I can't tell if it's analysis paralysis or if I'm too stringent on my analysis or just not finding good deals.
I'm following the 1% rule. I budget 50% for expenses not including mortgage, but including taxes, insurance, capital expenditures, etc. But for many properties, that's leaving me with a 5-6% cash on cash return, and a 9% total ROI.
For example, 80k house rents for 1k/month. Acquisition costs including minor renovations and 25% Down is 24k. Rental income 1000 minus 50% expenses is 500/month, minus mortgage payment 330 is 270/month. Per year that's barely 1200, which is about 5% COC return!!
I don't need the cash now by any means...my plan is to build a rental portfolio over the next 10-15 years to have a passive stream of 25k/month. And assuming only a 10% cash on cash return on investments, I'm prepared to put down what I need to. Problem is, the numbers just don't seem to work out ever on a spreadsheet! Moreover, with interest rates going up, 5.2-3% is typically what I'm finding, the numbers are even worse!
I'm not looking in Washington AT ALL...it just doesn't make sense. I am looking at Alabama and Texas mostly. I dabbled in Milwaukee but again can't find the returns. Oklahoma, same deal. Memphis I have no boots on the ground guy and am afraid of ending up in a warzone after hearing numerous horror stories. Heck, at this rate, I'll take an 8% return because that's what my traditional investments are averaging. I've also connected with wholesalers but even their deals are just too short to make it work.
Because it's a long-term strategy for me and I don't need the cash flow immediately secondary to a relatively high paying job, should I be looking at the ROI instead of the COC? Is 50% expenses, even for a relative turnkey, too high? I've talked to a couple lenders and they're all offering between 5-5.5%, am I missing out on better rates? My newest strategy is get conventional lending, fund the rehab myself out of pocket, and STILL The returns are <10%. I can see flipping making more cash but that's just not in my cards right now time-wise.
People have been telling me deals are easier to find and returns are better when the market slows down/crashes. Well, I'm watching the stock markets fall, interest rates go up, fears of inflation, and crypto crashing (not sure if that's related) and it all points to perhaps a slow down coming which excites me. But if interest rates keep going up, that only makes the analysis that much harder, unless prices fall significantly and rent rates don't fall as well. Am I missing something?! Any help would be appreciated!!
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Well there’s a lot to address here. First with regards to rates, yes they’re going up and that will likely continue for a while.
I would wish for a recession as that may cause interest rates to drop but it’ll cause other issues (like more vacancy).
I would keep calling around. I have a friend that just got quotes 4.75 percent rate. If your rate matters more to you, you can put more money down or buy the rate down if you want to get it down. You can also do 15 or 20 year options that will usually give you a lower rate, of course then you probably won’t cash flow at all or very little.
These rules you keep following (1 percent rule etc) are just guidelines, they aren’t the be all end all of real estate investing.
My rates are 5 percent or lower but even if they were a bit higher I’d still make money. My maintenance costs have been much lower than 50 percent. Maybe long term it’ll be closer to that but for a new or rehabbed property it should be much less.
In my opinion you should eventually want to become a true cash buyer, then the rates don’t matter at all. Of course then your ROI is less.
Finally I’d just get started with a solid good property. I wouldn’t have these outlandish goals at the start of like 25k a month or 200k a year and so forth. It’ll get very daunting. If you make 200 per unit you’d need 125 units
I’ve bought in Memphis and Cleveland and I really like Memphis as a market. It’s got lower taxes than Cleveland and the economy tends to be a bit better.
@Shiv Jey For what it’s worth, you SHOULD feel frustrated. Not because of your situation or the market but if it was “easy” then everyone would do it. I would posit you’re “more likely” to find a good deal in a place like East Birmingham (which the old mayor got in a literal fist fight with a councilman...if memory serves) but you have hundreds and thousands of coastal investors who are all looking for these same deals. If “tons of deals” were penciling out well then you’d probably have easy investment hurdles 🤷🏻♂️
So what to do about it...
My suggestion would be to identify the set of circumstances where you would “overpay”. Maybe it’s a property with a new roof, maybe it’s a 6-unit commerical multifamily, maybe it’s proximity to a Starbucks, maybe it’s a property until 1 mile from where your cousin (making things up) lives, etc. It helps to hone in on what your ideal investment is. I’d rather “overpay” for properties that meet my investment criteria than underpay for a deal that didn’t.
And I’m using “overpay” in quotes for good reason. Not everyone has the same skillset or investment criteria and I don’t think that everything that sells for more than I would pay is “stupid money”. Maybe they just want to put in sweat equity and I don’t want to swing a hammer. You just don’t know. So figure out what you *might* overpay for then when you find a decent deal within those parameters you can win that deal.
At a minimum, you should be including principal pay-down in your COC return since that is real money to you; it's just being partially diverted. So if $100 of that mortgage payment is going to principal, your return looks better by $1200 which puts your COC at 10%. Outside of that, you need to look at each deal on an individual basis - no way to know if your expenses are low or high, if there are any tax benefits, if there are more or less rehab costs, etc. Using your round numbers is only useful to determine in 10 seconds if you should bother with any further evaluation.
I hear you. When I heard Brandon's 10% or more COC, I wondered how he was getting that. What I noticed from reading one of his deal analysis, is that he is calculating that with selling a property in ~5 years and collecting the appreciation. The cash flow return was significantly less.
My take away is that if the cash flow is enough to cover occasional cap ex biggies, then I would be happy with a deal. For example, if the cash flow would estimate to $200/mo, even if that was about 5% COC, I would be sure of a cushion for my estimates. I would potentially be happier with that than a smaller property that cash flowed $100/mo at 10%, because a water heater costs the same for either place and would be half a year's income if it died.
I'm not ignoring appreciation exactly, but since I am looking to buy and hold in a city with job growth, it isn't my main concern.
So there is a concept Internal Rate of Return, which tracks all cash flows. This includes the exit. Sophisticated investors know how difficult it is to achieve even a 12% IRR. Yet, I don't know many who'd deploy at anything less than 14%.
Now, these cash flows are made up of monthly/annual CF, refinances, and final deposition. So, the question you have to ask is - how much of the return is back-loaded? And, how are we estimating that back-end...
50% rule is typically a bit short over the long term when considering CapEx. Thus, 8% CCR simply doesn't work - there has to be back-end. So this is your challenge. Can you find deals with real 8% CCR but reason to project appreciation...?
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