How much money do you make off your rental property? (real estate market, insurance)
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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).
I thought the $126 was added onto the $58. My bad; I'm off $126 total for the year. I used $175K or 100% because that's the income on BORROWED money and that is my point of posting. In other words, you cannot put down 80% and then highlight how good your return is on borrowed money. Therefore in order for me to simply the example on borrowed money, I used 100%. What's that expression: "past results are not indicative....." So yes, your 20% paid off portion is going to have a lot higher gains percentage wise. So the cash flow on borrow money in my eyes is terrible specifically on a SFH; a lot of work in 2017 and not a lot of upside coming. And the more homes you have (barring the all important appreciation), the more headaches you have for in my opinion for not-so-much $$'s. In other words, I am not going to rent out and manage a house for $5K upside less a whole lot of time and money to maintain it. I bet the real amount is $2-$3K less once you figure the ACTUAL cash flow on borrow money (and forgetting the all important APPRECIATION).
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Originally Posted by AZ Manager
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.
Really? I'm going to make an offer for $175K and ask them to pay my $2200 closing costs. In parallel, I'm going to offer $172,800 and write on the offer "buyer pays his own closing cost". Even if a seller is as absolutely dense as lead, their RE better explain basic math to them. It's the same damn $'s!
My point on 5 years was only for an example. Because you forgot two profit leaks. It could be in 10 years or 20 years. One leak is the cost of borrowing and I used 5 years purely as an example. If I was going to go into the SFH rental market, I personally would be buying newer or recently remodeled. Then I'd be selling them before the big expensive come into play.
Forgive me for having to mention this obvious point. But it is common place for someone to say proudly on their personal home: "I paid $190K in 2011 and sold it for $300K 4 years later!" Well, they forgot many details in between. Investors do it to. What were their borrowing costs? What was their selling costs? In your case, your "cash flow" numbers ignored both just as it ignored all kinds of profit leaks like depreciation, advertising costs, units that sat empty, etc. So some get rich seminar-speak simplifies "cash flow" all the time (albeit some are more realistic). Just look at all of your itemized deductions. It's a big number and there are all kinds of hidden ones coming up when you hang on for the long term. On my MN home (granted it is 4000 sq foot), I have a furnace ($3K), air ($2500), and roof ($8000) on the horizon. Windows are now 20 years old too and I might get another 10 years. If I ignore them, the house doesn't "appreciate" but rather drops like any other item you buy. Feeding the house with thousands of dollars over the long haul is the reason it "holds it value". Basically, the land is the thing that appreciates and not house itself. Hence, location, location, location. So in my personal case in MN, my PERFECT 1998 tile is looking outdated in 2017. Those repairs are part of the "repairs" that nearly all renters don't like to think about. They think short term. Hence, maintaining 26 homes costs a lot of time and money. Maybe not year 1-8 after buying re-done homes. But bigger dollars will follow as the years go on. Here in Surprise, my 2006 home is "cheap" to maintain. But add on another 10 years and three air and heating units are on the docket. Unless you want to be a slumlord and push out any fixes and think "cash flow cash flow" and hang onto them forever.
Quote:
Originally Posted by AZ Manager
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.
We agree, the majority of rental managers are crap (they were in short term rentals and that is why I did it myself too). And a big reason why they are worthless is landlords want to under pay rental managers and all they find is people who over promise and under deliver. I was in that camp. Or they lie to you on what it takes to fix so (in their mind) they are fairly compensated for the work. In short, you bought yourself a job which is fine.
I'm glad at this last point you are spot on your advice. The OP is obviously a novice and you left out key $$'s on a cash flow (which you are now discussing) and call my real-world numbers "laughable".
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Originally Posted by AZ Manager
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.
Understood on the eviction. In AZ, they have the right approach. Not so much the case in other states.
So 2.76% is a real leak that is based off of gross revenues (it has nothing to do with borrowing). So if gross revenues are $15,000 a year x 26 homes or $390,000, you have $390,000*0.0276==$10,764 that comes off of the bottom line AFTER your other expenses. So in the 100% borrowed money (i.e. leveraged) example, you are taking off $10,764 off of under $100K in income. That suddenly became a real profit leak. Then add in advertising costs to re-rent and time (which included meeting people, possible RE agent fees, etc).
Don't get me wrong. 2.76% is impressive. But with borrowed money, it makes renting out a SLF property not so attractive. When I rented furnished short term, I wanted 10% of the property cost in order to justify the expense. I had a $600K, $450K, and $180K hitting those numbers and they were all paid for. Again, they were on water. So I grossed $120K in rent on only THREE properties. All toys that I visited when they had openings that I could write off as an expense. That of course isn't all profit. But I got more rent, MUCH less wear and tear (1/2 the year they sat empty and while they were there, they didn't want to sit in the house). Most importantly, I didn't have to do it full time. SO I will admit that you are hearing some of my personal bias on SFH massive renters that often rent to people who are broke (I charged a lot and people had plenty of money to rent them). I sold them because it cost me mind share on what I do by day. But I viewed the real gains in the increased property value which wasn't much (but it took off big time from 2010 to 2017).
Quote:
Originally Posted by AZ Manager
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.
One reason rents go up is because of inflation. BUT, that makes doors, windows, air conditioning units more expensive to upkeep too. That's the reality.
OF COURSE your real income is a lot higher! That's because you have 20% down and bought a lot of them in unprecedented times with double digit appreciation. So when the value went up by much more than inflation (some by a lot) and that allowed you to charge more for rent. The "experts" were predicting MUCH slower growth rates. They were wrong so you lucked out and that is a good thing. So you cannot take your situation and apply it to a general statement that it makes sense to leverage on borrowed money with SFH's. In your specific case, you made a bet and it paid off. That was always my point; APPRECIATION. But you grabbed them in unprecedented times. So as I said in 2017, it's all about stealing a house which you could have spun or flipped. Stealing houses in 2017 is a lot of work (my friends example of scouring websites and knocking on doors).
In summary, you made a good bet and it paid off. IF for whatever reason the prices drop my 20%, rents too will eventually drop by the same percentage and your wealth will be wiped out by 20% of the leveraged amount. It could be a nuke aimed at North Korea which we will all be screwed. I'm not so sure I'd want to count on 26 families (many who are broke) to not have a job by getting laid off in a bad economy. If you own them, you are infinitely in better shape. It's why being diverse on your investments is important. Since cash is king, I will continue my lower risk lower reward model. If all is well on the world stage and housing goes up by inflationary rates, then your gains are multiplied as well by inflation less cost of keeping them up. So as I said all along, the upside on SFH is the appreciation.
I'm done. But I've enjoyed the chat.
Last edited by MN-Born-n-Raised; 12-03-2017 at 06:38 AM..
We paid cash so we are in pure profit mode now that we have paid ourselves back for repairs and upgrades. Rentals are a great source of passive income but you need to have the right personality. If you're the kind of person that freaks out over every tiny little maintenance call then being a landlord isnt for your.
If you pay cash your profit will be greatly reduced. Even for a non-primary residence mortgage, the rates are very low and it is MUCH better to leverage to get the most gain. Keep the same price point if that makes you comfortable, but get a mortgage. A mortgage actually gives you less risk.
As far as what is the profit, it depends on each property. You can easily do an operating income statement and figure out what your expenses are including possible vacancy rates, maintenance, etc compared to what the rents are. For instance I have two rentals in Scottsdale that cash flow much better than one in Mesa that I will unload once the longtime tenant wants to move. It all depends on the property you buy and the market you are in.
FYI condo's typically have large monthly HOA fees as well, that would need to be factored in. And condo properties do not appreciate in value nearly as well as single family residences. I have 5 and all of them are single family houses, I would not consider a condo.
Speaking from experience in the real estate/stockmarket, my advice is...
1) If you can buy investment property without getting a mortgage, Do it!
2) Stay away from the stock market, the insiders make money,we the small people take the hit.
3) Real estate is the best investment.
Speaking from experience in the real estate/stockmarket, my advice is...
1) If you can buy investment property without getting a mortgage, Do it!
2) Stay away from the stock market, the insiders make money,we the small people take the hit.
3) Real estate is the best investment.
I agree Real Estate is better than the stock market, but I'm in both (and have done very well in the stock market as a "small guy"). I would not put all of my eggs in one basket. Iwill reiterate your returns are greater in leveraged real estate than paid off real estate, but do what makes you most comfortable.
I agree Real Estate is better than the stock market, but I'm in both (and have done very well in the stock market as a "small guy"). I would not put all of my eggs in one basket. Iwill reiterate your returns are greater in leveraged real estate than paid off real estate, but do what makes you most comfortable.
I'm not sure about leveraged real estate getting better returns if you're talking about a normal market over a normal timeframe. I agree that putting all your eggs in one basket is risky....we have probably 2/3 in real estate and 1/3 in real estate investments (not counting our home) and we have gotten better returns from real estate than the stock market but it does require more effort to manage though the amount of time you put into managing your stocks investments can also take up more time if you do it right and have the ability to increase your returns.
The reality is timing is key whether you buy real estate or stocks but you have more quick flexibility with stocks.
2) Stay away from the stock market, the insiders make money,we the small people take the hit.
That's funny... I'm not an "insider", and yet have made hundreds of thousands of dollars in the stock market over the last decade. And with no secret, either... I know my tolerance for risk, I do not react to the market, I make a plan and stick with it. In '08, I kept buying while the lemmings all panicked and sold at the bottom.
Telling people to avoid the equity markets as a blanket statement is terrible advice. Telling them to get into real estate, period, no matter what, is terrible advice. Plenty of people have lost their rears in real estate, either because they were blindly speculating or because they thought they were going to become a landlord while knowing nothing about the rental business.
If you get a mortgage for 100% of the loan, you'll be paying a lot of interest for a 30 year mortgage or a 15 year mortgage,you're still paying interest just less. Also if you don't put down at least 20%, you'll be paying PMI. Me personally, I don't like dealing with banks or loan institutions, I don't like a bank holding anything over my head.
That's funny... I'm not an "insider", and yet have made hundreds of thousands of dollars in the stock market over the last decade. And with no secret, either... I know my tolerance for risk, I do not react to the market, I make a plan and stick with it. In '08, I kept buying while the lemmings all panicked and sold at the bottom.
Telling people to avoid the equity markets as a blanket statement is terrible advice. Telling them to get into real estate, period, no matter what, is terrible advice. Plenty of people have lost their rears in real estate, either because they were blindly speculating or because they thought they were going to become a landlord while knowing nothing about the rental business.
I guess you were one of the lucky ones. I made over a million dollars on one real estate transaction and plenty more on others. Real estate is tangible, not like the stock market, where it's not a realized gain until you cash it in, make sure you do it before you loose it! Don't tell me that I'm giving bad advise on buying real estate....you stick to the stock market and I'll stick to real estate.
I guess you were one of the lucky ones. I made over a million dollars on one real estate transaction and plenty more on others. Real estate is tangible, not like the stock market, where it's not a realized gain until you cash it in, make sure you do it before you loose it! Don't tell me that I'm giving bad advise on buying real estate....you stick to the stock market and I'll stick to real estate.
How about the stock market crash in the 80s, some people jumped out of windows to commit suicide, because they lost everything.
If you get a mortgage for 100% of the loan, you'll be paying a lot of interest for a 30 year mortgage or a 15 year mortgage,you're still paying interest just less. Also if you don't put down at least 20%, you'll be paying PMI. Me personally, I don't like dealing with banks or loan institutions, I don't like a bank holding anything over my head.
It's really easy math, folks. If your investment returns exceed your interest rate on the mortgage, you come out ahead.
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Or they lie to you on what it takes to fix so (in their mind) they are fairly compensated for the work. In short, you bought yourself a job which is fine. 
