Often discussed but don't individual markets have a bearing on the Ratio?
What would be the most you would pay for a single family (including rehab and associated costs) for a home that rents for $900/ month? Assuming all cash deal
Lucrative? Not the word I would choose. I would use the word "volatile". Yeah, you may get 2% the first month, but what if your crack-whore tenant with the 3 illegitimate kids and live-in boyfriend-of-the-month stop paying after that? How many months of ZERO rent will you have to wait before getting that 2% again? What if your rental gets quarantined for 4 months because it was turned into a meth lab? Or your last tenant loaded all your copper pipes and wires into their U-Haul when they left? You still getting 2%?
I'm not interested in "snapshots" of ideal situations, and these low-income, low-value properties are rarely ideal. Sure, I may get a little north of 1% in my market, but it's STEADY (solid blue & white collar tenants with stable incomes/jobs). And besides, I'm in this game for the upside, not the monthly rental scratch. Let's all meet back here in 10 years and compare total returns. :idea:
I'm with Brian on this one. Cash is real and can be further leveraged. Appreciation is a paper gain that can't be counted on (ask all those people from 2006). But enough with that...
I want to go back to my other question. It appears people believe the only way to get 2 - 2.7% returns is to be in a war zone... is that true? The home I'm buying is projected at 1.8% and it's definitely not a war zone (come on, it's Utah!). I got the impression others were finding similar if not better deals in places like Indiana and the Carolinas. Yes, I understand not wanting to be in a warzone regardless of the return... but given the same risk level, the same ability to appreciate... why would you accept 1.2% (for example) returns at home when some place like Podunk Nebraska had deals projecting 2.5% (for example)?
Are we simply saying that scenario doesn't exist? Are we saying that the logistical nightmare of owning property out of state more than destroys that additional 1.3% return? Just trying to understand if and when it's a good time to chase the best investments versus simply making due with what you're presented locally. Thanks!
In my area? Yes. In other parts of the country, perhaps not. However, from what I've seen presented, those properties that meet the 2% "rule" all seem located in lower end neighborhoods. Even if the residents aren't shooting up every day, neither will the property values ever.
If you look at the range of RENTS for a typical 3 bedroom house in this country ($800-2,200/month), you'll find they are much closer together than the PRICES of 3 bedroom houses ($50,000-400,000). That tells me in order to find 2% "rule" rentals, you're either going to have to maximize the rent (difficult) or minimize the cost (easier). So, where do you find houses that are much cheaper without giving up too much in the rent? Poorer, lower-quality areas.
LOL! C'mon, I know Utah is known for wholesome family-oriented Mormon ideals, but I've seen parts of Utah I would NOT want to walk down after sundown.
No, it doesn't have to be out-of-state to be a headache. It can be next door! What I'm getting at is many investors look at a $35,000 house in a undesirable area (no, bullets don't have to be flying), see that they can rent it for $700/month and believe they've found a helluvadeal. Fine, if you buy that house and get that $700 in rent, month after month, year after year, with very few late payments, missed payments, extended vacancies, evictions, and/or property damage, then you're right, you did find a great deal.
If anybody here has several (not just one) rentals in a certain area that truly meet this 2% "rule" AND have met it for several years (not just the last 2 months since you bought the place), I would really like to know where they are. I'm ready to buy.
Absolutely not! There is a difference between low income neighborhood and war zone. The area I invest in is low income neighborhood. Almost all my tenants have internet savvy. They found the rental through CL. They work hard, have blue collar jobs and pay their rent on time. They are all nice and friendly also.
Just to give you an example, my last purchase was for $28k for a 3 unit. I spent $9k on rehab (including 8 appliances for $1.5k). Before the rehab was finished, I had already found 3 tenants. The total monthly rent coming from this property is $1,750. Tenants pay their own utilities. I just pay for water, sewer and trash which will average $75/month. With cash flow returns like these, honestly, I don't care about appreciation. Even if my property is worth ZERO tomorrow, I still have cash flow coming in each month.
This is probably my best purchase so far, but there are other deals like these in my area. I have no problem being in this neighborhood after dark. Most of my tenants are families with kids and they look for low income safe neighborhoods.
However, 30 minutes from this area and you get into completely different market. You can buy a single family house all in for $10k and it will rent Section 8 for $700-750/month. The returns are great, but I will never invest in this area, because it's a war zone. But there are people buying like crazy in this war zone area. In fact, I know a guy who has bought 300 SFHs in last year in this area.
Nathan, not everyone has the same goals. Some people are more than happy with their 1% properties, because they are more in the game on appreciation. That's a great strategy and I respect people who do that. At the end of the day, you have to do what works best for you. If it was always about making the best rate of return, then IMHO, most of the investors should flip as you get to make the HIGHEST ANNUALIZED ROI of any investment strategy. In my market, I know I can make higher ROI from flips, but rentals are what I feel comfortable with. They fit my investment strategy and my personality.
Everyone has their own investment strategy and on a forum like this, there are a lot of successful investors making their money doing different things. You have to see what works best for you. Just because you are doing something that works for you, doesn't mean it will work for someone else or vice versa.
Mitch,
I own several, BUT have not owned them for several years. So who knows, I could be completely missing something and will realize it in a year or two. At that point, I think I will move to California and pay you to be my mentor.
I think I understand your investment strategy of purchasing a cash flow positive property with possibility of HUGE appreciation upside. I really respect that. But honestly, I think I am little impatient and like to see my money come in now in the form of cash flow. A dollar today is worth more than a dollar tomorrow.
Wow, that's amazing. I would buy one of those today and another next month! By summer 2012 I could quit my job! Is that in the Chicago area? What part? I'm afraid the neighborhood would appear much scarier to me than to you, but I have some friends in the Chicago suburbs I just may have to hit up for some intel. :idea:
LOL..that's exactly what I did..bought some properties like these and quit my job and do real estate full time now.
I don't own or carry any kind of weapons going to my properties. I am a skinny little Indian guy, but I feel OK in my area..LOL
So Sharad, your units are in the Chicago area? Thanks.
Yes, about 30-40 minutes from downtown Chicago.
Mitch,
I am situated in central Illinois, 2% deals are pretty easy to come by. Getting $600 rent on a $30,000 house not in the ghetto can be found. These are working class neighborhoods, not many shootings, just the usual drunken redneck fights.
Now I can go to another side of town and get about $900 rent due to many bedrooms and Section 8. But then I am dealing with shootings and all that crap. There was a recent crime study that listed the Springfield metropolitan area as the 5th most violent area per capita in the nation.
That being said my current plan is a mix of both cash flow and appreciation. I buy cheap rentals in town that are just for cash flow and then I use the cash flow to purchase nice rentals in the small suburbs that will appreciate down the road.
Sharad, the area you are investing in is very similar to mine. The areas I am buying are filled with hardworking blue collar workers who are tired of living in places where property managers treat them like crap and don't fix issues. They pay their rent on time, have families and are extremely nice people. I have been in war zones before, and you can tell the difference immediately between a working neighborhood and a war zone....
Its common sense that markets are extremely different. The deal for the guy in California will be completely different from us that are in the midwest.
I used to watch Flip This House, and it amazed me when they showed the flippers in California, they would buy a 3 bed 1 bath 900 sq ft house in horrible condition for $250,000 and then sell it fixed up for $400,000! crazy! You can buy a 3,000 sq ft 4 bed room house with a three car garage for that in Saint Louis.
Jonathan,
That's the most important thing to realize that the markets are different from one city to another. Even in the area I invest, if I drive 10 minutes from where I invest, I am in completely different market. The ROI is different, investment strategy needs to be different.