Rental Income ROI

12 Replies

Hi- 

I'm completely new to the real estate investment world, and would graciously appreciation any guidance and advices from the gurus on this platform.

I'm currently a resident in NYC. Because property here is just too expensive for me, I'm considering purchasing rental investment properties in Houston, TX. I've done some macro research on my own about the city, and find it appealing that the economy has been flourishing there and properties are relatively at my ideal price point. 

I've recently made one trip there to scope out the areas, and browsed through some properties. My target ROI after monthly expenses is 8-10% a year over the total purchase price. I'm having a dilemma between areas after speaking to some brokers and residents in the city. First, I like the areas such as the Medical Center where professionals and Universities are around (where potential appreciation might occur) or second, I'm debating upon maybe the more unfavorable areas where cash flow is higher but the neighborhoods aren't the greatest.

The properties I'm seeing for yearly ROI ranges from 5-7%... which doesn't meet my expectations of 8-10%. Now my question is, what is a good benchmark ROI for rental properties? 

Like most, I hope to be financially free in the future, owning multiple rental properties.

And if anyone have any insights about Houston, I'd greatly appreciate it if you can share your wealth of knowledge with me.

Thanks,
Lana

@Lana Chen Congrats on starting your foray into the REI arena. I've been a landlord once before, and a president of a 160 unit homeowner's association, so I have some experience, though I'm finding there is so much more than I've experienced thus far. I'd recommend reading, lots of reading here on Bigger Pockets, and in books, such as: Rich Dad, Poor Dad by Robert Kyosaki, The ABC's of Real Estate Investing by Ken McElroy, The Advanced Guide to Real Estate Investing by Ken McElroy, Building Your Wealth One House At A Time, John Schaub, Investing in Duplexes, Triplexes & Quads, by Larry Loftus. Also, the Bigger Pockets Book on Investing With Low or No Money Down by Brandon Turner, and Investing In Real Estate by Gary Eldred. Also, check the file place on BP for other eBooks.

Regarding ROI, you may want to look at other metrics depending on the properties you're reviewing, like cash on cash return, capitalization rate, gross rent multiplier, and etcetera. No metric is perfect, but it does give a general feel for things.

@Lana Chen  Do you plan to have a property management company help manage the rentals since you'll be an absentee owner?  Make sure you factor that cost into the calcs as well unless you plan to manage it long distance yourself.  Welcome to BP; there's opportunities in Houston but one needs to weed out the duds as well.

@Lana Chen

If you're taking about paying all cash and getting a stabilized 8-10% ROI then you are talking about capitalization rate. It is highly unlikely you will be able to achieve that in single family right now. Interest rates have brought cap rates down on all types of real estate. Multifamily is in the 4-6 range. You might do slightly better than that in single family.

Anyone telling you differently is likely uninformed or trying to sell you some oceanfront property in Arizona.

@Russ Beck Actually none of those metrics are better than ROI. @Lana Chen is focused on exactly the right metric.

Given the risk and hassle of owning rentals, I would not be happy with anything less than double digit returns. That number would include free cash flow plus mortgage pay down plus appreciation. All cash deals only make sense in a fast appreciating market because returns without appreciation of over 10% is hard to get without leverage. On a leveraged property 15-20% is not unreasonable to expect in non coastal properties. 

For less than that, there are many other investments that have far less effort and hassle involved.

Thank everyone for your feed back. 

@jimmyhue: Yes, I currently have a friend in Houston working in construction that will property manage the investments for me. Any areas in particular you think might be a good choice in Houston? 

@Anishtolia: I'm working on an all cash deal. Its fairly cheap...

Cost of property: $38,500
Estimated Remodel/Repair: $5,000
Total Cost: $43,000


HOA Fee: $295/month
Property Tax: $65/month
Property Managerment: $80/month
Estimated Rental $800
Estimated ROI (10 months): 8.28%
Estimated ROI (12 months): 9.93%
Monthly Dollar Value Return: $360

The down side is, appreciation around this property is very low... I would say only 2%.

What does everyone think about this deal?

Wow! What is included in the HOA ? It's almost 40% of your gross rents.

And are you sure about those taxes?   Seems low for Texas.

Sounds like a condo unit given the monthly HOA. Vacancy and turnover costs are likely to be a factor. You also have risk of special assessments from the HOA in addition to the monthly fees that can be a big downside risk with condos.

Also, make sure no HOA restrictions on renting out the unit.

This one might actually cash flow positively after adding vacancy and considering special assessments, but you can probably get much better ROI with a leveraged SFR that you buy below market, fix up, and rent out.

Ohhhh, you're talking that level of returns on that low priced of a property? I was going to say 5-7% was normal for Houston (due to high insurance and property taxes, which further suggests double-checking that tax amount as Bob suggests), but a big criteria I use for buying rentals (all out-of-state as well) is--I'm fine accepting a lower cap rate if I'm getting something in return for it, such as lower risk, nicer property, nicer location, better tenant pool, etc. A $38-39k property doesn't fit that, because none of that is nicer and the tenant pool won't be very high quality. I would require double-digit returns for a property like that because of the higher risk. Especially somewhere like Houston where property prices are higher than some, meaning cheaper properties are worse quality. Versus somewhere like the midwest where a $38-39k property wouldn't be as bad because all the property prices are generally lower. 

To answer the question of what I look for--there are a lot of things, but I think the most relevant here is what I said--does the cap rate you are potentially settling for make sense for the type of opportunity (ie risk) you are taking on. Higher cap rates and I'm fine taking on more risk. Lower cap rates are fine if it's really low risk. But a low cap rate for a high risk property? No way.

Originally posted by @Lana Chen :

Hi- 

I'm completely new to the real estate investment world, and would graciously appreciation any guidance and advices from the gurus on this platform.

I'm currently a resident in NYC. Because property here is just too expensive for me, I'm considering purchasing rental investment properties in Houston, TX. I've done some macro research on my own about the city, and find it appealing that the economy has been flourishing there and properties are relatively at my ideal price point. 

I've recently made one trip there to scope out the areas, and browsed through some properties. My target ROI after monthly expenses is 8-10% a year over the total purchase price. I'm having a dilemma between areas after speaking to some brokers and residents in the city. First, I like the areas such as the Medical Center where professionals and Universities are around (where potential appreciation might occur) or second, I'm debating upon maybe the more unfavorable areas where cash flow is higher but the neighborhoods aren't the greatest.

The properties I'm seeing for yearly ROI ranges from 5-7%... which doesn't meet my expectations of 8-10%. Now my question is, what is a good benchmark ROI for rental properties? 

Like most, I hope to be financially free in the future, owning multiple rental properties.

And if anyone have any insights about Houston, I'd greatly appreciate it if you can share your wealth of knowledge with me.

Thanks,
Lana

 Well done on doing some leg work on your own. I grew up most of my life in Houston and know the area well. As of 2012 I moved out of state and am investing locally with a friend. In my opinion, your best options are to either work with a partner on Bigger Pockets or work with a property manager. There are some great podcasts on owning out of state and I HIGHLY suggest listening to all of them.

As to areas. I would probably stick to some of the nicer areas and not go for the cheaper properties as they tend to be higher maintenance. Medical center is a great area, but not sure you will find many investment opportunities. There are several blue collar/middle class/lower middle class neighborhoods where you can buy that have good tenants. Good luck with your search.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.