How on EARTH to get good ROI with expensive properties?

OP

Investor · CO · Member since 2016 · 36 posts · 8 votes

4y

Quote from @Justin Pearson:

@Juliet Palfi Have you considered using seller financing of your hypothetical $500k house as an exit strategy once you decide to move on? If you are willing to live in a less expensive home then the cash flow from that long term note should be enough to pay down the mortgage on your next property and maybe some left over on top. Say you seller finance the 500k note and gets 3k a month in payments. Use that payment to pay down the mortgage on 2 cash flowing rentals and/or live in one. In this case you're using your property as the bank.

Thanks for the advice! It appears that "seller financing" is the exact same thing as being the PML (private mortgage lender) on my property I sold? Isn't it difficult to find buyers who even want seller financing? How would I even go about advertising that I am offering "seller financing" for a property? I can imagine many people out there do not even know what that is? Sorry for so many questions... but why would someone want me to be the "bank" when they can easily get a unconventional loan if they can't get conventional?

I just got a unconventional loan and it was super easy (has 7% interest until I can hopefully refi to get lower %).... and if I am going to to be the PML I would NOT charge less interest rate than other unconventional lenders... plus I have NO idea how to get the paperwork done etc in order to be a PML....

I know someone who had LOTS of rentals... then became the PML. It was less headache because then you don't have to worry about tenant headaches (if they don't pay you take your house back)... but what happens to all the tax advantages that rental properties have if you are the PML? They are gone! Not good!!!

OP

Investor · CO · Member since 2016 · 36 posts · 8 votes

4y

Quote from @Randall Alan:

You sort of answer your own question, you just aren’t realizing it. In short , not every property makes a good rental. As you pointed out, the $100,000 property is probably a sweet spot. What you fail to connect is: that is what you need to be buying if available… because the $500,000 property wont function as well. I graphed this out years ago. My question was simply: How do I maximize the use of my investment money… what property do I buy? I took a $75k House, a $125k house, and a $200,000 house. What the math showed was the cheapest house that could be rented for the most money is the best purchase. The $200,000 house returned the most income, but it was eaten up with higher mortgage and insurance and repair reserves. It was much better to spend $80,000 down on 4 - $100,000 houses than 2 - $200,000 houses; or in your case one $500,000 house. The $75k houses performed even better. The $75k house from 4 years ago is probably the $125k house today.

Your challenge seems to be only looking at $500,000 houses, I presume because that is the caliber of house you want to live in. And that is fine. The fault in your approach is forcing your house to be a future rental as your only option.

A better possible play is that you buy cheap rentals and don’t try to make your $500,000 house a rental later. Instead, you hold it if real estate is appreciating and sell it when you want and pocket the profits. At least that would have worked until recently.. but now the negative pressure in the form of very high interest rates is going to slow appreciation. How much is yet to be determined… will house prices decline? Probably… economics says yes. But then you have to factor in inventory… if supply is still constrained prices may just plateau if buyers can still afford the higher prices / interest rates. A lot will depend on how well the Feds balance their tightrope act of slowing down the economy.

The other thing you have to factor in is that you are now buying at a very bad time. Prices are high, the cost of money is way up, the home owners insurance market is crazy with increases. Insurance prices have doubled in two years… oddly enough driven by the high value of the real estate. If the house is worth double, you now have to insure it for double as well. Each of those factors act to diminish your profitability on your rental investment.

One option is to wait for a better purchase environment. Never fun to hear, but the urgency to buy something soon is probably sabotaging the best use of your money - which may be to sit idle while you wait for the market to reset

So determine if buying your $500,000 home as a rental is a valid plan - and if not - consider other options. it makes no sense to get a 3% return with an inflation rate of 8-10%… you are losing buying power.

hope it helps a little
Randy

Thanks for your advice! I guess on upside to this is that if I hold the property for 25+ years that it will hopefully have appreciated a LOT and THEN I could sell it. Only problem with that is... lets say that 500K house only appreciates 475K after those 25 years.... then it will have taken 25 looooong years to appreciate 475K. That is TERRIBLE considering it took 25+ looooong years! :( 475K is great but not if it takes 25 years... I could be dead by then!

From what I understand is that houses NORMALLY appreciate at a rate of 3.8% per year... let's pretend the CRAZY situation happening right now with inflation and housing prices is not happening. So that means the property will have ONLY appreciated 475K in 25 loooong years.

I was going to say, for this one property, that I will be "ok" getting 3% or 4% ROI and that I would simply hold it for long-term appreciation INSTEAD instead of decent rental cash flow ROI...

Is this a horrible idea? I know it is said to NEVER focus on APPRECIATION and to focus on CASH FLOW... but that is not my current situation with properties in this price point (I cannot meet the 1% rule) and I need to buy a house to live in ASAP for numerous and very valid reasons. I cannot be a tenant any longer and the area I want to live for the next several years does NOT have housing for anything cheaper than 500s.

So I need to figure out how to make what I am working with WORK with the least damage possible.

John UnderwoodPro Member

Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes

4y

Quote from @Account Closed:

Quote from @Justin Pearson:

@Juliet Palfi Have you considered using seller financing of your hypothetical $500k house as an exit strategy once you decide to move on? If you are willing to live in a less expensive home then the cash flow from that long term note should be enough to pay down the mortgage on your next property and maybe some left over on top. Say you seller finance the 500k note and gets 3k a month in payments. Use that payment to pay down the mortgage on 2 cash flowing rentals and/or live in one. In this case you're using your property as the bank.

Thanks for the advice! It appears that "seller financing" is the exact same thing as being the PML (private mortgage lender) on my property I sold? Isn't it difficult to find buyers who even want seller financing? How would I even go about advertising that I am offering "seller financing" for a property? I can imagine many people out there do not even know what that is? Sorry for so many questions... but why would someone want me to be the "bank" when they can easily get a unconventional loan if they can't get conventional?

I just got a unconventional loan and it was super easy (has 7% interest until I can hopefully refi to get lower %).... and if I am going to to be the PML I would NOT charge less interest rate than other unconventional lenders... plus I have NO idea how to get the paperwork done etc in order to be a PML....

I know someone who had LOTS of rentals... then became the PML. It was less headache because then you don't have to worry about tenant headaches (if they don't pay you take your house back)... but what happens to all the tax advantages that rental properties have if you are the PML? They are gone! Not good!!!

If you offered owner financing you would attract plenty of buyers. Many people can't qualify for a bank loan for a multitude of reasons but would still pay back your loan on time. Just get a decent downpayment, have an attorney do the the paperwork for a subject to mortgage.

Now may be a better time to be acquiring distresses LTR properties at bargain priced that cash flow better. Get em cheap and fix them up. I'm still finding motivated sellers or distressed properties that I can buy for under 30k. Get a handful of these and you'll be in early retirement with much less work than a STR. I have both and my LTRs pay all my bills plus much more. They have really appreciated and I have instant equity when I buy one of these on the cheap.

Chris SeveneyBusiness Member

Moderator

Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes

4y

@Juliet Palfi

Real estate returns can be bifurcated based on ongoing cash flow and on exit.

The $100k houses at 1% have very low home price appreciation so those properties typically will “cash flow”.

The $500k house will not cash flow but potentially have someone cover your interest payments and part of the principal. But over time this house will typically have greater appreciation. Have you seen investors in NY, Boston, DC, SF or other major cities ever complain about expensive housing? Nope because they reap benefits of appreciation and most people who truly build wealth do it from these types of properties and not the lower cash flowing ones

Also as noted most nicer homes in residential areas were not meant to be rentals and do not make good rentals. My street has NO rentals because we have 1 acre lots and the price of land is ridiculous and renters don’t pay you for the land. So a $1M home may rent for $4k-$5k which makes no sense.

7e investments53 Reviews

Website View Page

2 Reply

Randall AlanPro Member

Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votes

4y

I don’t really consider appreciation when I’m buying my personal home. I buy the house I want in the neighborhood I want. It’s just a whole different mindset for me. All real estate appreciates over time (generally speaking). You can nit pick and say if you bought a the peek and sold 3 years later when the market had cooled that wouldn’t be the case, but it is no different than the stock market in the sense that over the long term the stock market rises by 7% a year. It just might do it by going up 20% one year, and down 6% the next. So you will get appreciation (that is offset by inflation over that time). I just think you are mixing real estate investing (for profit) with owning your personal (higher dollar) home. They are two different games - both ‘played on the same field’ (ie real estate)… but they don’t follow the same set of rules.

If you are buying at the $500k level because that is all there is, you can make that decision on a personal level because you can afford to live in that house at that price point. Yes, that is real estate investing - but not investing for profit.

When you are selecting a house for profit, you buy the one that will cash flow from day one, hopefully for below market value, which is the cheaper one that will rent for the most dollars per square foot.

If you are committed to having both (now) - in a single property - then you have to choose a different area that accommodates that - which might be a compromise on where you want to live. Alternatively, you can split your approach and find a cheaper house to live in - maybe less square footage - and use the difference to buy a cheap rental or two. Remote investing or syndication may be your better investment option if there are no cheap houses where you live.

Randy

Bjorn AhlbladPro Member

Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes

4y

We had a rental a few miles south of San Francisco that we bought around 1984 for 148k.We held it in a 1031x and rented it out most years at a loss if you considered all expenses, allocations and equity. In 2015 we sold it for 1.2 million and bought rental properties near Olympia Wa; those properties cash flowed from day one. We knew we would relocate to the PNW so we were getting ready. ROI can be cash flow, or appreciation and sometimes both.

3 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

4y

The 1% rule is created and only works when the market is at the bottom, that's when the average CRE and SF CRE in the west coast are still 5-6% and the midwest is 6-8%, we're already in 2-3% cap rate since 2019. So that 1% theory is outdated.

In the long run, we will be in the era of sub zero cap rate.

William MorganPro Member

Fix & Flip or Hold · San Luis Obispo, CA · Member since 2012 · 136 posts · 63 votes

4y

@julie

@Account Closed there are 4 ways a rental property provides its owner a return….and you are only focused on one of them - cash flow over expenses. A better and more accurate picture evaluates all 4.

In more desired markets you will often see Landlords buying and renting properties that do not cash flow and may not even cover their debt service! While you may initially believe these landlords are foolish, many of them will go on to make far better returns than someone who only looks for a property meeting a 1 or 2% rule. This is of course is a very broad stroke observation with some important caveats.

The key to understanding why this may be true is by understanding ALL of the ways a rental property provides returns to its owner;

- Cashflow over expenses

- Appreciation (both price and rent)

- Principle pay-down

- Tax deductions

Case Study: I purchased a home for $550k five years ago. PITI was 3600/mo. I could rent for $3200/mo when it was purchased resulting in a negative $400/mo after debt coverage. Sounds like a terrible investment right? And yet this property's performance far exceeds those properties I bought meeting a 1 or 2% rule.

Sure it takes a slightly more sophisticated approach. And you must consider the market cycle and timing (e.g. now is a terrible time to try this) However, this is one reason why you see some folks buying investment properties that do not make sense using a 1% rule. And yet many of these folk’s returns will blow away those who only buy 1 or 2% rule properties, caveats notwithstanding.

Now, don’t get me wrong, not everyone who buys a Property in a desirable market will not automatically make great returns. But savvy investors can and do make great returns when done right.

Hope that sheds a little light.
W

Mark Cruse

Investor · Fort Washington, MD · Member since 2014 · 1k+ posts · 1k+ votes

4y

Too much over thinking and critical assessment. "Higher the risk, higher the reward" sums it up. If the numbers worked for all Class A, high end or expensive properties, that is where everyone would invest. They invest in the lower ones for a reason. The average person isnt choosing to invest in war zones or killing field areas due to being a peace corp type good samaritan who wants to save humanity. I have been selling off my class d Baltimore units and its no problem moving them because of 10 to 15 percent returns. Think that would work in Chevy Chase or Georgetown? LOL Not saying it cant be done, but multiple dynamics and characteristics must exists. Its rare.........

Branden Yang

Member since 2022 · 42 posts · 10 votes

4y

I've seen property in Washington worth 600-700k while the same property in Texas would be worth in 200-300 with the same exact rents. Don't buy houses, you can literally get 12-24 units with 500k and get even more appreciation. Why waste time on a house? You've gotta think bigger, not more. If I had a million dollars, why buy mansions that only rent out for 10k when you can buy apartments that rent out for 40-60k? I've seen ROI at 40-50% if you knew how to buy a bulk of properties. If you buy one property, what if no one rents it out? Now you're wasting money. I'm a huge critic against buying houses UNLESS you're flipping it. I've seen properties worth 100-200k when you could've just put 5% down for hard money loans and put 100-200k worth of renovations and easily make 500k. Properties are easy to find in the MLS, I literally see deals that I would've invested if I had money to do it (I'm trying to get partners that'll put downpayments, etc).

500k is like easily 12 units. You just need the right people who can manage your properties. I could easily find you a 550k property with 7BR/3BA that's in a good area. I've personally seen 10% on most deals. I've seen 1% per month on apartments, that's like 100k in rental income each year on a million dollar property or more. I'll find you a property for free, just contact me for your criteria.

Secondly, don't pay all-cash for properties, you can get 5.5 million dollars worth of properties with that 550k alone. If the interest rates doesn't make sense with the property, move to another property.

I'll find you a property for free that's easier for you, just contact me for your criteria.

OP

Investor · CO · Member since 2016 · 36 posts · 8 votes

4y

Quote from @John Underwood:

Quote from @Account Closed:

Quote from @Justin Pearson:

@Juliet Palfi Have you considered using seller financing of your hypothetical $500k house as an exit strategy once you decide to move on? If you are willing to live in a less expensive home then the cash flow from that long term note should be enough to pay down the mortgage on your next property and maybe some left over on top. Say you seller finance the 500k note and gets 3k a month in payments. Use that payment to pay down the mortgage on 2 cash flowing rentals and/or live in one. In this case you're using your property as the bank.

Thanks for the advice! It appears that "seller financing" is the exact same thing as being the PML (private mortgage lender) on my property I sold? Isn't it difficult to find buyers who even want seller financing? How would I even go about advertising that I am offering "seller financing" for a property? I can imagine many people out there do not even know what that is? Sorry for so many questions... but why would someone want me to be the "bank" when they can easily get a unconventional loan if they can't get conventional?

I just got a unconventional loan and it was super easy (has 7% interest until I can hopefully refi to get lower %).... and if I am going to to be the PML I would NOT charge less interest rate than other unconventional lenders... plus I have NO idea how to get the paperwork done etc in order to be a PML....

I know someone who had LOTS of rentals... then became the PML. It was less headache because then you don't have to worry about tenant headaches (if they don't pay you take your house back)... but what happens to all the tax advantages that rental properties have if you are the PML? They are gone! Not good!!!

If you offered owner financing you would attract plenty of buyers. Many people can't qualify for a bank loan for a multitude of reasons but would still pay back your loan on time. Just get a decent downpayment, have an attorney do the the paperwork for a subject to mortgage.

Now may be a better time to be acquiring distresses LTR properties at bargain priced that cash flow better. Get em cheap and fix them up. I'm still finding motivated sellers or distressed properties that I can buy for under 30k. Get a handful of these and you'll be in early retirement with much less work than a STR. I have both and my LTRs pay all my bills plus much more. They have really appreciated and I have instant equity when I buy one of these on the cheap.

Thanks for info! Stupid question... how would I go about being the PML (seller financing). I have no idea where to even start.. what paperwork is needed etc etc... being the PML seems like it would be complicated thing and I'm sure I would not even be able to answer any questions I am asked about it lol... it seems if I am the PML I cannot get any "hand holding" in the beginning until I am more experienced and better know what I am doing? Because right now I do not know my *** from a hole in the ground.

Justin Pearson

Flipper/Rehabber · Austin, TX · Member since 2020 · 17 posts · 5 votes

4y

@Account Closed There are people out there that have the cash flow and can prove it, and may make very qualified buyers, but have a **** credit score for various reasons (Mine is great due to 20k looming medical bills). I'd check out Pace Morbey on youtube, he's got a whole channel on buying subject-to properties and/or creative financing. In your case you could list the price at a premium price over amortized over a long-ish period of time to make the payments manageable, and you get your interest rate on the loan on top of the sale price. You set the terms, its a matter of how bad they want it and what they can afford. If they default you take the property back, and unless they've trashed it, you get to pocket the payments made minus taxes as your payout for having to deal with the chuckle@#$%.

Brett Imperial

Rental Property Investor · WV · Member since 2022 · 5 posts · 3 votes

4y

People (for the most part) aren't renting homes that are worth 550k. People who rent usually have a financial situation either it be lack of income or credit score so they rent something that falls into that category. If you can pay 3-5k a month in rent then you have the cash flow to just purchase a home. Not all homes are profitable to rent and homes that expensive fall right into that category. If you have a half million dollar home to rent it better be near the beach for a vacation home or 5 miles from Disney lol.

OP

Investor · CO · Member since 2016 · 36 posts · 8 votes

4y

I totally agree it does NOT seem that houses in the 500K range are good rentals... but why do I still see plenty of houses... even more exesnive than in the 500K range being rented successfully?

... and these properties are not near a beach or any special area and are not seasonal either... yet they are rented.

Some people just prefer to rent? I think it is nuts and doesn't make sense to me... because if I can afford to pay rent that HIGH... I would NOT be renting.. I would buy a house!

I am nervous about my plans to buy 500K 3BR/2BA house... because I am worried I will have difficulties renting it out in the future. really need help from a realtor does not only deals with residential... but also deals with INVESTMENT (rental) properties? Would such a realtor know more?

Because my RedFin realtor hasn't been able to help me or advise me with any of this stuff I am doing all of it by myself... I have NO idea if a rental property in the area I want to get it in is BAD idea or if it is OK.. or what rent I could possibly get for it... IF lets pretend I was going to rent out the property out TODAY instead of in the future. I am NOT going to rent it out today... but I would like to at least see what rent I could have gotten TODAY for it... because if it doesn't work TODAY... then it makes me uncomfortable to to think it would in the future. A LOT changes as time goes on o course and nobody can predict the future... but hope you understand what I am trying to say. If it does not work today... then it more likely won't in the future either. If id d BAD today... I ain't messing with it.

It's bad enough I am going to rent out property in the 500K range (in the future of course, not now)... but I don't need another issue on TOP of that.

OP

Investor · CO · Member since 2016 · 36 posts · 8 votes

4y

I forgot to say... this seller had NO idea I loved the views. When she rejected my full asking price offer and took the prop off the market... I started house hunting like crazy and was not able to find anything that even remotely compares to this townhouse.

So I then asked my realtor what if we go back to the seller and ask her if I were willing to pay more $$$ perhaps she would sell. I think it is then that the seller was informed how much a LOVED this townhouse.

Sad!! :(

David P.

Member since 2020 · 404 posts · 235 votes

4y

Just close on a duplex in southern california that I got 70k under list price. Even with that and relatively low interest rate (4.875%) i would need to rent it out at $5k (2200sqft) main unit just to break even on all the expenses. I am considering making it an Airbnb for the higher upside.

OP

Investor · CO · Member since 2016 · 36 posts · 8 votes

4y

Quote from @David P.:

Just close on a duplex in southern california that I got 70k under list price. Even with that and relatively low interest rate (4.875%) i would need to rent it out at $5k (2200sqft) main unit just to break even on all the expenses. I am considering making it an Airbnb for the higher upside.

How much did you put down? I would not be renting out the place I get until it is free and clear. I will get about 4% ROI then... I know it is HORRIBLE... but I am fine with that (I will get higher ROI with other assets). My hope is that a 3BR SFH will appreciate more than a 2BR townhouse over a 20+ year time... and in the interim during those years a 3BR SFH will cash flow more than 2BR townhouse. At least that's what t\it looks like when I use the biggerpockets rental calculator when comparing the two.

David P.

Member since 2020 · 404 posts · 235 votes

4y

Quote from @Account Closed:

Quote from @David P.:

Just close on a duplex in southern california that I got 70k under list price. Even with that and relatively low interest rate (4.875%) i would need to rent it out at $5k (2200sqft) main unit just to break even on all the expenses. I am considering making it an Airbnb for the higher upside.

How much did you put down? I would not be renting out the place I get until it is free and clear. I will get about 4% ROI then... I know it is HORRIBLE... but I am fine with that (I will get higher ROI with other assets). My hope is that a 3BR SFH will appreciate more than a 2BR townhouse over a 20+ year time... and in the interim during those years a 3BR SFH will cash flow more than 2BR townhouse. At least that's what t\it looks like when I use the biggerpockets rental calculator when comparing the two.

It was 25% but 1.28 mil purchase price. So factors in everything its about 7 k a month expenses. Part of the problem is one tenant is paying way under market about 1k under and im stuck with him at that rate for 1 year. If he was paying market i would just do long term tenant on both units.

Bill F.

Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes

4y

@Account Closed

What had the rent growth been for 3/2 SFR's in that area for the past 15 years?

What would your ROI look like in 10 years if rent grew at half that amount and you had a 30 yr fixed mortgage on it?

OP

Investor · CO · Member since 2016 · 36 posts · 8 votes

4y

Quote from @Bill F.:

@Account Closed

What had the rent growth been for 3/2 SFR's in that area for the past 15 years?

What would your ROI look like in 10 years if rent grew at half that amount and you had a 30 yr fixed mortgage on it?

I have no plans to rent it until the mortgage is free and clear which would be in less than 5 years. But I need a get a real estate agent who deals with not only residential properties but investment props too and understands the rental market because I feel like I am all alone here... I am not getting any feedback AT ALL (zero) from my current realtor on this!

Podcast Guest on Show #243

JD MartinBusiness Member

Moderator

Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

4y

You should always consider your personal home a place to live first, an investment second. It can be both but often requires compromises that one doesn't want to make.

If you can buy a home to live in that fits your needs and still experiences appreciation, you should accept it for what it is. Or be prepared to make the appropriate compromises to purchase a home that will also be an outstanding investment property.

Skyline Properties

View Page

Brian G.

Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes

4y

@John Underwood how & where are you finding those deals?