Percentage of profit on a rental property....
On a buy and hold investment strategy, what percentage of positive cash flow/profit do you look for on any given deal? Taking the gross rents received on any given property and then deducting your expenses associated with that property, (cost of any financing, real estate taxes, insurance, maintenance), what is considered a good percentage to have. What would be a minimum percentage?
Thanks,
I'm at about 32% on one I'm holding now. I'm very happy with that. The properties I get going forward I would like to be above 30%. Although I've never considered this function when analyzing rental properties. I always look at the 50% rule, and the 2% rule and try to get as close as possible to those.
I'm not a big fan of percentages or yields when it comes to investing. Reason being, most investors talk yield, but it is on such a small amount of money a daily trip to Starbucks would wipe out all the profit. If you are talking about 6 figures +, then it makes sense. Therefore, I don't have a percentage for you, but we shoot for $300-$400 per unit. I just can't get that excited about dealing with a tenant for $200 or less a month. The only way I would consider less money is if the financing is extremely favorable, such as zero interest. However, even on those that I negotiate, I still try to get my $300+ / month cash flow.
I talk to so many investors who think they are making money because they use 30-40% for expenses (taxes, insurance, vacancy, repairs, management or overhead). Too many new investors leave that last one out. They think it is free to drive out to their properties and do inspections, lease ups, put signs up, type up and run ads. Big mistake!
40% is too low. One large capital expenditure and all of the cash flow for 2-3 years is wiped out. It seems the people on here have it down and use 50% for expenses which is a real good rule. I have a friend who owns over 100 houses and has managed those same houses for 20+ years. He said his expenses run about 44% over the long term. Everything seems fine and dandy until that roof needs to be replaced, a water heater fails, tree roots destroy the sewer line, and don't forget about those lovely 'acts of god'. Just had a tree branch crash down on a roof and the HOA fixed the outside, but said the inside was my problem. That is when you discover if you have been budgeting for repairs or pocketing the money and calling it cash flow.
With the remainder 50%, you still need to deduct out what your financing costs are. Whatever is left is your real cash flow. Shoot for minimum $300-$400 per unit on your average rental property and you'll be a much happier landlord.
I'm not worried about yield, I'm worried about maximizing the return on my cash which can hurt the yield for any individual property.
I try to keep my mortgage below 1/3 of my rent roll for that property. Assuming the 50% rule on expenses long term, I'd be looking at yields of 15 - 20%.
I target a 15+% return on cash as that's more important to me. On that order, I am doing two cash out refinances on my properties which will hurt the yield on both those properties but will allow me to purchase a 3rd and possibly 4th property improving overall cash flow.
Some would rather make 50% on $50k in sales... I'd rather make 20% on $500k in sales.
in addition, the percentage changes drastically the minute the city decides to raise taxes. i always figure the highest taxes the property had over the past 10 yrs and use that for my monthly analysis.
This is a really good thread. I try to look at cash-on-cash return when debt service, taxes, and insurance are factored in. I have no "rule of thumbs" for COC numbers but you can get a feel for what COC you get for different neighborhoods by manually running numbers.
I've seen that COC has a tendency to really favor properties in the below-100k range. Even a nice quad that's in the 300s will not have as good of a COC as a lower-priced single-family residence. Furthermore, even these better-returning SFRs will be blown out of the water by a cheap condo, despite all of the HOA fees and even taking into account rehab costs! (with a rehab, I tend to factor in an extra 100/month for rent. I've found it works. )
So, when I look at properties, I sometimes take the COC with a grain of salt. It seems a little lopsided and if I followed it exclusively, I'd only have really cheap condos on the edge of town. LOL. Have other people seen this?
I'm curious that no-one has discussed cap rates when evaluating a deal. I'm still pretty new to the "math" side of investing - how does that work into your decision? Or does it?
Thanks!
Reviewing my own criteria, I guess I would have to say I use a combination of Aaron & Nathan's method.
cash flow - I try to hit ~$400 per SFH (after property mgmt, mortgage, taxes, reserves, etc.)
Cash on cash ROI - I shoot for a 15%+ cash on cash (over the long haul). I can usually hit 20-28% (in the short-term), but I lately, I've been trying to purchase "b+" properties that are newer and in better areas. They are a little more expensive, but I don't have as many repairs and I pretty much never have to deal with tenant problems, so I'm ok with taking a lower "ROI". I have more peace of mind and more free time.
Goal - my goal is to continue to acquire good-quality properties (3-5 a year) and 10-15 years down the road, sell half and pay off the "best preforming" units.
AG
A savy investor here in town tells me that his proforma on a property has to indicate he will get his cash back in two years. I have not been successful in finding a property that meets that criteria, the 2%, nor the 50% rules.
Don
This is just me talking but I keep it very simple. I try to only buy nice homes (3 bed 2 bath) in good neighborhoods with solid rental history that appreciate 3% + per year and I like to have at least $200.00 per month min positive cash flow, per property after paying all expenses.
I aim for 20% COC, at least in the pro forma. I usually use my own version of the 2-50 rule (1.5-35,2-65 etc.) depending on the area. I always take 10% headroom after whatever rule I apply. I rarely find suitable properties.
I am strictly talking multi-family here but, I look for $100/mon per unit after all expenses. COC 20% plus.
Originally posted by Jason Kosowan:
I try to look at cash-on-cash return when debt service, taxes, and insurance are factored in.I've seen that COC has a tendency to really favor properties in the below-100k range.
So, when I look at properties, I sometimes take the COC with a grain of salt. It seems a little lopsided and if I followed it exclusively, I'd only have really cheap condos on the edge of town. LOL. Have other people seen this?
Jason reiterates exactly why I don't like yields when investing in SFR. The numbers are just too small to waste time punching them into a calculator. If you claim you get a 20% COC return, but you only have $15K into the house, you are making a whopping $3,000 a year. I just can't get excited about $250 a month. Especially if the underlying financing isn't 100% amortized. Too much risk for way too little cash flow. There are much easier ways to make an extra $250 a month without having to deal with a tenant and maintenance. Now, if you consistently get 20%+ on your $500K, you start to grab my attention.
Not that I'm down on rental properties. A lot of my friends have become exceptionally wealthy holding houses. In this market, it doesn't make much sense for me to do so. I wholesale almost all properties that come across my desk. I'd rather have $5,000-$25,000 in cash today than a $300 a month income and a liability.
Originally posted by Jason Kosowan:
I'm curious that no-one has discussed cap rates when evaluating a deal. I'm still pretty new to the "math" side of investing - how does that work into your decision? Or does it?Thanks!
Cap rates have no business in the residential investing arena unless you are looking at large apartment bldgs. Analyzing caps on a 1-4 unit property is not the best use of your time.
Sorry Aaron, neither yours nor Jason's arguments make sense.
Cash on Cash is an apples to apples risk/return comparison on an investment. If you're going to invest $100,000... how much are you getting back for it? IMO, investing in a house is investing in a house. The risks of that asset going away (essentially 0) are the same regardless of prime location versus blue collar. So at that point, you've accepted a risk and now look to maximize the return. Sure, in the blue collar area you may need to buy 4 houses to invest $100,000 where as a prime area you'd only get 1... but why would you care? If the 4 houses generate $4,000 in rent versus the $2,200 you get in a prime area, you're getting a far better return at an equal risk level.
You seem to be arguing you'd rather get an 8% return on a $500,000 building than an 18% return on a $100,000 building. Now if you were leaving the other $400,000 in the bank, that might make sense. But if you could buy 5 buildings for $100,000 each at yield 18% why on earth wouldn't you do it?
If you have unlimited access to cash, CoC isn't important. But for most of us, Cash is our limiting factor. We don't have enough cash to fund additional down payments to buy additional properties... CoC then becomes extremely important as it tells us how quickly we'll be able to grow. How quickly will I get my dollar back to invest again?
Hey, if you can sell luxury homes and make 1 $500,000 commission a year... great... but for most, slow and steady wins the race. It's much easier to make $500 1,000 times than to make $500,000 once. It's all about scaling those small profits up... ask Walmart.
Originally posted by Nathan Emmert:
You seem to be arguing you'd rather get an 8% return on a $500,000 building than an 18% return on a $100,000 building. Now if you were leaving the other $400,000 in the bank, that might make sense. But if you could buy 5 buildings for $100,000 each at yield 18% why on earth wouldn't you do it?
No where in my post did I say anything about making 8% on $500K so I'm not sure where you came up with this. I also don't see how leaving $400K in the bank at 1/2-1% interest ever makes any sense.
Originally posted by Nathan Emmert:
Hey, if you can sell luxury homes and make 1 $500,000 commission a year... great... but for most, slow and steady wins the race. It's much easier to make $500 1,000 times than to make $500,000 once. It's all about scaling those small profits up... ask Walmart.
That's not Walmart's business strategy at all. They grew by opening in small communities, undercutting the mom and pop local stores putting them out of business until they were the only game in town. They also paid their employees as little as possible, expected them to work over time for free, and constantly ride their suppliers for better quality and lower costs.
As far as my business philosophy, I'd rather make the one $500K commission and spend the rest of my year looking for my next big deal or on vacation over burning the midnight oil dealing with 1000 small transaction for the same income.
"We think too small. Like the frog at the bottom of the well. He thinks the sky is only as big as the top of the well. If he surfaced, he would have an entirely different view."
Mao Tse-Tung
You've said you don't get excited by $250 a month. So essentially, even if that $250 a month is a 100% return on investment, it doesn't matter to you. You look at the individual piece versus the sum of what you could do with your money. That's what you implied.
You're right, getting $100 a month isn't real exciting, no one is retiring on that. But if I can generate $100 a month in a way that allows me, with the cash I have, to create 20 more of the same deals... I'm all over that... especially if the alternative is 2 deals that generate $500 a month.
Given X dollars, I want to maximize the return I can get on it. I don't care if that's $0.01 a month on 1 million deals... or $1,000,000,000 a month on 1 deal.
The per deal metric just doesn't make any sense to me.
You don't realize it, but you are arguing in favor of my point of view Nathan. You are talking about making a 100% return like it some amazing feat... on $250!!! What are you going to do with $500?
You might make 100% return on your $250 once, maybe twice, but you are not going to do it consistently over and over unless you want to throw some hypothetical situation at me which is a waste of both our time.
If you only have enough cash to make $100 a month in income, why are you investing your cash into a long term hold and taking it out of the game? You would be better off wholesaling or flipping the properties to create operating capital until you are in a position where it makes sense to take some of your money off the table and stick it into an investment that will produce passive income.
#4 Off Topic Contributor
- Investor
- Round Rock, TX
Originally posted by Tom Wallace:I don't really understand this question entirely, but most investors look for at least $100/door/month. The return metrics really vary by product type.
On a buy and hold investment strategy, what percentage of positive cash flow/profit do you look for on any given deal?
Originally posted by Tom Wallace:
Taking the gross rents received on any given property and then deducting your expenses associated with that property, (cost of any financing, real estate taxes, insurance, maintenance), what is considered a good percentage to have. What would be a minimum percentage?
This also varies a great deal by product type, but 50% is a good RULE OF THUMB for all expenses over the long haul not including debt service. So gross rents / 2 is a good long-run approximation for your NOI.
Aaron, there's a huge difference between getting a 15% return on your investment and using the money that generates a 15% passive return to do flips and wholesales. You've changed from investing to having a job. I already have a job, a great paying job, I don't need a real estate job. I need a place to create long term wealth, a vehicle that provides above stock market returns with less risk. I'm not trying to replace my salary and benefits with real estate. I look at Cash on Cash because it shows passive returns. The returns you're advocating are far FAR from passive and really can't be compared.
"We think too small. Like the frog at the bottom of the well. He thinks the sky is only as big as the top of the well. If he surfaced, he would have an entirely different view."
Mao Tse-Tung
Thanks for posting this Aaron
Personally, if I could, with 20K in cash acquire a property of say 500K (since that's the number we seem to be using here...) and make 0 cash flow after the expenses and debt service is paid for; I'd rather have that than an 100K house making 15-20% (calculated COC return on first year) on my 20K. I think 15 to 20 years down the road I'd be better off.
But if I am into mediocre stuff around 100K, which is where I expect to have access, I would like to see at least 200 per month in profit on a 20K dp. That's only 12%. And that's only 12% the first year. If I was investing in a vacuum, every year that passes would show me a lower return since rent rates stay relatively flat while interest bearing investments compound (considering a theory of steady to rising interest rates). So, you really have to keep reinvesting your profits year after year to maintain that percent return you are concerned about. If I have to put work in to maintain my "return" I think I am earning money running a business rather than receiving a return for an investment. Chances are, I will not be able to reinvest my 200/month (2400/year) into another property that will return 15-20 percent, or whatever my goal is the very next year, or every year thereafter. Chances are much more likely it will take me about 2 years. But that's just me, an average Joe with a day job. We all have different opportunities to choose from and different priorities, so I certainly wouldn't suggest my philosophy is the "right" one.
Originally posted by Nathan Emmert:
Aaron, there's a huge difference between getting a 15% return on your investment and using the money that generates a 15% passive return to do flips and wholesales. You've changed from investing to having a job. I already have a job, a great paying job, I don't need a real estate job. I need a place to create long term wealth, a vehicle that provides above stock market returns with less risk. I'm not trying to replace my salary and benefits with real estate. I look at Cash on Cash because it shows passive returns. The returns you're advocating are far FAR from passive and really can't be compared.
Nathan, this is a little buried in my previous post, but the return you are caculating is only valid for the first year. Rental rates will remain relatively flat and you will not see this percent return year after year and does not behave the same way as investing in an interest bearing account that compounds. In fact, your return in terms of percent will decrease over time.
UNLESS you reinvest it - which is the JOB that must be done that you are saying you don't want to have.
Brian, how do you figure my Cash on Cash return goes down? Unless you're using value of money calculatons, it stays flat or goes up due to inflation of rents. I base my CoC on 50% expenses so some years it will be higher, others it will be lower but I don't see a reason it would go down over time.
You are right though, I do need to reinvest the returns which would further increase the return on my initial investments. I do disagree in finding investments in being a Job though. It's like the market... you have guys who just buy the S&P mutual funds, you have others who research individual stocks & read some sites, and you have day traders. The same can be said on real estate... you have people who buy turn key, people who search for good properties, and people who do a bunch of advertising and lead generation. i'm looking to be in the middle category. I am willing to put some time in to generate good returns.. but it's a hobby, not a full time job for me.
Originally posted by Nathan Emmert:
You're right, getting $100 a month isn't real exciting, no one is retiring on that. But if I can generate $100 a month in a way that allows me, with the cash I have, to create 20 more of the same deals... I'm all over that... especially if the alternative is 2 deals that generate $500 a month.
Hold on. Are we talking MF per door or SFH here?
Either way I've got this system down pat!
I buy 100% LTV so my return is infinite and then I do this 100 times. That's 100 x infinity - a really big number. I then spend every waking moment managing those 100 SFHs. Well what do you expect when I cannot afford property management? The debt service takes all that ...
/take tongue out of cheek
Nathan, my point is that CoC is only valid for the first year. If I invest 20K and every year I get 2400 back, yes, 2400 is the same percent of 20K, but if I had the money in an interest bearing account, then I would be getting return on the previous 2400 every year thereafter. I guess part of my point is that CoC is only really relevant the first year.
If you put 20K down on a propery and 8 years down th road you make rent profits of 2400/year, are you going to walk around talking about 12% CoC for that property? No, because time value of money and oppertunity costs over the past 8 years have transformed the financial picture and the "CoC" was really only a cute way to look at the first 1 or 2 years of rental profits. It is only a metric. A quick and dirty way to evaluate the merit of a deal.
You can't tell Aaron how his returns are based on working a real estate job and are not comparable to what you are doing when you have to reinvest the money you are getting as well. You can't miniize it and say, "oh, well, what I do is a hobby." So what you are really saying is that you have a part time job that you enjoy doing. Aaron has a full time job that he enjoys (apparently) doing. So his comparisons, in my opinion, are valid. Not to say your strategy is wrong - just that Aaron makes a valid point.
I think i agree with both of you two arguing. With low returns, your risk increases because you have more furnaces, more roofs, more potential problems with the amount of properties you need to generate sizable income.
Me personally, i look for 20% CoC return after all anticipated and fixed expenses. Must be at least $300 net profit in total or else its too much risk of profits being wiped out when 1 problem occurs.
Originally posted by Aaron Mazzrillo:Originally posted by Jason Kosowan:
I try to look at cash-on-cash return when debt service, taxes, and insurance are factored in.I've seen that COC has a tendency to really favor properties in the below-100k range.
So, when I look at properties, I sometimes take the COC with a grain of salt. It seems a little lopsided and if I followed it exclusively, I'd only have really cheap condos on the edge of town. LOL. Have other people seen this?
Jason reiterates exactly why I don't like yields when investing in SFR. The numbers are just too small to waste time punching them into a calculator. If you claim you get a 20% COC return, but you only have $15K into the house, you are making a whopping $3,000 a year. I just can't get excited about $250 a month. Especially if the underlying financing isn't 100% amortized. Too much risk for way too little cash flow. There are much easier ways to make an extra $250 a month without having to deal with a tenant and maintenance. Now, if you consistently get 20%+ on your $500K, you start to grab my attention.
Not that I'm down on rental properties. A lot of my friends have become exceptionally wealthy holding houses. In this market, it doesn't make much sense for me to do so. I wholesale almost all properties that come across my desk. I'd rather have $5,000-$25,000 in cash today than a $300 a month income and a liability.
Originally posted by Jason Kosowan:
I'm curious that no-one has discussed cap rates when evaluating a deal. I'm still pretty new to the "math" side of investing - how does that work into your decision? Or does it?Thanks!
Cap rates have no business in the residential investing arena unless you are looking at large apartment bldgs. Analyzing caps on a 1-4 unit property is not the best use of your time.
If $300/month in income *net* doesn't excite you, I'm not sure what would, besides these big piles of cash you're collecting from wholesaling.
What do you do with the $5k-$25k per deal?, stuff it in a mattress?
Eventually that money is getting parked somewhere...
Brian, I think you are using too many paragraphs to describe a concept as simple as compounding interest, makes it sound a tad confusing.