Return on Investment Goals (Buy and Hold rentals) 2019

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Return on Investment Goals (Buy and Hold rentals) 2019

Sarah B.
Landlord · Sioux Falls, SD · Member since 2016 · 100 posts · 58 votes

I am a new investor, investing PT/evenings (still have my day job) in my second year of buy and hold investing with 2 rental properties so far. I am curious as to what ROI people are expecting and actually seeing right now. I know the podcasts talk about "2% rule", 10% min ROI, cap rate 10, etc. and those numbers sound amazing. I am sure people who are well-connected, seasoned investors investing full-time/with a team are able find those deals, but I have yet to find one in my 2 years of looking (the 2 I've bought are about at the 1% rule / about 8% ROI, cap rate 7ish. My second year in I'm doing fine, cash flowing, but I'm wondering if I should get more selective. I don't want to buy a bad deal, but I also don't want to pass up decent deals waiting forever for the "perfect" one to come along. I believe in order to find the best deals I will have to quit my day job and do a lot more hustling, and I'd like to get a bit more experience under my belt first. My goal is to quit and do more hustling by the end of this year, but in the meantime, what is a REASONABLE ROI? For those of you with more experience, what ROI and cap rates are you seeing now, and did you start with lower rates of return? Newbies like me, what is working for you? Thanks for any help you can offer!

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Joe SplitrockPro Member
Moderator
Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
7y

@Sarah B. reasonable is relative. The podcasts that talk about the 2% rule where recorded years ago. Many markets tanked so bad that you could buy off the MLS and get 2% deals with no effort. As the market has recovered, it has compressed CAP rates so good today is different than good eight years ago.

Personally, I am happy with buying B class, rent ready properties at 0.8% rule. If I was buying C or D class in central Sioux Falls, I would need to be over the 1% rule. Those older properties in rough neighborhoods take more time and money to run. So when I say relative, I mean the type and quality of property is a factor.

The 1% or 2% rule doesn't take into account expenses or condition of the property, so it is not a complete metric. You could have a multifamily where you pay heat, electric, water, garbage, lawn, snow and repairs happen every month, with vacancy once a year. Compare that to a single family home where tenant pays everything and you have no vacancy. It is hard to use the 1% rule to compare the two. 

I prefer after expense metrics like ROI or CAP rate. ROI is nice because you can compare directly to other investments like the stock market. I like to get double digit return on just cash flow. CAP rate assumes a cash purchase, so ignores financing. You could have an 8% CAP rate property that loses money if your financing terms are bad or down payment is low. CAP rate is good to compare two similar investments, but doesn't paint the full picture when you are using leverage. 

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  • Martin Grizzanti
    Investor · Rochester, NY · Member since 2015 · 499 posts · 169 votes
    7y

    @Sarah B. Are you buying only Sioux Falls, ID?  Have you thought about buying out of town?

    0Reply
  • Sarah B.
    OP
    Landlord · Sioux Falls, SD · Member since 2016 · 100 posts · 58 votes
    7y

    @Martin Grizzanti I have, in fact I own a rental in Portland, Oregon that I self manage and am part of a syndication in Florida.  I am not opposed to it but don't have many contacts/connections in other cities (yet)...

    2Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y

    @Sarah B.

    I do not want to start a cash flow versus appreciation debate (there are already enough of those) so I will not refer to appreciation but value add.

    I purchase RE in hopes to have a near term >100% ROI due to value add. Ideally, I achieve infinite ROI via the BRRRR but I do not achieve a full extract of my investment unless I get a significant assist via appreciation (so I fail on the infinite short term ROI).

    I have only purchased a single RE that met the 1% ratio. Yet a majority of my purchases have achieved the infinite ROI (i.e. I have extracted all of my investment (purchase and value add costs) via refinance).

    My recommendation is to not limit yourself to the high cash flow properties to achieve your ROI goals. Including value add properties may expand your purchase pool and obtain ROI that is extremely hard to obtain via cash flow only.

    By the way: Love the Black Hills especially Crazy Horse (my favorite man made item, I have visited it 5 times over the years starting in 1995).

    Good luck

    2Reply
  • Sarah B.
    OP
    Landlord · Sioux Falls, SD · Member since 2016 · 100 posts · 58 votes
    7y

    @Dan H. if you've been visiting Crazy Horse since 1995 you must have seen quite a change since that time!  It is definitely cool to see!

    Thank you for the great advice. I will admit I have not yet done the BRRRR strategy but would like to! May I ask, how do you find your properties to BRRR? I have gone to more county foreclosure auctions than I can count, without success (people are way overpaying, IMO) and to date I've only done MLS and it's difficult to find good deals there. I'd love to hear where you find yours!! Thanks again for the tip- great advice!!

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    Originally posted by @Sarah B.:

    @Dan H. if you've been visiting Crazy Horse since 1995 you must have seen quite a change since that time!  It is definitely cool to see!

    Thank you for the great advice. I will admit I have not yet done the BRRRR strategy but would like to! May I ask, how do you find your properties to BRRR? I have gone to more county foreclosure auctions than I can count, without success (people are way overpaying, IMO) and to date I've only done MLS and it's difficult to find good deals there. I'd love to hear where you find yours!! Thanks again for the tip- great advice!!

    I have seen a lot of changes to Crazy Horse over the years and the progress is constantly increasing.  We flew a helicopter around it on a trip.  Helicopter was cool but wife got motion sick.  Mt Rushmore is a disappointment if you see Crazy Horse first.  There are also some great caves in the Black Hills.

    I have found most of our purchases from MLS but I am regularly presented off market listings (close to daily). The last purchase we made (and the last 2 offers we submitted) the seller contacted us directly. Off market, similar to auction, does not necessarily imply good price. I have never gone to an RE auction but would like to but I agree that bidding can often drive up prices. I buy a lot of hiking/camping/backpack gear. The price used items sell for on eBay (due to being bid up) is incredibly high. Often higher than new close out prices. I have my favorite gear classified ad sites and get much better deals at those sites.

    Note a value add does not need to be constrained to simply rehabbing a property (but that is what my value adds have consisted of). I know of someone that purchased an out of date single story house on a large lot. They subdivided the lot. Then they tore down the little house and built a monstrosity (looks like a dorm) and a very large ADU (looks like a regular house for the area where small houses are 2500') on one of the divided lots. They have not yet started work on the second lot but I expect it to be 2 more homes. Similar, SFR that are zoned for multifamily that can have units added. I doubt you can find these any more, but RE purchase that include the mineral rights and sell the mineral rights but keep the RE. This is equivalent to the NW US were they buy the RE with lumber rights and sell the lumber rights and keep the RE.

    The advice is to try to not be constrained to just thinking of a rehab when evaluating value adds.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    @Sarah B. reasonable is relative. The podcasts that talk about the 2% rule where recorded years ago. Many markets tanked so bad that you could buy off the MLS and get 2% deals with no effort. As the market has recovered, it has compressed CAP rates so good today is different than good eight years ago.

    Personally, I am happy with buying B class, rent ready properties at 0.8% rule. If I was buying C or D class in central Sioux Falls, I would need to be over the 1% rule. Those older properties in rough neighborhoods take more time and money to run. So when I say relative, I mean the type and quality of property is a factor.

    The 1% or 2% rule doesn't take into account expenses or condition of the property, so it is not a complete metric. You could have a multifamily where you pay heat, electric, water, garbage, lawn, snow and repairs happen every month, with vacancy once a year. Compare that to a single family home where tenant pays everything and you have no vacancy. It is hard to use the 1% rule to compare the two. 

    I prefer after expense metrics like ROI or CAP rate. ROI is nice because you can compare directly to other investments like the stock market. I like to get double digit return on just cash flow. CAP rate assumes a cash purchase, so ignores financing. You could have an 8% CAP rate property that loses money if your financing terms are bad or down payment is low. CAP rate is good to compare two similar investments, but doesn't paint the full picture when you are using leverage. 

    4Reply
  • Sarah B.
    OP
    Landlord · Sioux Falls, SD · Member since 2016 · 100 posts · 58 votes
    7y

    @Dan H. if you've been visiting Crazy Horse since 1995 you must have seen quite a change since that time!  It is definitely cool to see!

    Thank you for the great advice. I will admit I have not yet done the BRRRR strategy but would like to! May I ask, how do you find your properties to BRRR? I have gone to more county foreclosure auctions than I can count, without success (people are way overpaying, IMO) and to date I've only done MLS and it's difficult to find good deals there. I'd love to hear whe

    0Reply
  • Sarah B.
    OP
    Landlord · Sioux Falls, SD · Member since 2016 · 100 posts · 58 votes
    7y

    @Joe Splitrock thanks for the great info!! Yes - I know the 2% rule is super general and I always run numbers more specifically, that's just a general tool I use when looking a properties to know if it's worth even running the numbers on. I look mostly at cash on cash ROI and aim for a minimum of 10% - higher if it's going to be a lot of work like you said (I have a class C that's around 11.5% and I'm starting to wonder if it's worth it due to recent events with a tenant's dog). Thanks for weighing in, I wanted to get a feel for what others are doing/getting. I'd love to wait for a 15% ROI but feel like I'd be waiting for years for that....

    0Reply
  • Sarah B.
    OP
    Landlord · Sioux Falls, SD · Member since 2016 · 100 posts · 58 votes
    7y

    @Dan H. wow! Daily off market offerings? You must be incredibly well connected!  How long have you been investing? Who is bringing you most of the deals? That's amazing.

    I love the story of subdividing the lot!  Thinking outside the box is definitely key!

    0Reply
  • Bill F.
    Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes
    7y

    @Sarah B.

    I look for at least a 15% annualized returns taking into account cash flow, amortization, tax savings, and appreciation(usually through value add). My primary measure of return is MIRR.

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    Originally posted by @Sarah B.:

    @Dan H. wow! Daily off market offerings? You must be incredibly well connected!  How long have you been investing? Who is bringing you most of the deals? That's amazing.

    I love the story of subdividing the lot!  Thinking outside the box is definitely key!

    I do not consider myself well connected but I have been in RE investing 15 years but my Mom started in the mid 1970s (so long ago).  The off market deals come from a variety of sources but most the off market listings are not very impressive.  

    Unfortunately, the example of the subdivided lot and the monstrosity/dormitory comes from a property behind my house that is fed by a road that uses an easement across my lot.  So the traffic going by my house has increased at least 10 times.  So I like the creativity but hate that it is near my house.  NIMBY.

    0Reply
  • Patrick Donnelly
    Lender · Oakbrook, IL · Member since 2018 · 34 posts · 9 votes
    7y

    Great Job Sarah, I talk to plenty of millennials who already have 5+ properties, pretty impressive and will be retiring a lot earlier than most. Though when it comes to percentages there can be many more that should be taking advantage of the great programs that are out there and low rates especially for rentals. I find that there are plenty of properties where the rents are covering the PITI, millennials and many others just need to pull the trigger.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y
    Originally posted by @Sarah B.:

    @Joe Splitrock thanks for the great info!! Yes - I know the 2% rule is super general and I always run numbers more specifically, that's just a general tool I use when looking a properties to know if it's worth even running the numbers on. I look mostly at cash on cash ROI and aim for a minimum of 10% - higher if it's going to be a lot of work like you said (I have a class C that's around 11.5% and I'm starting to wonder if it's worth it due to recent events with a tenant's dog). Thanks for weighing in, I wanted to get a feel for what others are doing/getting. I'd love to wait for a 15% ROI but feel like I'd be waiting for years for that....

    I didn't mean to slam the 1% or 2% rule, because I use the rules too. It is a fast way to figure out at a high level if a property is work pursuing. 

    I think you are on the right track. Waiting is the worst thing you could do. The biggest advantage in real estate investing is time. Time gives you appreciation in property value. Time gives you appreciation in rents. Time gives you mortgage pay down. 

    I started in C class and it was a great wealth building tool, but it comes with challenges. Mine wasn't a dog, it was three fires over two years. Midnight move outs. Abusive boyfriend. Meth addict. We got past it all and honestly I am stronger for having experienced it. Half the battle in this business is overcoming adversity. These problems cause most landlords to sell and exit the business because it is emotionally draining - if you let it be.

    1Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    @Dan H. if you love Crazy Horse, I highly recommend attending the annual Volksmarch. It is a 10K hike that brings you right up to Crazy Horses face. It is amazing how large it is when you are standing right next to it. It really gives perspective on how far away the viewing station is.

    The amazing thing about Crazy Horse is the story it tells about commitment and vision. This guy literally walked for an hour up stairs with jack hammer every day by himself. You could argue it was delusional to believe he could ever finish this carving. He refused money from the government, because he believed they would never finish the sculpture. Which when you read the history on Mount Rushmore, you find out they didn't ever finish that carving. They stopped at the heads. 

    Sorry to diverge here, but I love Crazy Horse. We are financial sponsors of the project and visit it every time we are in the area.

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    Originally posted by @Joe Splitrock:

    @Dan H. if you love Crazy Horse, I highly recommend attending the annual Volksmarch. It is a 10K hike that brings you right up to Crazy Horses face. It is amazing how large it is when you are standing right next to it. It really gives perspective on how far away the viewing station is.

    The amazing thing about Crazy Horse is the story it tells about commitment and vision. This guy literally walked for an hour up stairs with jack hammer every day by himself. You could argue it was delusional to believe he could ever finish this carving. He refused money from the government, because he believed they would never finish the sculpture. Which when you read the history on Mount Rushmore, you find out they didn't ever finish that carving. They stopped at the heads. 

    Sorry to diverge here, but I love Crazy Horse. We are financial sponsors of the project and visit it every time we are in the area.

    Flying around it in a helicopter by itself would give good perspective of the size but when I flew around it there was a large crane and dump truck on the arm.  Both were so small from the visitor center that I could not make out for sure what either one was if it were not for the close up view from flying around it.  I suspect that there is usually large construction vehicles on the statue but the statue is so big, and the viewing is so far away, that it is hard to notice the construction vehicles.

    I have seen great cathedrals, great pyramids (Tikal among others), great buildings (Empire state building), great structures (Eifel Tower, Holt antenna array, Washington Monument, Old wall of Dobrovnik), other pretty good statues (mt Rushmore).   Crazy Horse is what I consider the most impressive; not even close.  I am due for another visit to see it but it will not be this summer.

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