Please see - - my ROI seems low - -but real ?

Question

Hello, eventually I'd like to buy another 3-4  units - could be condo, could be single-family. The ROI I'm about to show, I feel is lower than what I see people talking about.  Lower than the average yearly stock market return.  Mind you, I'd still do it because I can't sleep having 100% of my nest-egg in the same asset class, especially when said asset class is paper stocks. Anyhow, was hoping folks would look at this and comment.    Say it's a Metro Area that is forecasted to have strong growth in coming years,  use Atlanta for this example, say - Kennesaw, GA, Single Family home, 3bed/2bath.  Price assumes rehabs are priced in, OR the home was just about turn-key ready:

Purchase Price:  $235,000

Monthly rent: $1700 per mo, $20,400

Expenses:

*Property Manager: $2,040

*Property  Taxes: $2,000

*Insurance:         $1,500

*Yearly Repairs:   $1,400 (calling plumber, A/C  guy, etc)

*Maintenance Accruals: $3,000 (replacing carpets, doing paint, replacing appliances. I'm hoping $3k per year does it. This means I'd spend $15,000 in 5 years, or $30,000 in 10 years)

*Vacancy:           $1,700.      (New tenant every 2 years. I'd miss one month's rent, + $1700 broker fee)

*Miscellaneous:   $500          (Stuff I haven't thought of here)

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NET yearly rental income: $8,260 divided y $235k purchase price=  3.5%

Appreciation: Avg 2.5% per year so in a 5 year example:

Selling price: $260,000 - $14,000 commissions and fees:  $244,000 net proceeds.

=Total 6% net appreciation in 5 years, so avg ROI of. 1.2% per year.

3.5% rent + 1.2% appreciation =.     4.7% Yearly ROI if held for 5 years.

I look on this , and feel ROI is low.....but -line by line those are the expenses so maybe it's realistic?

I feel that 2.5% is a realistic appreciation rate - much lower than the last few decades and - by most accounts, areas like Atlanta, Raleigh, etc are still expecting influxes of people, and homes under $250k don't seem to be the builders' number one choice because there's not so much profit in it.

Would really appreciate any comments or thoughts, thank you.

Kalim Kalla · Answer

Hey Mel, Based on this response I think you will find solid growth opportunities in some pockets inside the perimeter of Atlanta and one of my favorite areas for longer growth as you mentioned in VA would be Acworth, Canton, and those areas further N-OTP. These areas are seeing rapid growth and have a lot more land for the communities to grow. Inside the perimeter some of my favorite areas are 30318, 30311.

I focus on distressed deals and one of the things I do help my investors understand is that if you are doing a 40-50k rehab on a property, there shouldn't be any reason for you to spend 3k a year on maintenance or so. Nonetheless the conservative approach is definitely better but might not be super realistic for all deals and could end up killing your numbers in some situations putting you off from great cash flowing and CoC return deals.

John Powell · Answer

@Mel Park 2.5% is a little low on the appreciation. Rents and expenses seem to be inline with the Kennesaw Area. I think inflation is here to stay for a few years. I’m looking for properties that are in the path of progress, have numbers similar to what you are talking about but can also be used as short term rentals to significantly increase the income during the hold period and hopefully significantly out preform the market on the appreciation side too.

Jonathan R McLaughlin · Answer

@Mel Park hey mel just saw this. Essentially, yes. Those tenants "tend" to be easier if screened well. They may move, and they may call but it is less likely to be constant hassle. And that renter class is fine, in fact prefers to have, online rent collection. So what is a property manager actually doing other than this? Not too much, and I say that not to criticize. They take on liability, potential of hassle etc.

Establish a relationship with a credible handy guy, treat him well. Maybe a plumber in addition. Thats essentially what property managers with reasonably few units do. Get a maid service to clean the property during turnover in addition.

We have been targeting a similar space with purchases recently and its not just milennials who like it, its downsizing boomers, now the biggest renting group in America.

Jonathan R McLaughlin · Answer

@Mel Park if it’s a “b” and up rental consider having a handyman/repair guy on retainer instead of a property manager. Go to an online rental platform for the rent. I don’t think you give up much and it’s not a heavy lift at all. Can be a good deal both ways

Mel Park · Answer

@Jonathan R McLaughlin  I feel the same about Condo.  On this forum and others, I've seen some experienced landlords really strongly prefer detached single family and they site no HOA dues and no HOA problems as reasons.    The (2) units I've owned since 2012 are townhomes with an HOA and honestly - I've never had a problem, not once.  Do HOA dues come out of my profit? Sure - - - BUT --  I don't have to accrue money for a new roof, or exterior painting, or lawn care.    If I avoid condos/townhomes on my next 3-5 purchases, it would only be because  people say that detached homes appreciate better than townhomes and condos - - but the HOA/Condo concept actually appeals to me vis a vis maintenance.

Jonathan R McLaughlin · Answer

@Mel Park forgot to add  if its a condo..exterior maintenance likely taken care of by HOA. I mean what is there to do once you have a solid renter other than replacing the occassional appliance?

Mel Park · Answer

@Jonathan R McLaughlin

Thanks, that is in interesting idea. By "B", do you mean sound property, and creditworthy tenant, and if so I'd be assuming that there wouldn't be constant repairs, or trouble collecting rent?     As far as retainer for handyman - I guess that means just paying a guy a monthly fee, in return for him taking your calls first?  In that situation - do you just call a different person when you need plumbing or heating? Thanks

Mel Park · Answer

Thanks for chiming  John.   I'm also hoping my 2.5% appreciation is a tad low. If I take out extremes --  such as the 2008 crash, or this Covid skyrocket..... it still seems that 3.5-5% was and is realistic.  I see millennials - despite what we were told wanting homes - seriously wanting homes wanting them.  I feel many will have student debt, other expenses, and homes under 300k are a great match for them.  Also I look at new people coming to America. I can say with 100% certainty - home ownership is high on their list.  That, plus population increases in areas like Atlanta...heck, 2.5% is basically inflation. I'd love to be surprised down the road in a good way.

I want to devote a tiny part of my portfolio to speculation - no different than stocks. I want to figure out - whether its Raleigh or Atlanta....areas where there's *nothing* ....but in 5-7 years, the development will start.     My first company was in Woodbridge, VA in 1999 the town was known for pawn shops, body shops, 7-11s, graffiti.  Now -  there's a Wegmans, an Apple Store. Cripes, I can't even say 'Apple of Woodbridge' without grinning because I still remember how it used to be. Small houses were 80K in those days.  Then - in 2010 I finally had money to invest - but I figured I missed the boat because those houses were at 200k.  Well --  now those 200K'ers - are at 300K.

Houses are the first priority, my bread and butter if you will.  But I'd love find a promising area, and buy some residential lots or even commercial, and just know that those funds don't exist for me for awhile.

Mel Park · Answer

Yes, I'm sure people will offer that and I've seen similar listings on LoopNet, Crexi, etc and I guess it's either ignorance or cowardice on my part ----but I sort of don't believe it so I've never delved into it further.  What you say makes sense.... those ROIs they offer....are probably with everything optimal, and everything going perfect, no property manager fee, etc.   In business, I've never been the home-run hitter. Even at my apex-  I liked doubles and triples....but consistent and realistic. I think that same trait is following me into this new phase of life.   For me, the real estate would indeed be a source of income but not sole income. I like the hedge - in that it's bricks, not paper stocks. Also the depreciation - - part of my strategy is to have the real estate company legally earn zero profit ....lower my AGI, and that makes for favorable tax treatment in other arenas.

Please see - - my ROI seems low - -but real ?

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