What returns do you look for on rentals when paying cash?

Question

Hello BP community, I just wanted to get an idea of what a good deal looks like when paying cash for a residential rental property?

I understand the numbers behind a good property when financing it, but I wanted to see what other investors would expect to see from a rental purchased with cash?

For example, if you paid cash for a house at $100,000 and it rented for $1,000 a month, would this be a good deal to you? If not, what price would make this a good deal?

Jeff B. · Answer

Treat all-cash exactly the same as analyzing a purchase with a loan.  There's no special consideration; just there's no mortgage, pmi payments.  Treating them as equal will lead you to a better purchase decision.

Lee Smith · Answer

Here is my first thoughts:

• Diversification: You don't want to have all your eggs in one basket.. Some investments may have low cashflow, but appreciation may be better.
• Leverage - You could definitely split that 100k up a bit and do some deals that are leveraged, and some deals where you are all cash in... 
• Steals and not deals: Also, some guys may not be in a hurry to invest... They may be looking for steals, and not deals.. They will wait for the best deal and may have cash sitting out there for months waiting.
• People aren't going to give you the real scoop... I have guys who tell me they have a 25 cap property, then I go look at the numbers at it's really only a 10-15 cap...
• End of life: When I get older I may be okay with a lot lower return because I don't want the issues...

Me personally, CURRENTLY, I look for a 15+ cap on multifams or a 10+ cap on single fams... I get that cap rate after I deduct all known expenses, and some projected expenses(vacancy rates, annual repairs, property management, etc).. Even though I own my own property management company, I still figure in PM costs because I don't want to manage them myself forever!

Jeff Ihnen · Answer

I am more of a conservative investor and do not feel comfortable having several different mortgages making $100 cash flow on each. That just does not seem like enough wiggly room when something goes wrong. If you pay cash for 50k and 100k properties and snowball the money, you will always cash flow using the 50% rule correct? I think it will take a lot longer to get rich this way but it seems like in my head anyway a slow and steady way to make good money.

Champak Shah · Answer

Leverage always gives better return .

However -- you said -you understand - how it works with a bank loan.

Just do the numbers - and take out bank loan and mortgage -

$ 1000 per month is good - in Atlanta most people use that - Rent = 1% of purchase price. -- you get $12,000 per year - assuming no other expnese - it is 12 % cash on cash return.

Now you have to deduct - property tax and insurance as well as any yrad work etc doen - then say you may NET $ 10500 --  NET -  so your return will be 10.5 %

Currently banks are paying less than 1 % --

So what do you feel comfortable.   You need to decide how much return do you want. Ad waht is your long term goal - how many will you buy.

For a good house- in good area - less maitnenace and less headaches from tenants -

5 % to 8 % retun is good.

You can increase - your return by Leveraging --say you can get 50 % LTV loan or 65 % Also- it depends -if you have a good paying job - you can get Depreciation and interest write off --that increases yorur eturn..

I was getting 15 % average return with four rental homes - from 1981  to 1993

that included - tax write off - from my   salaried job  -a s engineer.

Thomas S. · Answer

At a bare minimum I would need $1500/ month to insure not only positive cash flow on the property  but also a solid return on my cash investment. If not you would be better off spreading it over multiple properties.