freshly painted home.
Here is how my brain would calculate things. To make it simply, if I pay $175,000 for a home and financed 100% of the value, to cover the cost of money at 4.5% that's $175K*0.045 or $7875. Assuming you house never sits empty and at $1275 a month, gross rental income is $1275*12 or $15,300. Now we need to remove the profit leaks of the HOA ($58*12) + 126 annual + taxes of $935 + insurance of $400 that equals $2557. So $15,300 (rental income) - borrowing interest $7875 - annual fees of $2557==$4868. As for the closing costs, if the seller pays for it, that meant you simply overpaid for the house by $2700. If you sell the house in 5 years, then you have to reduce the 5 year income (in this example) by $2750/5 and pull it from the $4868/yr. My point is buyers closing costs add up.
So we start with $4868 excluding closing costs and we have to start putting IN dollars immediately to make it more livable; there is always something (time and money). Then we need to reduce the net gains like management fees, renter that don't pay, months where it stays empty, fees to get people evicted if things don't go well etc. The issue at hand is that's tough to really know how much to attach to reducing the $4868. But it's not insignificant.
Then comes the depreciation and wear-and-tear. Of course there are the expensive items like paint, roofs, heating and air, appliances etc. And then there is all those inexpensive trips we all make to the Home Depot that positively add up; $20 and $100's at a time (plus time or money to fix).
I can go on and on. The bottom line is the "cash flow" that people love to show forgets major details.
If you have 25 SFH's at $5K "cash flow" because you are borrowing $$'s that $125K a year in income. But as I said, that assumes you never have any maintenance, never have a home that sits empty or one that is full of people not paying, and the list goes on and on.
For me juggling, 26 SF homes for $125K LESS a whole lot of profit leaks that we briefly touched on, doesn't sound like a good business model to me. As I said early on where you chuckled, the ONLY way it's worth the massive hassle for most if is if your homes appreciate. In your case, your timing (with a good degree of luck) was exceptional! Therefore in 2017, I have absolutely no desire to buy then rent out single family home. Of course, if I could go back to 2011 with my 20-20 glasses on, I would have bought as many as I could.
But the "seminar-speak" on SFH rentals is going to spin this in a whole different fashion. My numbers assume 100% borrowing because a good portion of the real income is dodging the cost of money or $175K*0.045. That's where the majority of the proceeds are (by far) in the balance sheet.
To reiterate, you are in (very) fine shape because of when you bought. And who knows, the price may increase over the price of inflation and you can pick up even more gains. Or..... Rent pricing pressures may have a correction when more apartments get finished. In the meantime, I will buy expensive things and sell them for more money that I paid for and focus what I do best. IMHO, in 2017, the OP should run for the hills with buying a SFH. YMMV.
Here is how my brain would calculate things. To make it simply, if I pay $175,000 for a home and financed 100% of the value, to cover the cost of money at 4.5% that's $175K*0.045 or $7875. Assuming you house never sits empty and at $1275 a month, gross rental income is $1275*12 or $15,300. Now we need to remove the profit leaks of the HOA ($58*12) + 126 annual + taxes of $935 + insurance of $400 that equals $2557. So $15,300 (rental income) - borrowing interest $7875 - annual fees of $2557==$4868. As for the closing costs, if the seller pays for it, that meant you simply overpaid for the house by $2700. If you sell the house in 5 years, then you have to reduce the 5 year income (in this example) by $2750/5 and pull it from the $4868/yr. My point is buyers closing costs add up.
So we start with $4868 excluding closing costs and we have to start putting IN dollars immediately to make it more livable; there is always something (time and money). Then we need to reduce the net gains like management fees, renter that don't pay, months where it stays empty, fees to get people evicted if things don't go well etc. The issue at hand is that's tough to really know how much to attach to reducing the $4868. But it's not insignificant.
Then comes the depreciation and wear-and-tear. Of course there are the expensive items like paint, roofs, heating and air, appliances etc. And then there is all those inexpensive trips we all make to the Home Depot that positively add up; $20 and $100's at a time (plus time or money to fix).
I can go on and on. The bottom line is the "cash flow" that people love to show forgets major details.
If you have 25 SFH's at $5K "cash flow" because you are borrowing $$'s that $125K a year in income. But as I said, that assumes you never have any maintenance, never have a home that sits empty or one that is full of people not paying, and the list goes on and on.
For me juggling, 26 SF homes for $125K LESS a whole lot of profit leaks that we briefly touched on, doesn't sound like a good business model to me. As I said early on where you chuckled, the ONLY way it's worth the massive hassle for most if is if your homes appreciate. In your case, your timing (with a good degree of luck) was exceptional! Therefore in 2017, I have absolutely no desire to buy then rent out single family home. Of course, if I could go back to 2011 with my 20-20 glasses on, I would have bought as many as I could.
But the "seminar-speak" on SFH rentals is going to spin this in a whole different fashion. My numbers assume 100% borrowing because a good portion of the real income is dodging the cost of money or $175K*0.045. That's where the majority of the proceeds are (by far) in the balance sheet.
To reiterate, you are in (very) fine shape because of when you bought. And who knows, the price may increase over the price of inflation and you can pick up even more gains. Or..... Rent pricing pressures may have a correction when more apartments get finished. In the meantime, I will buy expensive things and sell them for more money that I paid for and focus what I do best.
A lot wrong with your math starting with 100% financed on $175k at 4.5% is the difference of $1.5k in interest over a year ($7817.24 in the first 12 months at 100% and $6253.80 at 80%) and on a very insignificant note you doubled up the annual HOA fee (monthly was $48 and annual was $126 for a monthly average of $58).
Just because a seller pays closing costs doesn't mean you overpaid on a home. It is common practice in the west valley for sellers to still be paying closing costs and at what I offer on any homes I buy I am certainly well below market value with or without seller paid closings. Don't know why you are talking about selling in 5 years again though I am talking about buying rentals not flips, depreciation recapture and capital gains taxes will eat a large portion of your appreciation if you were to do this so you better hope the appreciation was huge.
If I have to put in money right away in repairs on any purchase then that money is added into my total cash in and I'm looking to get 14% on those repair costs too, most homes on the market are ready for tenants to move in with next to nothing going into them. In the example, and every rental I buy, I spent 2 hours going through the house top to bottom figuring out what needs fixing and replaced and as I said that house was good to go but it would need paint in 2-3 years time. That paint will be paid for through increased rent, you can expect to get 3% out of an existing tenant anywhere in the valley or 5% on a vacancy up to 10% in "hot" areas. A 3% increase on $1300 a month is an extra $468 year two then $482 in year three which covers about half of what it costs to paint with the remainder being paid for in year four/five.
I don't make a lot of trips to Home Depot for things so that is an odd one and management fees are for people who don't have the time or patience to deal with rental houses (90%+ of the time dealing with tenants is simply cashing checks unless your rentals are in low income areas); the majority of managers are **** and add extra expenses for you AND your tenants so if you can avoid them do so. The most I buy, on a vacancy only, is keys ($6 or less), air filters ($5 - $10) and light bulbs which get charged to the deposit. I will spend a little bit on smoke detectors every 10 years. I repaint walls every about 3 tenants or 7 years but that is at a significantly lower cost than having the entire place painted, 1500 sq ft is about $700 labor and $400 in paint. All of that is easily covered in rent increases alone so this idea that there is a ton of profit leaks I generally find laughable.
As for vacancies and evictions I don't have problems with either, I'm averaging 2.76% vacancy across all my rentals which is trending up and my tenants stay for an average of 4.6 years which is trending down slightly. No one in AZ should EVER have a problem with an eviction between the deposit and how fast evictions happen here. Evictions in AZ for non-payment happen in 20-24 days; 5 day notice sent certified is 10 days then on day 11 you file in court (early AM) and get your process server to attempt personal service AND mail the notice that afternoon. Tenant needs to receive the service by mail 2 days (is it 3?) before the hearing date so when you file schedule the hearing 5 days out and then 5 days from that the sheriff will kick them out. If you are a smart LL then you have a security deposit for more than a month's rent so the rent and court costs will be covered.
Not going to get into how much money I'm making other than to say your estimate is way too low, no consideration for rent increases at all. I spend my entire day with my wife and son enjoying life and cashing checks/doing inspections twice a year so $125k a year is a lot to make off of everyone else's hard work/money. That doesn't even take into account principal reduction on those mortgages.
Quote:
Originally Posted by MN-Born-n-Raised
IMHO, in 2017, the OP should run for the hills with buying a SFH.
With the specific situation the OP is in I couldn't agree more. As I said earlier finding a GOOD rental with good returns is hard since prices and rates have gone too high and rents haven't kept up. The point of my last posts was that it isn't impossible if you have the time/knowledge to put into the search.
If anyone wants to get into rentals they just need to understand what is involved, both time and money, but there is a TON of up side to doing it, with plenty of risk too. DO NOT get in over your head like some idiots did before the crash, I still have what I did before the crash, and do not look at property values as they don't matter if you are in it for the long haul. Find good rentals with acceptable returns and stick to them; personally appreciation and principal reduction is nice but cash in hand is all that matters today.
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But I'm here to tell you that there would be no way in H_ll I would have ever leverage on a bunch of SFH's. But as luck would have it, you are up and count your blessings. So timing is nearly everything on SFH rentals and the bulk of your gains is the luck of your timing plus buying right SFH's. Of course there is all kinds of ways to make money in RE. Generally speaking, SFH's that you borrow money on and rent out is THE lowest on the food chain. 
