Which calculator method to use for a SFR rental...

Question

I'm trying to pickup my first rental property in Cleveland and I've read a few Ohio forums including "Grading Cleveland Neighborhoods" - https://goo.gl/NP3hNE and it sounds like an "ok" rental market (at least 9 months ago when the thread was posted).

But doing the calculations, I'm not sure if using the Cash-On-Cash calculator https://goo.gl/ZsBYZD is the way to measure rentals. Or if using the Rental Calculator https://goo.gl/wuOr95 works for a Single Family Residence rental.

Should I be more concerned with:

1. The fact that I'm going to get 17.5% ROI strictly on the cash purchase (Rent / Purchase Price)

2. The 9% "Cash on Cash" ROI (using Rental Calc)

3. The fact that it does not meet the 2% rule (only 1.38%)

4. It has a paying renter so I should be happy regardless :)

Here's the Bigger Pockets report https://www.biggerpockets.com/calculators/shared/9... on this property:

4492 Parkton Dr Warrensville Heights OH 44128.

Price $61,000 - existing renter is currently paying $890 monthly.

Advice graciously accepted...

Justin R. · Answer

@Kevin Ely You should be most concerned with #2.

The reason B&H real estate is attractive is because you can safely leverage.  In that market, the problem is that you have plenty of downside risk, but little upside potential ... to compensate for that, you should be looking for higher CoC returns by leveraging your cash.

However, the bigger thing I think you should be concerned about is the logo on the top left of the report you pasted.  Any time there's a house that recently had construction done - especially construction done by someone who's going to flip the house to you (and who's profit is determined by how little work they do to the place), you need to be very, Very, VERY sure of the quality and depth of construction.  It's way too easy to put in new cosmetics and ignore everything behind the walls and in the closets that needs updating.  I would personally *never* buy a home flipped by someone to an OOS investor unless their reputation was sterling or I inspected it myself.  Too much risk.

Thomas S. · Answer

@James Wise

"That is a 8.75% return"

A 8.75% return on a cash purchase is deplorable. I consistently earn higher than that on mutual and other income funds.

What this is showing is that the property itself is earning nothing on it's own and that your cash, which is creating 100% of the returns, is under performing. That is deplorable results and indicates that the property is a liability that you would be farther ahead not owning.

With those numbers as a average for the area it is not worth investing in income properties with cash. Actually it is rarely advisable to invest in real estate with cash based on there being easier more passive investment vehicles available.

James Wise · Answer

1st thing you should do is toss out the 2% rule. In today's market conditions that is not something that is achievable. Were we hitting that number (& higher) in 2013, & 2014 yes. 2018 no.

Next it's very important that you understand in the rental business there are an unlimited amount of variables at play at all times. People want to do calculations on their spreadsheets till they are blue in the fact. Spreadsheets don't rent properties, tenants do. & tenants don't read your spreadsheets!

When you break down numbers it's gonna be a reasonable average. For example that house you are looking at. $61k with a rent of $890/mo. In my experience you can reasonably expect to net about $5,340/year on a cash purchase. That is a 8.75% return. However you can find things priced a little better in Garfield Heights or Euclid. Both of which I consider to be a nicer area than Warrensville but it's all pretty similar. At that point you are just splitting hairs. Because you WILL NOT make exactly $5,340 every years. Some years you'll do better, others you'll do worse. That's just a reasonable assumption of how much one can make on average over the long term with a portfolio of many similar properties. It would be impossible to narrow it down any further than that given the nature of this business.

Don Petrasek · Answer

@Kevin Ely  I'm in Cleveland but work on the other side of town so don't have a lot of current knowledge of Warrensville Hts - I know it as solid blue collar neighborhoods but you need to screen well.....@James Wise who created the grading neighborhoods content that you referenced (which is the best description I've ever seen of the Cleveland market) I'm sure he can give you an up to date assessment...

Your calculations look good.  $890 could even be a little on the low side- I'm getting $925 for 2 houses I have in similar neighborhoods on the west side and the last house I had available was rented in less than 2 weeks to strong tenants.

Looks like you have some rental experience so I'm sure I'm not telling you anything you don't already know but I'll say it anyway:   Having a paying renter is great, but I'd get the application they filled out and do a background check yourself.  I focus on 1) making sure they have verifiable monthly income from a stable job that equals 4x monthly rent (gross income) + 2) no history of eviction (at all even 10 yrs ago is a show stopper for me) or recent judgements >$2000 (the concern is that they're going to get garnished eventually).  Forget about credit reports/scores, you'll rarely see good ones in these areas.  You can look for evictions and judgements via public records which are easy to access here.   I've seen too many people buy houses with tenants included and almost immediately get into trouble....

To me, the bottom line return is what's important (Cash on Cash).  There's no magic return threshold, it depends on the risk.  Keep it simple.  Same way you'd evaluate dividends on a stock.  The numbers and assumptions in your report all look good - so my opinion is that 9% is a good estimate of the return.  The risk is that you wind up switching tenants more than about once every 2-3 years and take a couple thousand dollar hit each time you do so or have a major repair too soon.  Just like the risk with buying a stock with a 9%, 10%, 11% dividend is that the company can't sustain it with revenues.  The thing I like about real estate is that I have the ability to directly manage the asset.....which lowers the risk vs other investments.  plus you get the benefit of depreciation (which I don't think is included in your calculations).

The key for this property is management/oversight.  Its not a set it and forget it neighborhood......

Hope this helped.  Good luck.

Eric James · Answer

Aren't there easier ways for you to get a 9% COC return?

Rob Gillespie · Answer

Hey Kevin,

It may sound over simplified, but I take gross annual rent and cut it in half and that is the NOI. It is the most accurate way I have ever used on SFH rentals.

With that said, I am not saying the other methods are wrong, but the 50% rule is pretty good

Dan H. · Answer

This is already stated/implied by other posts but the average S&P 500 return over the last 90 years is just under 10%.  S&P 500 is definitely less effort.  Even using PM rentals take time/effort.

I would not choose to invest in buy n hold for that expected return or even if it was a little higher return.

I realize that the entry cost is high in San Diego but the historical ROI on financed buy n hold is significantly greater.

Good luck

Tom Ott · Answer

What is the condition of the property? You can get a much higher rent in Warrensville if the property is actually fully renovated. The price might go up, but you should still be able to hit the 2% rule in that area.

Good luck!

Kevin Ely · Answer

if a 9% ROI after monthly expenses is what you get as opposed to 17% before expenses, is that what is considered a good deal in your eyes?

Kevin Ely · Answer

I failed to mention I'm in San Diego relying solely on the property mgmt company to help. There is a good book someone mentioned about long distance renting....

@Tom Ott - the property is in good rent-able / habitable condition with recent carpet, paint etc.

@Eric James - yes I thought the same thing, but not sure where to get 9% CoC besides mutual funds and RE (Vegas, etc)

@Don Petrasek - I have zero rental experience - hence my apprehension to picking up this as my first rental.

@James Wise - I wanted to hear that the 2% rule is just that - a rule and rules sometimes can be broken and STILL be a good investment.

Which calculator method to use for a SFR rental...

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