I'm in eastern MI and I'm curious to know what other ROI investors are seeing across the country.
My three rentals:
Class A neighborhood - all in value 95K - $910 in rent = .95%
Class B neighborhood - all in value $40K $775 rent = 1.9%
Class C neighborhood - all in value $14K $545 rent = 3.9%
I realize this metric is one of many ways to gauge your investment's return but wanted to see what other areas are coming in at.
Thanks all -
gross returns are nice but in my mind its all about net...
the C class or really probably D class looks best on paper for gross but usually you never come close to hitting those numbers over time.
On my A class I break even and am happy to have my tenant pay my mortgage taxs and insurance for me.. in markets were my profit will be made on resale and or I already make my profit on Go zone tax benefits.
but on your gross numbers I think most mid west investors realize the same metrics
Only have one property which is a duplex located near Fort Riley, KS. Class A neighborhood $255,000 / $127,500 per side.
Side A : $127,500 and $1,275 in rent = 1.0%
Side B: $127,500 and $1,300 in rent = 1.02%
Rents have varied from $1,395 to $1,250 (the $1,250 became vacant in December and was a slower rental time). Both net about $300 after expenses.
Hope that helps!
@Ginger Walker now that sounds like a great investment cash flow and A class
Forgive me if I'm ignorant, but isn't ROI return on investment? Cash invested / cash-flow? I can get 1%/yr in a CD. Why play with tenants and toilets?
Maybe your stating monthly % returns? Gross rents/purchase price (R/V ratio?)
A couple of mine look like this. No way I (or most) can compete with eastern MI in general.
Bought a B-/C+ triplex with $22k down, CF is $403/mo. ROI = 22%
Bought a B 7-plex with $45k down, CF is $1200/mo. ROI = 32%
These account for Cap Ex, but not management (I self-manage & DIY most repairs).
Gross rents are just one part of it. Breaking it down to account for all the expenses and coming up with the monthly casfhlow per door, and IRR, cash on cash return, that's what really matters
Thanks @Jay Hinrichs we mostly stumbled into it but it has been a great investment. We are currently in Northern VA and the ROI's are not even close here. You will be lucky to get about $2,000 a month on a $300k property.
1) WA (Class B+/A-) - 140k all in - $1495/month.
2) NC (Class B) - 85k all in - $975/month.
3) NC (Class A) - 132k all in - $1495/month.
Return %'s don't interest me unless I'm leaving all my investment in the deal...like a CD or stock. Then, the return on that investment tells me how fast (or painfully slow) I get my investment back...and actually start to make money.
I'm only interested in the cash on cash return, or cash flow, since both of those profit gauges tell me how much actual money I am making...now.
This makes more cents (dollars) to me since my business model requires that I get all my cash back before the end of the year...most of the time back within a few months.
Returns are really hard to gauge. At the end of the day we are just estimating.
I have estimated cash flow using 50 percent rule, of around 200+ or - per SFH. Plus equity pay down, and maybe appreciation.
My properties range from A to C-
However, you never know. I have a duplex, that looked good on paper but it's a POS in reality. Low quality tenants, evictions, vacancy.
So simply looking at a percent to rent, is just a start, to try and get an estimate on expectations on how a property may perform.
If you want % returns on the different Classes, mine are as follows (and this is cash...not virtual money):
Class A: I don't do Class A. Very difficult to cash flow after I get all my cash back out.
Class B: $150k in (and back out again between 3-12 months)
Class B: $60 in (and back out again between 3-12 months)
Class B is in a couple of different markets
Class C: I don't do Class C
Keep in mind, these returns reflect None of my cash (money) is still in the deal by the end of that first year...so this is all pure, as in TRUE, profit.
I think what @Joe Villeneuve hit on is key. What is your strategy? Mine personally is similar to Joe's, but finding deals in non war zones that fit that criteria. I do not care if a lower class C or class D property is at 3.9%, it's just not worth the hassle over the long term.
Serious question: If I buy a property with 100% borrowed money and make $1 in profit is my ROI infinite?
Also, while we're having a return metrics conversation: If I buy a property at $350k that is worth $600k 5 years later, what metric captures that other than a net worth calculation? Say rents only increase 25% over the same time period, your CAP rate is actually worse at the end of the 5 years because property value is so high.
I want something I can put on a spreadsheet that incorporates the increase in equity into the property returns- does anyone know if something like that exists?
@Tyson Taylor you reflect that on your personal financial statement.. you can do it at cost basis.. and then you can do it at true market value.. to get an idea of your net worth.. as your not going to realize that equity unless you sell.
it allows us equity and appreciation investors to be paper tigers LOL>
@Tyson Taylor An IRR calculation could take into account the initial purchase of the asset, the exit proceeds, and the cash flows you bank during the 5 years in between.
As compared to the sub 1% return from a savings account, it all looks good. I think it is far more complicated than simply one number (Rent multiplier, cap rate irr, etc). No one has mentioned the time time and effort it takes to find and maintain the property. It is hard to factor the value of your time. Real estate will never be as passive as the savings account. Financing also changes all the numbers. Pay interest only, seller finance at a lower rate for a ltv over 80%.
Cash on cash as a measure beyond year one, is not very useful. How do you measure cash on cash when you get all your money back? Time to recapture investment might be a better metric.
With that said, if you can clear 1% a month you are in a good place. Much beyond 2% a month you are in a rough neighborhood.(pun intended) The second area to look at is how much cash it generates after all the expenses ( mortgage, tax, management fees, etc). I have heard people say they like to be in $200 per door. I generally like to be north of $300-400.
I generally shy away from appreciation as part of my strategy. Any deal I am interested in must stand on its own merits today. I can not predict the future any better than the weather man. I do expect my equity to increase based on inflation and paying principal every month.
Generally, I shoot for the properties that generate revenue of 2% or greater per month based what I have invested, to leave me room for cash flow. I prefer high cash flowing properties. I don't go for appreciation. Everyone has their own strategy and the reasons behind that.
I have to agree with @Joe Villeneuve here. Personally, I'm not the smartest guy, I hate numbers, and hate calculations and formulas even more. I keep it simple and that is the reason that I make money doing this. I ask myself when I am all in, will this property cash flow? Am I going to clear $1000 month in profit after my expenses? For every property, I want to clear $1000 every month unless it is a single family house that will appreciate at a faster rate where I plan on making my money on the back end. All I care about is cash flow because cash flow allows you to grow. Im not worried about paying things down. I go through growth phases, and then I sit back and use the cash flow to eliminate debt. This way properties are consistently being added to the portfolio while others are paid off somewhat regularly. In order to do this though, you need to buy the properties right and they need to cash flow.
Now for my personal home, I took the exact opposite approach. Absolute shortest term mortgage offering the best interest rate possible. Personal debt only impedes cash flow where business debt can work in your favor AT TIMES.
This business isn't as complicated as people make it out to be, so why complicate it? I know a guy who is a millionaire in the tens of millions. Grew up poor in a section of Providence and never finished school. We are talking 50 years ago. This man can not read or write. He literally has to bring his wife to every single closing to read the paperwork to him so that he knows he is signing what he negotiated. This man has compiled a portfolio of commercial real estate that would rival anyone. He develops and owns shopping centers and dozens and dozens of Dunkin Donuts. This man does not know spread sheets, calculations, or formulas. He understands shrewd negotiation, money management, and cash flow.
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