Negative ROI!?! Are my calculations off???

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Negative ROI!?! Are my calculations off???

Spencer Gracia
Rental Property Investor · Orange County, CA · Member since 2021 · 9 posts · 9 votes

Hey Guys I am a rookie investor (Still have not purchased my first investment property.) I have had some issues calculating ROIs. I am in the Los Angeles area however I have been looking into investing in the Memphis area.These SFDs seem super affordable (150k) and under but it seems like when I find a home on the market the ROI calculations always end up upside down, becoming negative. My question is, am I simply looking in the wrong market? Or is there something im not looking into as far as having positive cash flow. I hope Im making sense in my questions.

Thank You in Advance!

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Clifton R.
USA · Member since 2019 · 7 posts · 9 votes
5y

@Spencer Gracia

If you provide details on the property (price, taxes, assumptions for vacancy and maintenance), we could provide insights.

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  • Clifton R.
    USA · Member since 2019 · 7 posts · 9 votes
    5y

    @Spencer Gracia

    If you provide details on the property (price, taxes, assumptions for vacancy and maintenance), we could provide insights.

    7Reply
  • Kevin Purvis
    Developer · Orange County, CA · Member since 2020 · 42 posts · 23 votes
    5y

    Memphis is still a good market.  Something is likely off in your analysis.  

    0Reply
  • Spencer Gracia
    OP
    Rental Property Investor · Orange County, CA · Member since 2021 · 9 posts · 9 votes
    5y

    @Kevin Purvis have you invested in Memphis? I’ve been looking around east Memphis and just outside

    0Reply
  • Kevin Purvis
    Developer · Orange County, CA · Member since 2020 · 42 posts · 23 votes
    5y

    Hi Spencer,

    Yea, I have turnkey rentals in Memphis, which means i probably overpaid for the house and yet still get decent cashflow.  what kind of assumptions are you running?

    0Reply
  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    5y

    @Spencer Gracia I recommend that you check your sources of information for your rental and cost comps. It is possible to get a negative ROI if your property costs more to maintain that your can get in rents. It may be that your method of calculating ROI is including bad information. We can't help you without the numbers.

    0Reply
  • Spencer Gracia
    OP
    Rental Property Investor · Orange County, CA · Member since 2021 · 9 posts · 9 votes
    5y

    Kevin,

    Example: I ran numbers for a140k home with 20% down($28,000)

    Avg. rent in that area went for $950

    TOTAL Expenses including: $1051

    -Mortgage $668 

    -Utilities (Water/Trash) $40

    -Vacancy $48

    -Cap expenses/Repairs $200

    -Property Managment $95

    Am I way off on my numbers in regards to rent or expenses???

    0Reply
  • Tina Tsysh
    New to Real Estate · Orange County, CA · Member since 2020 · 214 posts · 184 votes
    5y

    You are getting a negative ROI because your monthly expenses are higher than your monthly rent. Are you buying a property that requires some work? Or is the house in a perfect condition and "ready-to-be-rented"? If that's the case, you are paying a premium to purchase that home. For numbers to make sense, you would want to look for a home that needs some work, that way you are adding value and thus increasing the market value of the house. Once it's renovated, you can raise rents and hopefully get a positive IRR. Let me know if you need any further help with your analysis!

    2Reply
  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    5y

    @Spencer Gracia You have positive cash flow, because your vacancy and capex/maintenance are not monthly cash flows.  However, you are correct in adding them to anticipate future costs.  You are estimating your maintenance/capex at 21% of rents.  Why is this estimate so high?  Also, why are you paying for water and trash.  Typically, tenants are responsible for those costs.

    Are you using average home prices and average rents for the Memphis area?  Or did you check prices and rents for a specific neighborhood?  You should be able to find a good rental neighborhood where the numbers work.

    6Reply
  • Spencer Gracia
    OP
    Rental Property Investor · Orange County, CA · Member since 2021 · 9 posts · 9 votes
    5y

    @Bob Norton thank you for that info, I was just told from a (California investor) to sock away 100 dollars each for repairs and capital expenses and to add that into your ROI calculations.

    I have crunched the numbers with the avg rent prices for the specific neighborhoods the properties were in. Now, I’m not a real estate agent nor have access to other programs than the generic real estate apps like (Zillow or RedFin etc).

    Are there other deals I'm not seeing in front of me that others might find on listings like the MLS.

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    5y

    @Spencer Gracia

    That’s a terrible deal. You to get way more rent out of that place. Move on to another property.

    2Reply
  • Spencer Gracia
    OP
    Rental Property Investor · Orange County, CA · Member since 2021 · 9 posts · 9 votes
    5y

    @John Morgan what is everyone’s strategy on determining rent yield?

    0Reply
  • Dennis Wayne
    Member since 2020 · 339 posts · 356 votes
    5y

    It’s not that your analysis is wrong it’s more the fact your deals just suck . Creative math won’t solve that .

    A good starting point to use when starting out is the rent must be Atleast 1% of the purchase price . Example :If your paying 140k you better be getting 1,400 in rent per month !

    6Reply
  • Spencer Gracia
    OP
    Rental Property Investor · Orange County, CA · Member since 2021 · 9 posts · 9 votes
    5y

    @Dennis Wayne Right on, huge help thank you.

    0Reply
  • John MorganPro Member
    Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
    5y

    @Spencer Gracia

    I like to get at least 1% of sales price in rent for starters. If I can’t get that, it better be in a really nice area that is up and coming. Otherwise, no dice.

    0Reply
  • Matt J.
    Rental Property Investor · Hugo, MN · Member since 2014 · 283 posts · 257 votes
    5y

    I'm surprised the rents would only be $950 a month on a $140,000 house. In Duluth, which is not a crazy-high rent market, a 4-bedroom house is generally selling for around $140,000 and the rents are averaging at least $1500 a month. Keep on searching, like others have said, target 1% deals as a baseline and go from there. 

    1Reply
  • Erik B.
    Rental Property Investor · Amityville, NY · Member since 2018 · 351 posts · 441 votes
    5y

    Is your estimated rent price for an apartment or a SFR? There's generally a big difference. Renter doesn't differentiate between the two.

    did you add taxes in to the mortgage?

    to calculate true cash flow you were right to factor in cap ex and vacancy, may just need to get more accurate numbers for these metrics.

    0Reply
  • Bob NortonPro Member
    Accountant · Slidell, LA · Member since 2019 · 382 posts · 272 votes
    5y

    @Spencer Gracia Yes, adding $100 each for maintenance and capex gives you a margin of safety for your estimates.  The California investor who gave you that advice must of bought a bad deal in the past and uses those amounts as a hedge for new projects.

    Generally, you will not find deals in the MLS. Especially in this market with inventory low. You would need boots on the ground to find them. You could try contacting the organizers of local REIAs for names of wholesalers in the area or investor friendly realtors.

    0Reply
  • Andrew Watson
    Rental Property Investor · Atlanta, GA · Member since 2015 · 36 posts · 44 votes
    5y

    We invest south of Atlanta, in Macon and surrounding areas. We can buy houses all day long that need work for $25-$30k, or houses in very good shape for $55-$60k, all of which will rent for $650-$950. 

    I don’t know anything about the Memphis market but those numbers are pretty weak.  We would pass on that deal without a second thought. 

    0Reply
  • Langston Carr
    Realtor · Little Rock, AR · Member since 2019 · 17 posts · 6 votes
    5y

    @Spencer Gracia if you'd like to invest just 2 hours west, I can help you tremendously in the Little Rock area! I'm a novice investor myself. I currently have 4 rental properties and 1 flip (all within this past year). But the investments are all solid. My lowest ROI is 73% and my highest is 105%. Let me know if you need any assistance. I guess I should mention that I am also a top producing realtor if that helps any.

    1Reply
  • Jonathan StonePro Member
    Rental Property Investor · Camas, WA · Member since 2020 · 284 posts · 202 votes
    5y

    @Langston Carr

    As a local to Little Rock, do you feel it has the same growth and employment potential as Memphis?  As an out of state spectator, I'm also on the left coast, Memphis caught my eye for the fact there is varied employment and diversity of industry.  Does LR, AK have some of those same features as near term potential?

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y

    Keep in Mind in Memphis you have double tax.. IE if the property is in the city of Memphis proper you have county and city property tax  so investigate that a little bit.. if you buy just out of Memphis like just over the border in MS tax's could be lower or as stated out of the city limits.

    rule of thumb you dont need to drill down into these numbers  napkin math is simple for rentals.
    you will have about 40% to 50% of your rent  at 1200 and under go to the proper care and feeding of your rental.
    if its less over time great job you get the upside.  But that will cover the sniff test  and then you can decide.

    As others have mentioned unless things have radically changed in Memhpis a 140k house is a pretty good area and good house and should rent for that 1200 number.. or more  not 950.. that's the first problem with your math.

    However I like your conservative nature and your friends advice.. stuff happens just does.. So 40% of gross rents at least and that will keep U from cutting checks.

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  • Langston Carr
    Realtor · Little Rock, AR · Member since 2019 · 17 posts · 6 votes
    5y

    @Jonathan Stone, I would say that it has about 70% of the same potential. Obviously Memphis is the second largest city in the south (by population) however, Central Arkansas encompasses about 700,000 citizens between Conway AR and Benton, AR. The job industry is increasing and our new mayor is implementing a lot of local attractions. Amazon just announced a 825,000 sq ft fulfillment center which is set to open in 2021 and will employ about 10000 people. The housing market is about the same if not a bit lower than Memphis and not as competitive. Our team focuses on off market deals and we work with investors continuously. We’d like to consider ourselves turn-key when it comes to real estate since we also handle the property management aspect of things.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Langston Carr:

    @Jonathan Stone, I would say that it has about 70% of the same potential. Obviously Memphis is the second largest city in the south (by population) however, Central Arkansas encompasses about 700,000 citizens between Conway AR and Benton, AR. The job industry is increasing and our new mayor is implementing a lot of local attractions. Amazon just announced a 825,000 sq ft fulfillment center which is set to open in 2021 and will employ about 10000 people. The housing market is about the same if not a bit lower than Memphis and not as competitive. Our team focuses on off market deals and we work with investors continuously. We’d like to consider ourselves turn-key when it comes to real estate since we also handle the property management aspect of things.

    Amazon and C class Blue collar rentals are a match made in heaven..  is that 10k works or 1k workers  10k seems like a lot in one facility.

    Plus ( I dont know one of the few cities I have never done bizz in   in the deep south or mid west)  but what I hear and read the eviction an landlord laws are the best for an owner in the entire country.. A lot of the Memphis TK guys opened up shop in LR over the last decade as Memphis became saturated.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    PS your smart to shop for 120k and up rentals that have gross rents at or above 1200  that gives you enough GROSS revenue to save for Cap ex which will happen..  you have to be careful with SFRs that only have gross rents lower than 700.

    you may not have enough gross revenue over time to pay for that 8k roof.. or other major components that WILL need replacing or major upgrades over a 10 to 20 year hold.
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  • Langston Carr
    Realtor · Little Rock, AR · Member since 2019 · 17 posts · 6 votes
    5y

    @Jay Hinrichs my apologies, I meant 1,000 employees.

    1Reply
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