Acceptable ROI
What percentage Return On Invested Capital after all the expenses are accounted for do you guys look for on your rental properties? 10%...15% per year?
What percentage Return On Invested Capital after all the expenses are accounted for do you guys look for on your rental properties? 10%...15% per year?
I'm certain that you will get a variety of answers to this question since people invest in different ways and with different timelines. That said, here is what I expect. I currently will not purchase property that I can not rent for 2% of purchase price or greater. This is unrealistic for many areas, and niches, but that is what I expect. ROI is infinite in one sense because I do not leave any of my money in the properties. I always refinance them for more than what I put into the property. Occasionally I will purchase property outright, but I must still be able to get at least 2%/month return. So I guess you could say that I expect a minimum of 24% annually. I do make changes in my portfolio and investment criteria based on the economy and other reasons but my methods don't vary much from what I mention here. Also, ROI will vary as you reach the limit that you will own, and begin to pay off properties, and sell off underperforming properties.
davmille:
Did I understand correctly that you will do 100% financing on your investments?
Or don't I get what all my money in the deal means or appreciation?
Yes, I do frequently do what amounts to 100% financing. For example, I recently bought a house for 18k, invested 10k and the property appraised at 50k. Since I only had 28k invested of my own money, it was easy to get a cash out finance loan of 70% of appraised value. This is something that many people do and you would not have any problem finding a lender to do this.
I have what i believe is a unique method, I want $100 per month for every $5000 of the purchase + rehab price. First $100 rent is for taxes and insurance. Thus if I can rent it for $600 my purchase plus rehab target price would be 25k.
I've never figured what the ROI would be, not very good I'm sure since I haven't financed them. If one was being polite he would say I am retired, if they were being rude they would say I am unemployed, thus cash flow has been an important consideration. I do have a credit line available on 2 of them, that is for $4000 more than I spent, so theoretically the ROI could be infinite.
Wow Mykle, someone else who goes for cashflow! However, either I didn't quite understand your message or there was a typo. If you expect $100 rent/$5000 invested, then a property that you invest $25k in should bring $500/month instead of $600 right? Either way, that is an excellent cash flow. I haven't looked at it that way, but I guess I have properties that would fit on either side of that number. My lower priced properties would be higher, and my higher priced properties would be lower. I'm not sure what the average would be. It's too late tonight to run those numbers.
Davemille, ha, glad to see someone around here who uses numbers I can understand, all the 100k and can get 1k a month stuff is beyond me.
Anyway, the first $100 from rent is for taxes and insurance etc, I don't count it when it comes to figuring the purchase price. I don't always make those numbers right on, but I come close.
Thanks for the clarification Mykle.
intersting, thanks for the replys guys. Also, how do you go about finding most of your properties? I understand about looking for motivated sellers, but do you get most of them from RE agents, preforclosures, probate properties, birddogs or what? thanks i'm new to this so bear with me
I like "nothing down" methods, which makes ROI impossible and impractical to calculate. Afterall...what if I put $10 earnest money down, and got a return of $500 per month (12,000% ROI). Not really great information.
I look at cap rates and cash flow per unit per month and find that more helpful. Sure ROI is nice when you're bragging at your wifes work christmas party (I don't have christmas parties...I work for myself), but it isn't particularly useful unless you're going into deals with at least 5% down...and even then, there are so many aspects of a great deal that I find it difficult to quantify and draw lines in the sand that way. I wouldn't do a 100% ROI deal if I only put $100 bucks into it and it took up lots of my time. I would do 50% ROI deals all day long if I was putting in minimal capital and never hearing about them again.
Its hard to measure ROI in real estate. But I think for this purpose you might just want to measure ROI on the investment/cashflow. Remember appreciation also adds to your return.
Or you can work for a monthly dollar amount target.
The most important thing is to be TOTALLY clear about what you want.
Wishing you positive cashflow!
All Creative Real Estate Investors?
Isnt there anyone who puts down 20% on a rental property and has a target ROI???
I know people who look for 12%, and others who insist on 15%.
Real Estate is less risky than the stock market, but also less liquid, so I really think its a decision that you make depending on the alternative choices you have for your money.
How much money you can put in an illiquid investment and not need for emergencies. And how comfortable you are being a landlord.
You may have great comfort with all of the "negatives" of real estate.
You may feel 10% ROI is good enough.
And you still enjoy AFTER TAX benefits of depreciation and interest deductions. As well as appreciation in value.
Good Luck,
Neill
[ Edited by Neill7 on Date 06/05/2004 ]
ROI - Very difficult to calculate in some types of investments. Until you sell you will not really know what the appreciation is so the any ROI before that is a guess.
What is interesting about the discussion is there are some different styles showing up.
An investor or two that focus on yield. Gross rent is 1%-2%/monthly of purchase price.
You have folks who get in, refinance and effectively have no cash left in the deal. Any return at this point is infinite so less critical as ROI on a zero investment is interesting.
You have (but have not heard from here yet) folks who do invest for appreciation. They many times are happy with minimal cash flow after all expenses. They prefer positive cash flow but taxable yield is not their objective.
There are folks who buy notes or other things that produce a cash return every month without any management issues. They look for something between 10%-15% unless they are focused more on MH's. I know one lady that will only do deals with the return is 30% per year. Absolutely no upside other then the interest if the borrower pays on time. Otherwise there might be some other ways to make a profit.
One large variable is to look at the market you want to invest in. In some locations you can not cover the mortgage without a very large equity position in the property. You could try to find distressed sellers but you will not find that many in a hot market. Most of them can still sell retail unless they have zero equity. Again, such deals will likely not cash flow.
Conclusions.
1. Ignore ROI unless you are deal with certain types of transactions. Very high leverage deals or deals that show OK cash flow and large appreciation are hard to predict the ROI. After the deal is completely finished you can produce the figure.
2. Focus on what will work in the market you are investing in. Markets change over time and you can chance locations or technique.
3. The less intelligent of us that are investing profitably just look for a decent return in a deal we understand. The exact ROI or other calculations are rarely used. If my account keeps growing and the properties are sound I figure I am willing. Getting a spreadsheet out to produce the higher math has never interested me. BTW - I trained as an engineer so I know enough about math to realize that I rarely need more then the ability to calculate a mortgage payment schedule and the effective interest rate when I discount things.
As they say, IMHO...
John
[addsig]
thanks for the replys guys, lots of interesting info
hardtime,
I look for cash flow without regard to a specific cash on cash return. I like to put enough down so that my Debt Coverage Ratio is at least 125%. I like Dave T's cash flow analysis spreadsheet to assess a deal, and also apply his suggested criteria of a minimum 1.25 DCR and a minimum 15% Internal Rate of Return. These two metrics insure that my property generates sufficient cash flow to sustain the property while I am waiting for appreciation to make the real money.
I go for low leverage properties with regard to the appraised value -- in other words, I take a healthy equity position. For example, I bought a 3/1.5 townhome here in Frederick MD for $49K in 1999. I put about $8K into the rehab and have the property rented for $850 per month. I only put 10% down (the property appraised for $63K "as was". So my initial investment (including rehab cost) was only about $13K.
This year I decided to update the kitchen (new cabinets, new appliances, new countertops), replace the carpet and vinyl in all rooms, paint throughout and redo some of the landscaping along with wear and tear repairs. You guessed it, I am selling. It went on the market this past weekend for $152500. After spending another $8K in this rehab, my total profit from this property from appreciation will be around $85K,
I will do a 1031 exchange and acquire two condos for my replacement properties at a total cost of $186000. Since exchange proceeds will cover all my downpayment and settlement costs, I have no new money out of pocket. The condos will each rent for $950 per month and I expect them to appraise for around $210K at settlement (below market purchase possible because I contracted pre-construction).
Now if you go back to my 1999 property and add up my costs, I have about $21K out of pocket invested. When I go to settlement on my 1031 replacement properties, I will still have that same $21K out of pocket for this investment.
My cash flow from these two new condos is expected to approach $700 combined per month or $9400 per year. If you wanted to do a cash on cash ROI calculation, I guess I am looking at just under 45%, though with no money out of pocket, I wonder how valid this calculation is.
The point I want to make is that cash on cash ROI calculations are really "tunnel vision" metrics when applied to a single aspect of a comprehensive real estate investment plan designed to increase your net worth over time. If I needed a great ROI number back in 1999 when that townhouse came on the market and the rents were only $650 per month, I might have passed on the deal and I would not be able to enjoy the great exchange deal I am structuring today.
By the way, another similar townhouse in the same complex came on the market in 2001. I bought it for $69K as the replacement property in a 1031 exchange and will also sell this one later this year or early next year, probably for $159K (My total out of pocket investment for this one is also about $21K). Time to start looking for another set of 1031 replacement properties.
[ Edited by NewKidinTown on Date 06/07/2004 ]
thanks for the reply bro, intersting way of looking at all this.
Interesting discusion! I look to put only about 5% down on my properties so thats about $4000 on an $80,000 duplex. I then want cash flow after all expenses and a contribution to a maintenace fund of about $250 per month. So the ROI is in the area of 75%. I also look for a DCR of about 150%. I also look for a DCR of 100% or above minus one tenant, this is hard to do on 2 unit buildings but is possible with 3 or above units in my area. I try to keep my initial out of pocket expenses low by having the seller pay all closing costs plus necessary repairs. I may have to pay a little more to induce them to do this but it only adds a few bucks to my monthly payment so that is OK. I'm going on 50 years old so cash flow is everything, I'll be dead in 30 years!
Chris A.
Hi Group,
I’m trying to calculate some financials on real estate investment. Please let me know if I’m on the right track.
Sale Price: 80,000
Down: 10,000
Net monthly Profit: 600
Monthly Payment going towards principle: 2,000 Yearly.
What is my ROI?
600 x 12 = 7,200/year
7,200 is 72% of 10,000.
+ 2,000 from Principle
---------------
9,200 is 92% of 10,000.
Does this mean my ROI is 92%
Thanks,
Angel
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