Future rental property

[NetSkyBlue]

I’m wondering about the feasibility of a future rental investment. This would probably happen 5 years to 10 years down the road.

I have read that somewhere around 30% ROI is something to aim for in a rental property. I’m just not sure how to find this kind of %. Nothing I can figure is going to be more than 10-15%.

Keeping in mind that inflation will have changed all these numbers in 5 – 10 years, I’m going to try to run the numbers in “today’s” dollars.

Most 2 bedroom apartments in my area are $700 - $1000. Most “budget” or “starter” homes run $110k - $150k. I have read that rent should be at least 1% of purchase price, so $1100 - $1500/month.

I’ve looked on Craigslist, and it seems to me most rental houses on the market here are listed for $1000 - $1600/month. Most “want to rent” posts are looking for housing in the $800 - $1000 range. I have no way of knowing if the houses listed at the higher prices are actually being rented at that price or not.

I would have to put down at least 20% (22k – 30k). Figure $4000 closing costs? Water/sewage/garbage at approx. $165/month.

If I bought the $110k house, rented it for $1100 a month, a 30 year mortgage would be about $450/month (and who knows what interest rates are going to do over the next decade). Honestly, I’m not sure how much landlord insurance would be. $200, $300/month?

Mortgage + insurance + water, etc = $815 minimum.

$1100 - $815 = $285 Estimated cash flow

$285 x 12 months = $3420. Assuming a 7% vacancy, that leaves $3180.60/year.

$3180.60 / initial cash outlay of $26,000 (downpayment + closing costs) = 12% ROI.

What am I missing? I don’t think the market would support higher rent, and putting down more cash to get a lower monthly payment won’t help increase the ROI.

Is this just not a market in favor of rental houses?

[MonkeyMama]

In my opinion, most rental figures quotes (like 30%???) are extremely bullish.

You are missing property taxes? Repairs and maintenance? The cost to fix up the place when the renters trash it?

I think it can vary widely by region. The region I live in is right now very *hot* for rentals. But rental purchasers tend to pay cash. I can see the draw. You plop down $200k cash and can rent said house for $20k per year. That's a 10% return (before expenses), which isn't bad. Property taxes are cheap here. {Next door neighbor has rented home and had 0% vacancy for several years}. But problem is rental market is saturated with folks who have lost their homes to short sale or foreclosure. These people will eventually leave the area, or buy another home. I don't see these rental rates as sustainable for the long haul. Might be a more solid short-term investment, considering the other options in this economy. Of course, I also think home prices are only this high due to extreme speculation. Most homes here are being bought up by foreign investors - local wages do not support these home prices. The investors expect these homes to be selling for $400k again in the future - HA!

Until people start buying homes they can actually afford, and as long as interest rates are rock bottom, I don't see much room for long-term housing appreciation. But that is my regional perspective.

I am actually not opposed to investment real estate - it's just been a *terrible* investment the entire time I have been an adult - way over priced in the regions I have lived - the numbers just don't work out very well. Your numbers look far better than anything I have ever seen around here. I think the point is usually more that eventually home will be paid off and will generate higher rents (inflation). Also, ideally housing appreciates over time - so there is more money to be had keeping a rental for the long run (eventually selling it).

[BudgetSurgeon]

I’m wondering about the feasibility of a future rental investment. This would probably happen 5 years to 10 years down the road.

I have read that somewhere around 30% ROI is something to aim for in a rental property. I’m just not sure how to find this kind of %. Nothing I can figure is going to be more than 10-15%.

Keeping in mind that inflation will have changed all these numbers in 5 – 10 years, I’m going to try to run the numbers in “today’s” dollars.

Most 2 bedroom apartments in my area are $700 - $1000. Most “budget” or “starter” homes run $110k - $150k. I have read that rent should be at least 1% of purchase price, so $1100 - $1500/month.

I’ve looked on Craigslist, and it seems to me most rental houses on the market here are listed for $1000 - $1600/month. Most “want to rent” posts are looking for housing in the $800 - $1000 range. I have no way of knowing if the houses listed at the higher prices are actually being rented at that price or not.

I would have to put down at least 20% (22k – 30k). Figure $4000 closing costs? Water/sewage/garbage at approx. $165/month.

If I bought the $110k house, rented it for $1100 a month, a 30 year mortgage would be about $450/month (and who knows what interest rates are going to do over the next decade). Honestly, I’m not sure how much landlord insurance would be. $200, $300/month?

Mortgage + insurance + water, etc = $815 minimum.

$1100 - $815 = $285 Estimated cash flow

$285 x 12 months = $3420. Assuming a 7% vacancy, that leaves $3180.60/year.

$3180.60 / initial cash outlay of $26,000 (downpayment + closing costs) = 12% ROI.

What am I missing? I don’t think the market would support higher rent, and putting down more cash to get a lower monthly payment won’t help increase the ROI.

Is this just not a market in favor of rental houses?

Not sure where you got 30% ROI from. If you can do 12%, you are doing very well, IMO. Where else can you get a 12% ROI today, without incurring massive risk. As a former landlord, I think it's a good way to make a nice monthly cash stream. A couple of things worth pointing out to you:

- Unless the laws have changed since I was a landlord, you can depreciate 1/19th of your
cost basis each year, and treat this as a deduction against revenue for tax purposes. This
will effectively increase your ROI. The downside to this is that once you sell your rental,
the adjust cost basis of your home (for the purpose of calculating profit) will be reduced
by your total depreciation amount to date (i.e., you will be paying more tax on profit, if
you just outright sell the home, and don't roll it in to something more expensive);

- Unless your area is not rentable for reason, I would count on 1 month out of 12 for missed
payments (delinquency, timing of moves, etc.). So, I would count on 8.33% for vacancy rate;

- Depending on your area, and how close to bottom of the market you purchase, you will probably
see an increase in home value over time. This appreciation will increase your over ROI
as well;

Go for it.....just make sure that you are not over-paying for your home. Do your due diligence on comps for the area, to make sure that you are paying no more than market value for your rental.

Good Luck!

P.S. Re-read other poster's post. Yes, make sure that taxes and repairs are factored into your expense equation.
I had assumed that mortgage has taxes built into to it.

[NetSkyBlue]

At this point, I just want to determine if this is even a goal worth working towards. Why save up for an investment property if it's a bad idea and will never work, you know?

Ideally, I'm interested in generating cash flow, as opposed to holding property for future appreciation (although hopefully that would happen!)

I'm only looking at the 30% ROI because I've read that's where you should be. Having 2-3 rental properties generating enough cash flow to replace working a full time job for someone else would be the "end goal" if having one worked out well.

Any landlords who can comment on how to find the type of property that lends itself to positive cash flow?

[MonkeyMama]

I'm only looking at the 30% ROI because I've read that's where you should be.

I think this is the problem. Rental real estate is always way over blown and overly simplified. I have heard this a million times too, but have never *Seen* it.

But you are asking good questions. So many people blindly believe that real estate is *get rich quick* and never bother to run the numbers. It's a good idea to talk to people who have been in real estate a long time, too. (People who have done well through the thick and thin).

[NetSkyBlue]

Thank you, this is what I wanted to hear - that this amount is an acceptable return. How do you feel about 30 vs 15 year mortgages on investment properties? I am leery of 30 years anyway, but maybe it's better in the case of an investment.

Following the timeline I'm in, I would most likely want to hold on to and manage the property for about that long. I'm tempted to say I'd rather pay it off in 15 and pocket a larger profit the last 15, but I can't determine if that's the wiser financial decision.

I also read that I should have the equivalent of 6 months' rent cash reserves (and that lenders may even require this). Is this in addition to having an amount saved as a maintenance fund?

And also, is it best to not put more than 20% down on a rental property?

[c3troop]

Owning a rental home I will say if you are looking to get extra income its hard. Something always goes wrong. But when the loan is finally paid off you will be during pretty. By the way my note is 850 a month and I charge 1095. Same renters for two years. last year due to repairs I did not make a penny, but the mortgage was paid by someone else. I will be acquiring one more rental soon.

[NetSkyBlue]

Owning a rental home I will say if you are looking to get extra income its hard. Something always goes wrong. But when the loan is finally paid off you will be during pretty. By the way my note is 850 a month and I charge 1095. Same renters for two years. last year due to repairs I did not make a penny, but the mortgage was paid by someone else. I will be acquiring one more rental soon.

I expect any transition to owning your own business to be hard. But I would like to look at what I'm doing now as researching a possible career change, rather than just getting some extra income.

[97guns]

i have 4 rental properties and my highest yielding property nets me 14%. the return on investment is better if you use the mortgage for leverage. i am making 12% on properties that i have free and clear. landlord insurance is a basic fire protection and is $40 a month.

i didnt see you list property tax, in my case it accounts for the majority of my expense, approx $1000 a year per property.