kellen2811
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I am currently looking into a rental property. What is a good return on investment for the first year? The property is a 2 Unit that is selling for 42500 but will require around 5000 to make higher rents. The average profit for the year after taxes is 6536 based on 595 rent for each apartment and using taxes for 2009. The initial investment includes a 7000 down payment plus closing cost and the aformentioned 5000. Is 46.6% return on investment in the first year a good figure? I am relatively still new to this game although this will be my second rental property.
Math:
Down Payment- 7000
Closing Cost- 2000
Construction- 5000
Total- 14000
Percentage return- 6536/ 14000- .46685
To me that return is not to bad for the investment, but was just wondering what returns everyone else may be seeing. Thanks
Kellen
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Sat May 29, 2010 5:39 am |
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coaster
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Kellen -
I think you're leaving out some of your expenses:
- debt service
- marketing
- maintenance
- insurance
- utilities? typically apartments in that price range the water and perhaps even the heat in included in rent.
- taxes should go in the debit column; you're confusing the issue by allowing for it in the "average profit."
Real estate is typically a long-term investment. I think you'll give yourself a better picture if you look at your balance sheet over a longer period and amortize the one-time expenses over the expected holding term.
Though I'm not a landlord, so I may be way off base. I'm just suggesting from the viewpoint of an investment.
~Tim~
Eye Candy : Why Whimsy
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Sat May 29, 2010 6:00 am |
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kellen2811
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Coaster,
I actually did figure in all of that. The utilities are paid by the tenants including water sewer heat electric, lawn work, and trash removal. All seperated to each unit. I took the cost per year bases. Took total rents for one year without vacancy, and then subtracted expenses for the total year, school tax, county tax, city tax, insurance and mortgage payment. The 6536 is net profit. The net income is 14280. With expenses at 7743. Now these are all estimates. The taxs are exact and the mortgage is exact. The only estimate I allowed was on insurance which I tried to estimate high on.
The taxes are actually figured into the debit column. Sorry for the confusing post. The only thing I figured into the income column was rents. I try to be skeptical when looking into investment properties.
Kellen
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Sat May 29, 2010 6:08 am |
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coaster
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Kellen, it sounds to me like you've done your homework. I'm skeptical of that return, too, though. Just keep in mind when you're dealing with property there are always unforeseen expenses. So long as you have enough capital and/or free cash flow to handle those without going bust, then you should be all right.
Best wishes and good luck.........
~Tim~
Eye Candy : Why Whimsy
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Sat May 29, 2010 4:45 pm |
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oldguy
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The closing cost and the $5000 repairs are one-time costs that don't add equity.
After year #1, you'll have income of $14,280 plus about $500 dep tax break, ie $14,800/yr.
Costs are $2556 for the mortgage, plus prop tax, ins, repairs. So maybe $8,000 in a 'no problems' year. And your equity is about $7000 - ie, an ROE in Y2 of over 100%. Later, if the unit appreciates and your equity goes from $7000 to $14,000 or $21,000, the ROE will drop accordingly
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Sat May 29, 2010 9:29 pm |
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kellen2811
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Maybe I should provide some more information for more insite from you guys.
Mortgage currently offered from my bank
10 year 6.25% at 381.36 a month
15 year 7.50 at 315.32
20 year 8.5 at 295.22
I am currently looking at the 10 year mortgage and probably will be the one that I select. Those are rates that are for the full 42500 being asked, currently negotiating for 35000.
Profit in a 100% rental year is 14280.
Expenses
Solid(Yearly)
County Tax-525.43
City Tax-1563
School Tax-810
Insurance- 1000 (estimated)
Mortgage- 4576.32 ( 381.36 monthly)
Flexible-
Unforseen Expenses
Non Rental Months
Net- 5805.25 in a good year without flexible expenses
I guess i do not understand your ROE oldguy. Can you explain a little more to me? I did look up what ROE ment but still could not translate it. I apologize but I have never taken accounting or business classes. But I do love MATH. Thanks
Kellen
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Sun May 30, 2010 3:14 am |
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oldguy
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You'll have the $14,280 income plus the $500 dep income, minus your expenses minus maybe $1500 for a vacancy and a repair. so about $4800 income. Your equity in the property if you sold it today is about $7000 - so the ROE is $4800/7000, ie 68% in Y2.
As years pass you will gain equity two ways - appreciation and principal paydown. At Y10, the property will be paid for and it may be worth $65,000. So then your ROE will be $4800/65,000, ie 7.4%. (It will actually be more because you will have raised the rents)
My reason for using ROE rather than ROI is that the ROE is a good comparitve number for looking at other investments. Eg, say that, in the Great Bull Market of 2015 to 2030, the index returns 15%/yr (in my dreams?) and you are deciding - do I cash out my $65k and buy the index - or do I keep getting my 7% - or do I refi to raise my ROE back up to 25% and put the cashout into that mystical 15% market?
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Sun May 30, 2010 1:35 pm |
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coaster
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Think of it this way:
investment = money put in.
equity = value of what you own.
While oldguy is quite correct in distinguishing between equity and investment, and that your one-off costs don't increase your equity, I think that it's a matter of apples and oranges when talking about what kind of a gain an investment gives you, which is the basic end result you want: maximum gain for minimum risk. I think that for most people, the concept of ROI is what's going to give them the clearest picture of how they're doing:
ROI = net liquidation value now / sum of all the money put in
When you do it that way, your costs to aquire and maintain the asset get included in the sum of the money "invested" and the costs to liquidate get deducted from the proceeds.
Another way to look at it: using ROE, you have a return while you own the asset; using ROI, you only have a return when you sell the asset.
Basically what it boils down to is using whatever method makes the most sense in achieving the goal of knowing "howgozit"; I do think it's misleading to use the numbers from one method to compare with the numbers from another method -- apples and oranges. 
~Tim~
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Mon May 31, 2010 4:02 am |
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iwillguide
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real estate is not profitable in current economy.i feel better you invest in stock markets if you want to see good returns.
payday loan sites | real payday loans
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Tue Jun 01, 2010 10:18 am |
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Zector
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Is this your first rental? If so be weary, a building that needs "updates" or "repairs" is usually how a bad story starts. Can it go as is? Updates/repairs often get out of hand (I bet the seller has a very good idea of this). But can be used to lower the asking price.
I think you should do some more research on rentals. Saying a "Profit in a 100% rental year is 14280" is misleading, its not profit.
You are looking at a CAP rate of about 25% if you buy at 42,500. That rate is a bit on the OMG I cant believe its not butter side. Rates normally range from 6-15 depending on the level of risk (15 being a lot more risky).
Your cash on cash return at 46% is up there with asking Santa for a new car.
These rates can be found, don't get me wrong. But they are one in a million. If it was this easy and that much money, who would work?
If it was such a huge cash cow why is they guy selling? Chances are its better for him to sell it off on someone for some reason. It sounds like you have some glitter in your eyes and not looking at the details and facts.
Have you seen the actual rent rolls? Have you been threw the property? Inspection?
Sounds WAY to good to be true, I think there is a underlying reason he is selling (don't buy the "oh I want to retire" bit). Just do your homework, use the facts and numbers and not feelings!
Rentals has done very well for me, but I have dug a LOT into things before I put money on the table.
Good luck!
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Mon Jun 07, 2010 2:32 am |
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kellen2811
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Zector,
This is not my first rental actually. It will be my second if I decide to buy it. I have been through the property. The inspection would have to come after an agreement has been met on price and negotiated from there with any findings.
The property can currently go as is actually. It would need a cleaning in the one apartment. The upgrades I would perform would be mainly cosmetic to bring a higher clientel in.
The profit is not 14280. That is actually the Gross Income not the Net. I am very skeptical when it comes to these types of things.
So far I have done all the research I have been able to do without having a sellers agreement and getting an inspection.
I have gone as far as talking with previous and current tennants on any problems they may have found. Since they live there, they should know better than anyone.
Thank You for the advice.
What kind of things do you normally do regarding research for a possible property?
Kellen
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Mon Jun 07, 2010 4:40 am |
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kellen2811
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The profit is in the 6500 range. Depending on unforseen circumstances
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Wed Jun 09, 2010 3:53 pm |
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moonraker1
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You another good option as equity market for high returns. Real estate still stays as one of the best option.
Payday Loan Cash Advance Loan Cash Loan Loan Companies
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Sat Sep 18, 2010 10:26 am |
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moonraker1
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Joined: 21 Aug 2010
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You another good option as equity market for high returns. Real estate still stays as one of the best option.
Payday Loan Cash Advance Loan Cash Loan Loan Companies
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Sat Sep 18, 2010 10:28 am |
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