Investor · Boulder, CO · Member since 2015 · 118 posts · 16 votes
I am currently setting up my goals and would like to be realistic in my projected returns, because a couple of percentage points make such a huge difference.
My goal is to use $60K of my own cash from income or to use equity in my properties to buy 1-2 properties per year using leverage. If I use a 15% (in cash flow only) annual return on my new investments, at age 40 (11 years from now), I would have $1.68 Million, and at age 50, over $8 Million. These numbers are not adjusted for inflation and also don't include appreciation and loan pay down.
Has anyone been able to consistently average a 15% return long term on their cash using leverage?
The short answer Brian is "yes, but, results may vary", and one BIG variable your not accounting for is that NO real estate has absolute static numbers; there is vacancy to consider, general maintenance but most importantly to never ever forget when doing longer term projections is Deferred Maintenance, those things that DO wear out over time such as roofs, exterior paint/ siding, maybe asphalt, these are some big expenses that if not accounted for can really hit hard.
I consulted for a private REIT whom had similar goals, so we focused on buys that had newly replaced and upgraded systems like roofs, hvac and so on, so that we had some considerable time of stable numbers without that impact.
Next item is how about rent increases? your COC ROI should improve over time, not remain static and especially not decline, in theory (finger crossed).
Remember the 3 commandments; we make $ when we buy, we retain $ when we renovate, and we reap it when we capitalize it (sell/ rent). It's all about the buy, everything else is adjustments to that.
The short answer Brian is "yes, but, results may vary", and one BIG variable your not accounting for is that NO real estate has absolute static numbers; there is vacancy to consider, general maintenance but most importantly to never ever forget when doing longer term projections is Deferred Maintenance, those things that DO wear out over time such as roofs, exterior paint/ siding, maybe asphalt, these are some big expenses that if not accounted for can really hit hard.
I consulted for a private REIT whom had similar goals, so we focused on buys that had newly replaced and upgraded systems like roofs, hvac and so on, so that we had some considerable time of stable numbers without that impact.
Next item is how about rent increases? your COC ROI should improve over time, not remain static and especially not decline, in theory (finger crossed).
Remember the 3 commandments; we make $ when we buy, we retain $ when we renovate, and we reap it when we capitalize it (sell/ rent). It's all about the buy, everything else is adjustments to that.
@brianmaida If you read Millionaire Real Estate Investor, you will see some nice tables that show long term returns. It also goes into return on equity. I liked all the profiles of real people success stories in the back of the book.
Get a long term perspective and don't let short term issues panic you.
Last year I took a major hit in profits from vandalism on an eviction ($9.9k) and that was depressing. However, it does mean I'll not pay taxes on the Sch-E. It also clobbers the ROI that year.
But I've held this since '97 and my cash/cash return is in the 23% range. What, me worry - - laughing all the way to the bank.
Anyone have a good long term rental return calculator that takes increased rent and inflation on expenses into account? I have had a hard time deciding what the annual increase should be, so I have been defaulting to 3% on both rent and expenses (taxes, maintenance, etc).
@Joseph M. I have issues with this approach borrowed from the stock market and MBA types. These statistical methods are interesting but frequently are so static that they misguide the investor. HOW? RE is cyclic and dynamic. Not only do National averages have nothing to do with your community, demographics are in motion too and jobs get lost as well as created AND that can vary between two cities in the same County.
Setting the rent to the FMR on the day of signing the lease is one art. Nickle and dimeing the tenant with increases to keep you rents at the FMR is tedious and quickly becomes harassment imo. If you follow that precisely, then as FMRs start to fall, would you reduce rents the following year? ha-ha, not likely.
It's more effective to keep a tenant than it is to attempt to get a replacement.
I rarely increase rents and consequently have tenants in residence 6-8 years.
That is why I have been using 3% across the board to give me some idea how the rent will increase over long periods of time, creating higher ROI.
I don't raise rents, but would do a 3% or annual increase to come up with rent when the property is relisted, assuming that keeps me in line with the market. I have been able to get over market by keeping my properties in great condition, offering extras like a tv on the wall w/ surround sound or bedroom furniture I didn't need and marketing better than a real estate agent can.
That is why I have been using 3% across the board to give me some idea how the rent will increase over long periods of time, creating higher ROI.
Understand the intent. Suggest you monitor tenant retention and see how many move-ins you get per year. The r/r of tenants has an expense and for me, 3% would not cover it.
Gotcha. Having only two rentals that are local, I ask for 60 days notice and the right to bring prospective tenants in up to 60 days prior to end of lease. With postlets and craigslist, so far have been able to have 100% vacancy for the cost of my time. I have gotten better at screening people so I don't have to show the place too many times. Also, haven't had to put much money into both condo units. I know both of those things will change over time.
I would say yes, but the bigger question is at what risk? what is your tolerance for risk? As I tell my clients who eye the 15-25% returns in markets like Detroit and upstate NY, it's not whether the returns are there... the question really is whether the risks are worth it to them.
HI Brian, thanks for asking. At this time no, I don't focus on turn key properties. I am primarily a fix and flipper. The returns are better here in Socal as a flipper than it is as a long term rental. I have a long term rental here in Socal, which I picked up and manage for my clients as an experiment, but the numbers don't really make sense doing rentals.
Also, i think the timing of your capital investment matters a great deal on whether you get the yield you are after and given how flooded the market is with money right now, I think the risk level is relatively high for a given asset that yield 15%. For example before 2008, it wasn't uncommon to buy a large apartment complex or a fourplex in say.... Riverside and yield 15% or thereabouts. The quest for yield in the last 7 years has meant the same investment is now yielding in the 5-7% range as the money seeks sanctuary. Is this the new normals...I don't know. I don't know enough about economics and policies to make that call.
I would say yes, but the bigger question is at what risk? what is your tolerance for risk? As I tell my clients who eye the 15-25% returns in markets like Detroit and upstate NY, it's not whether the returns are there... the question really is whether the risks are worth it to them.
To be extremely honest with you, I think using 15%+ forecast in your retirement projections (while possible) is amazing unrealistic for a very long list of reasons. I am not saying you can't or won't hit that target but making it your base assumption is dangerous.
When I plan I try to plan conservative but still try to get the best possible deal that's possible. Then if I have a bad month or even a bad year I'm not hurting because I wasn't shooting for the moon and when I have a banner year, it's all icing on the cake.
If you plan conservative and work hard, you will sleep, eat and live well. If you plan high, every day you will feel like you're walking on a tightrope. Some people like the thrill, I'd rather eat and feel secure.
Anyone have a good long term rental return calculator that takes increased rent and inflation on expenses into account? I have had a hard time deciding what the annual increase should be, so I have been defaulting to 3% on both rent and expenses (taxes, maintenance, etc).
Rent appreciation is extremely localized for even just a general number (Chicago versus Flagstaff), it gets even more variable down to neighborhood level. Further influenced by what you buy and how well you buy. For instance in 2013 rental rats increased less than 1% nationally, in Denver it was about 2.5%. What good would general numbers do? Dig in locally for the info.
well said @Steven Stokes Can you be more specific about what your approach is and how it has worked out for you? One of my main goals is financial freedom. I need net cash flow of at least $80K so I can quit my job and do the things that I want to do with my time.
Find the right property in the right areas and your rents will skyrocket till they reach or surpass the 15%
Or find properties in distress areas in not so great locations for dirt cheap and get far passed the 15% cash on cash immediately
The houses I buy generate 5-10% PER MONTH but with my strategy I buy heavy distressed property in not so great areas
my only current investments I purchased with 40k down and after all expenses will give me 30k thats a 75% cash on cash return. But since I baught in detroit I will most likely never see appreciation in rent and very little if any appreciation in property unless I deeply force appreciate by rehabbing