Phoenix R.E Investors: What Gross Rental Yield are You Requiring? (real estate market, renters)

[Potential_Landlord]

Hi Phoenix R.E. Investors,

Lets' say you do not speculate on future appreciation, but intend to hold a rental forever to only profit via cash-low. What gross rental yield as in rents/purchase price would you require for an investment object? - I would say >10% is required.
Thanks.

[ShampooBanana]

Agree. I would probably shoot for 12% or more personally and in the market like this where there is plenty of available product and the rental market is strong I would expect nothing less.

[S. Chris Webb]

I strongly disagree that there is "plenty of available product". The Phoenix area has been suffering an extremely low inventory for about a year and a half now. Prices have been going up steadily as a result. You are competing with a lot of other investors, many of whom are from out of the country and have a lot of cash, that are looking for the same deal though. We've been suffering over-price bidding wars for some time, and cash-filled pockets prevail. That said, as low as the prices are, if you are able to get a winning offer, even paying more than list price, you can still get a pretty decent cash flow.

If you're talking about how much the property will get in rent as a percentage of what you paid for it, that depends on the type of property. A newer, $200K SFR might only get $1400/month, but a $40K condo might get $550. However, the expenses on the condo will likely be a much higher percentage of the value than the higher priced home, taking away from that yield, and don't count on as much appreciation on a condo.

[john3232]

Originally Posted by Potential_Landlord

Hi Phoenix R.E. Investors,

Lets' say you do not speculate on future appreciation, but intend to hold a rental forever to only profit via cash-low. What gross rental yield as in rents/purchase price would you require for an investment object? - I would say >10% is required.
Thanks.

10%?

Very hard unless you can handle the rehab yourself.

I think you can still find homes under $100,00,00 which might rent in the $800-900 range but you'll need to get them rent ready yourself. Such homes are often in pretty bad shape.

[oldtrader]

What you apparently want is a 10% Cap (Capitalization) Rate. One problem often found, is that people try to compute it, without taking into consideration all of the expenses. One has to be very careful that some of the expenses are not left off of the expense statement. The industry standard to project a cap rate, is that the expenses will be a minimum of 40% of income. If you finance the property, lenders are going to very careful to see that expenses are in line with the norm. If reviewed by an experienced real estate accountant, are going to say lower than 40% cannot be true. I have seen income/expense statements that would show the expenses are as low as 23%, which is a big fat sign say big fat liar.

Then re-compute the return after factoring in loan payments. Depending on the financing, the return may be higher or lower after factoring in the loan payment.

There are 4 benefits and returns on a real estate investments.

1. Cash flow return.
2. Tax Flow Return. After tax savings are factored in it is computed the same way as the cash flow return.
3. Loan Amortization Return.
4. Appreciation Return. In today's unstable real estate market, this is the one hardest to compute.

Total Return On Invested Dollar. This is the sum of all of the above 4 returns, and the Wall Street Journal once wrote an article that this is the only way to evaluate investment property and has been accepted as the industry standard since 1975, when I invented the form and name and it was first published in a professional magazine, and went on to become the standard it is. Using this as your guide, you can evaluate several different properties to see which one is the best to invest in.

[Zippyman]

I wouldn't invest in rentals where I didn't fully expect massive appreciation over the long term. It's too much hassle and risk otherwise. If I only wanted ~10% I'd trade stocks, or do some Of the financial arbitrage tricks on fatwallet.

[john3232]

Originally Posted by oldtrader

...If you finance the property, lenders are going to very careful to see that expenses are in line with the norm. If reviewed by an experienced real estate accountant, are going to say lower than 40% cannot be true.

To be on the safe side I allot 50% to cover expenses.

[mjd2k]

Originally Posted by Zippyman

I wouldn't invest in rentals where I didn't fully expect massive appreciation over the long term. It's too much hassle and risk otherwise. If I only wanted ~10% I'd trade stocks, or do some Of the financial arbitrage tricks on fatwallet.

I agree. That has always been myexperience.

I'm not sure what the OP is calculating 10% on? Probably I missed it as sometimes my ADD kicks in reading posts.

Are you basing it on your cash investment? That is the CAP rate. So if you put 25% down on a $100k loan, then you are looking for a return on the $25k as the bank is putting out the other $75k.

Assuming a 10% return on your $25k, there are easier ways to earn $2,500 with less risk Of course you pay taxes on any mortgage paydown also, so your takehome may be even less than you think.

I can't knock rental as I've had up to 12 at a time and I still have a three rentals but as I've said before, the only money I have ever made off rentals is from appreciation. Without appreciation, I don't think its worth it.

PS: Im just in the process of putting $35k into a rental I've had for 12 years. That kills several years of revenue. I took out an interest only LOC against the equity so Im still running cash flow but Ive lost $35k off the appreciation. I can eat that as it has appreciated more than that but...... if it never, why bother?

Another PS, so far I do not have any rentals in Phoenix. Ihave a property but not renting it ....yet. All my experience with rentals has been in a couple of Canadian provinces.

[gtbguy]

I have three SFRs in the Phoenix area. The following are gross percentages and do not reflect HOA fees, taxes (really low in the area), maintenance, and insurance.

Property #1 = 11.6%
Property #2 = 17.2%
Property #3 = 17.3%

All three have been VERY easy to rent (original renters since purchasing the homes) and without any problems. Knock on wood.......

[whodiman]

Originally Posted by gtbguy

I have three SFRs in the Phoenix area. The following are gross percentages and do not reflect HOA fees, taxes (really low in the area), maintenance, and insurance.

Property #1 = 11.6%
Property #2 = 17.2%
Property #3 = 17.3%

All three have been VERY easy to rent (original renters since purchasing the homes) and without any problems. Knock on wood.......

You obviously bought these when the market was low. If you were to sell these same properties today there is no way the next buyer would get these cap rates and unlikely above 10%. Am I correct?

I think the only way to get a 10% cap now is in a less desirable neighborhood where you may sacrifice some long term appreciation.

I know this thread is specifically targeting the cap rate and not the overal aspect of real estate otherwise this debate could take several directions.