Rental Property: What type of returns should I be getting?

13 Replies

Hello All!

I am looking at buying rental properties and I wanted to find what net return I should be looking for in relation to

purchase price and the amount of rent.

Any advice would be helpful... Btw, I am looking at the Indianapolis market... if you have any other "good" return markets I should

look at, by all means, please suggest!

Thank you!

Ilona Kovacs

    @Ilona Kovacs What you can expect in the Indy market depends a lot on the how you are purchasing, and in what price range.  I would suggest you stick with properties that will get $900 (or even $1,000) rent or better.   These will be in better areas and likely to perform better over time.  If you are buying turnkey you will be likely be right around 1% rent to price ratio at these prices, maybe even a little less.  That is going to put you roughly in homes $85k - $120k is a good range.

    Indy market is very competitive right now for deals, and that has been pushing off market prices up.  OOS investors like you and I have to be particularly careful in evaluating deals and the team we work with.

    I work suggest you also look at Kansas City, MO (KCMO) as the market is very similar to Indy, but not quite as competitive and tight on inventory just yet.  

    Larry Fried, Real Estate Agent in OR (#201211636)

    @Ilona Kovacs that’s more of a personal thing you need to figure out. Me personally I have a limited amount of capital so I need to be able to pull all of my money out in 1 year and cash flow $200 a month after expenses. Now I do violate this rule if I can refi and pull all of my initial cash out plus extra cash out and still cash flor $100 a month. I came to these terms with myself by setting my goal of 50 doors that each cash flow $200. So I ask, what is your overall goal with rental properties?

    Sean Carroll, Contractor

      Tooootally depends. Depends on what and where you are buying. So since you are looking at good cash flow markets (yay!), then it depends on the type of property you are buying and the neighborhood, etc.

      The key is- the higher the risk, the more projected returns you want. As the risk gets lower, lower returns are okay. It's all a trade-off.

      I wrote this a while ago but it kind of dives into it-

      https://www.biggerpockets.com/renewsblog/2016/02/2...

      As far as good returns markets- since you are in NY...Baltimore and Philly have been strong lately. Indy of course, Kansas City, Chicago... a lot of the midwestern cities. But again, a lot of it depends on what you want to buy. But there are definitely options! 

      I'm in LA and also invest out-of-state for cash flow. Reach out anytime if I can be of any help!

      2% Rule:

      Purchase Price - $100,000

      Expected Rents - $2,000/month

      1% Rule:

      Purchase Price - $100,000

      Expected Rents - $1,000/month

      You want to be at a minimum getting the 1% rule and if possible look for 2% rule deals (I've personally never seen a 2% deal) or something in between is just fine.

      Good luck!!

      If you go the section 8 route you can check this site for what kinda of rents you can expect. IMO it is hard to get those max rents from section 8 so I would run my numbers on getting a couple of hundred dollars less in rent. 

      https://www.huduser.gov/portal/datasets/fmr/fmrs/FY2018_code/select_Geography.odn

      Thanks for the feedback!

      Questions:

      @Steve DellaPelle   The 1 and 2% rules, are they for "net" rents (after expenses, property mgmt fees) ?

      @Sean Carroll Well, we are looking to replace my husbands' income, and he makes about $250k net/yr, so if I look at your calculations,that

      would be roughly 100 doors @$200/mo, right? and this is net effective profit, yes?

      Ilona Kovacs

        @Ilona Kovacs Yes this should be gross rents before anything is taken out! Generally that will be able to pay off all your expenses and leave you with a solid cash flow each month (perhaps $100-$200/door) like @Sean Carroll mentioned.

        @Ilona Kovacs This depends on a lot of factors, particularly the property class and neighborhood. An A class property will generally have a lower price/rent ratio and cash on cash return than a B or C class from a cash flow stand point. It may however, have more appreciation potential so you should start by defining your goals and criteria. I've been active in both Indianapolis and Kansas City since 2010 and both are strong cash flow markets but the key is knowing which areas perform well. Indianapolis can vary neighborhood and even street to street so you have to know the areas. I would strongly caution you to avoid the cheap, low end areas that look good on paper. You're not going to be able to attract quality tenants and they don' pan out. I know the Indy market well. I'd be happy to share my insight and experience if you'd like to contact me. 

        They can vary from 7 percent cash on cash to 20 plus. I have one that will probably be 8-10 percent and another one that’s probably going to he 15 plus. Two different cities though

        Originally posted by @Ilona Kovacs :

        Thanks for the feedback!

        Questions:

        @Steve DellaPelle   The 1 and 2% rules, are they for "net" rents (after expenses, property mgmt fees) ?

        @Sean Carroll Well, we are looking to replace my husbands' income, and he makes about $250k net/yr, so if I look at your calculations,that

        would be roughly 100 doors @$200/mo, right? and this is net effective profit, yes?

         Keep in mind that the 1%/2% rules are rough guidelines.  Certain properties in my area fetch higher rents, but they have higher vacancy, more repairs, and heat is paid by the landlord.

        Good analysis is still required.  Play with the Rental Calculator under "Tools".

        Jordan B.

          to replace a 250k a year income in rental houses is not something most can or will do in a lifetime.

          with average returns in the 100 to 250 a month range ( IF YOU DO IT PERFECTLY)  it would take you 100 to 200 homes in your portfolio to reach this.. pretty tough thing to do if you working and not in the rental house business.

          flipping done right you have a much better chance of hitting those numbers.. My wife did one deal last year and made 120k on that one deal..

          Now that all said I have helped a few investors reach that 20 to 30k a month in income.. but its what they do its all they do its a 10 hour a day 5 day a week job for them to keep it all going and consistent. 

          if your bound and determined to do this with cash flow real estate then  I think you need to jump right into multi family .. but again like others have said you need to buy quality you buy low end multi family and it could break you financially and emotionally.

          @Ilona Kovacs  I like posting after @Jay Hinrichs because I can just say “I agree with Jay” and I sound really smart.

          I do in fact agree with Jay. Getting to the point that you are earning 200-250k a year in real estate is probably going to either take a lot of your time to create and manage, or you are going to need a lot invested (like 1-3 million) in order to get that income level. But that probably won’t be completely passive either.

          To give you perspective, my business partner and I have acquired 16 buy and hold properties this year and we have completed 6 flips with one still on the market. It has taken a ton of work. Half of them have 0 of our own money into them and the other half have about 150k all together. They are all single family residences in Arizona that I or my assistant manage. Half have a tenant now with 3 more getting tenant within the next 2-6 weeks, 2 still on the market to get tenanted and 3 under construction.

          When they are all finished and tenanted we are looking to make about 4K (2k each) a month on the properties. In order to get to your numbers we will have to repeat this process over and over again for the next 10 years or so or go into something bigger. 

          Like I said it is a lot of work. You can do it, but I just wanted to provide a perspective so that you could see it is not get rich quick. It is more like get rich by working a ton.

          Disclosure:  I'm a partner in a TK firm here in Indianapolis.  

          Here in Indy, the market is indeed heating up.  That said, we are still doing very well in B and C class properties.  Yes, it can change street by street.  Our best returns (sometimes approaching 2%) are in stable areas that are within 15 minutes of downtown.  We are very excited about what's going on in Indy...the city is definitely going through a renaissance.

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