60% annual return ?! What's the catch ?

8 Replies

Hey guys!

I'm so glad to be part of this community, really helpfull!

Very first thing, I'm french so my english will not be perfect and I'm sorry for that, but will do my best hehe

I'm an real estate investor (cash buyer) in Europe & Asia and I'm now interested by the USA's market so I'm trying to learn as much as possible.

If I'm writing this post, this is because I need to understand better one thing.I see many properties (here or anywhere else) with amazing annual return like 30% 40% 50% or 60%, so my question is : where is the catch ? Of course there is one, if not it would be so easy!

Here is an example:

"Asking Price: $20,000.
Current rent from both units: $1,050
Similar units rent in the area: $1,400
Rehab – Needs a new roof.
Total: 2 units, 4bed/2 bath, 1,320 SqFt.

Amazing INSTANT income! This well-maintained Duplex is centrally located
in a great location for an income-producing property. It doesn't need
much besides a new roof and some cosmetics.

Enjoy being a landlord with great returns on your investment and start to collect rent from day 1.
Very easy to rent year-round to long-term tenants.

Features:

* 2 separate electric meters ( Tenants pay electric)
* Landlord avg' water & sewer - $68 + $75.

Unit A: 2bed/1bath, 660 Heated SqFt, currently rented for only $500 to the same long term tenants.
Unit B: 2bed/1bath, 660 Heated SqFt, currently rented for only $550 to the same long term tenants."


Ok so this duplex has an gross annual return of 1050*12*100/20000 = 63% ? What the hell ?!

Even if I have -50% for fees etc. the net annual return could be 30%, still pretty high!

I'm aware about class D and I guess this is one obvisouly. But looks like there is long term tenants so thats means, without rehab and without searching for news tenants, we get big cash flow from the first day, so my question again is: where is the catch ?

Let's say we get a new roof + some cosmetics as announced. Let's say 10k (I absoluty don't know what could be the cost so maybe I'm wrong) and 40% of charges, we could still have 600*12*100/30000 = 24% ?

I'm just trying to understand, since as an European investor such annual return are quiet impossible in our countries.

Thanks a lot guys!



It is likely in an undesirable area, and in need of many repairs, you may have difficulty finding future tenants, selling the property and you will likely have much higher than average repairs.  Even so that is an extreme outlier even for the USA.  What city is it in?

@Tony Camorra

As @Aaron K. alluded already, this property is likely to be located in a D/F neighborhood. 

I suggest you read the following if you don't know what I mean by D/F 

https://www.biggerpockets.com/blog/2015-12-09-class-a-b-c-d-real-estate

While it is "possible" that you could see 25%+ returns on a property like this, the reality is you will actually lose money, especially since you are investing remotely 

These types of real estate investments are analogous to buying spec-grade bonds or lending to subprime borrowers. 

I'd make a concerted effort to avoid this or any other deals similar to this one

Very common Atleast in the Midwest . Of coarse folks from the west coast or hot markets will choke in ,tell you these are all dangerous D properties and full of stabbings bed bugs and evictions . In some cases I guess that’s true but that is grossly exaggerated on here .

In fact I have multiple units with these kinds of returns . Getting 1000 rent in 20k building is completely doable and not hard to achieve . I would personally expect crazy ROI and would not consider a property that didn't hit Atleast 3% rule . I want it worth my while .

Sure You may not get appreciation but I really could care less when the place is paid off in 2 years by the tenant . I buy in cash or get the seller to hold financing or a combination of both . No point in even getting the bank involved at these price points

I guess The " catch "is they tend to be more hands on and self managing locally is the only feasible realistic way to run these to realize the good returns . Relying on property managers will likely give you fits and eat up your ROI . Having the right management is critical to low priced Midwest markets .

property like that you will be lucky to collect rent 50% of the year  constant turn over etc.. you will LOOSE Money why would anyone sell a performing asset like that for 20k ???  right ?

The catch is that you are not likely to ever get that kind of reward on a consistent basis. You are being pitched on a best case scenario. The reality is it probably won't work out like you expect.

Some people do very well with low end properties. But that rarely happens long distance.

Lets say for example you have a tenant that does not pay for four months before they are evicted. They decide to damage the property on the way out. A tenant can easily do $10,000 worth of damage. There goes 1/2 of your investment.

Originally posted by @Tony Camorra :

Hey guys!

I'm so glad to be part of this community, really helpfull!

Very first thing, I'm french so my english will not be perfect and I'm sorry for that, but will do my best hehe

I'm an real estate investor (cash buyer) in Europe & Asia and I'm now interested by the USA's market so I'm trying to learn as much as possible.

If I'm writing this post, this is because I need to understand better one thing.I see many properties (here or anywhere else) with amazing annual return like 30% 40% 50% or 60%, so my question is : where is the catch ? Of course there is one, if not it would be so easy!

Here is an example:

"Asking Price: $20,000.
Current rent from both units: $1,050
Similar units rent in the area: $1,400
Rehab – Needs a new roof.
Total: 2 units, 4bed/2 bath, 1,320 SqFt.

Amazing INSTANT income! This well-maintained Duplex is centrally located
in a great location for an income-producing property. It doesn't need
much besides a new roof and some cosmetics.

Enjoy being a landlord with great returns on your investment and start to collect rent from day 1.
Very easy to rent year-round to long-term tenants.

Features:

* 2 separate electric meters ( Tenants pay electric)
* Landlord avg' water & sewer - $68 + $75.

Unit A: 2bed/1bath, 660 Heated SqFt, currently rented for only $500 to the same long term tenants.
Unit B: 2bed/1bath, 660 Heated SqFt, currently rented for only $550 to the same long term tenants."


Ok so this duplex has an gross annual return of 1050*12*100/20000 = 63% ? What the hell ?!

Even if I have -50% for fees etc. the net annual return could be 30%, still pretty high!

I'm aware about class D and I guess this is one obvisouly. But looks like there is long term tenants so thats means, without rehab and without searching for news tenants, we get big cash flow from the first day, so my question again is: where is the catch ?

Let's say we get a new roof + some cosmetics as announced. Let's say 10k (I absoluty don't know what could be the cost so maybe I'm wrong) and 40% of charges, we could still have 600*12*100/30000 = 24% ?

I'm just trying to understand, since as an European investor such annual return are quiet impossible in our countries.

Thanks a lot guys!

Sure, there are plenty of properties available in the US for $20k. Most of them are priced about $50k too high.

There is a cap on profitability in rentals that is influenced by the principle of substitution - once it is the same or less money to own instead of rent, people will often do that.

Then there is the influence of profitability that comes from they way an owner occupant will incur expenses from living in a property verses the way a renter will incur expenses living in a property (physical depreciation).

Finally there is the expense of management. While an owner-occupant is willing to take this time consuming task on for free, it is a direct expense for an investor.

What this really adds up to is the cards are stacked against an investor with respect to making money in rentals, not the other way around. I am sure you know all this already, but thought I would point it out to any other people that might get excited about a thread title claiming 60% returns.

 

@Tony Camorra we are missing some key details on this property to give you accurate advice, so we’re forced to jump to some conclusions. Here are some relatively safe assumptions: #1 is location. Location is everything in real estate investing. Location, location, location. The price indicates it is in a location in severe economic decline, meaning the property is approaching, or has already reached, economic obsolescence. This could be in an area suffering from post-industrial decline, where there are few jobs left and the population has dropped by half in the past few decades, leaving the remaining residents to deal with urban blight and pollution that is inherent in the tail end of a boom/bust industrial cycle. We have a lot of areas like this in the rust belt or small rural areas that were one factory towns and the factory moved to Asia. In many places cities use tax dollars to bulldoze whole neighborhoods of buildings, meaning high taxes for the remaining residents. In many places like this it will be impossible to find anyone willing to manage properties for you as PMs realize taking on properties like this are a lose-lose proposition. #2 is overall physical condition. The listing description says it needs a new roof and some cosmetic stuff. That’s probably a lie. How long has it been needing a new roof? Chances are, when whoever buys it tears off the old roof they will discover it has needed a new roof for a long time and the result is now the decking and trusses are rotten and need to be replaced, costing more than the home is worth. What else is wrong with it? Probably a lot. It’s highly probable the costs to maintain the property and to catch up on all the deferred maintenance and capex exceed the gross rent. This would be physical obsolescence. If the numbers look too good to be true, they probably are. Or, maybe you found the deal of the century, but probably not.