I thought it may be useful to some of those in the bigger pockets community who are new to investing in RE to share some actual data from “C” class properties.Given all the discussion around projecting returns from buy & hold real estate (eg 50% rule, how much to allow for vacancy and maintenance etc), sharing hard data may prove helpful for some investors.
First some background. My wife and I are small scale foreign national investors from Australia. We started investing in the Metro Detroit market in 2011 given the strength of the $A at the time and weakness of the US housing market. Our aim was to build up a level of passive income for financial independence / security. For those who don’t know, the Australian residential property market generally offers very low rent ratios (say around 0.3% or 0.4% per month), making it difficult to build up passive income.
We have built the portfolio up to 5 houses since then, having bought 6 houses and sold 1. Our 5 properties are as follows:
Eastpointe 1 – Bought and rehabbed in 2012 for about $US36,000
Royal Oak CC – Bought and rehabbed in 2013 for about $US44,000
Eastpointe 2 through 4 – bought in one line at the end of 2016 for $US 165,000. They were purchased having been rehabbed in the prior years and with no major deferred maintenance.
Essentially going into the 2017 year the portfolio represents a group of houses that have 3 or 4 years of “wear” on them after a rehab process.
The results were as follows (by Property)
|Royal Oak CT||$10,800|
|Total Property Income||$56,319|
|Royal Oak CT||$6,475|
|Total Property Expenses||$32,357|
|NET PROPERTY INCOME|
|Royal Oak CT||$4,325|
|Net Property Income||$23,962|
Alternatively here is the result by expense type (and compared to budget):
|Budget||Actual||Actual to budget|
|Utilities, Legal Fees, Other||$-||$2,435||-$2,435|
Finally, here is an average breakdown per dwelling:
|Per Annum||Per Month|
|Utilities, Legal Fees, Other||$487||$41|
A couple of points re the above numbers:
-We had nil vacancy over the 2017 year.We also had some back rent which got paid. The result was that we actually received above 100% of potential rent.Our total maximum rent should be $4,420 / month or about $53k pa. Needless to say this is an amazing result and will not be repeated.
-There was a mix up on taxes between us and our property manager, meaning that we had to pay some of the prior year’s taxes in 2017 – this pushed the tax expense line up.
-The Royal Oak Charter Township property had a very bad year in 2016 with tenant issues. Some of this bled across into 2017 as utility bills had to be paid from the vacant period. Also one of the Eastpoint properties has us paying about $60 / month for water under the lease, which we hadn’t budgeted for.
-I think we have a very good property manager.
Please note that this likely represents an above average year – due to no vacancy / turnover. If one house had gone vacant (say average rent of $900 / month) then the impact may have been:
-Lost rent $900 (assuming can get tenanted in one month, which would be a great result)
-Re-letting fee $900
-Utilities, mowing / snow clearing during vacant period – say $300
-Repairs prior to re-let – say $1000 (could easily be much more)
-Total cost, say $3,000.Could be more, especially if the tenant turning over was because of delinquency. By way of example, when the Royal Oak CT went delinquent there was nearly $5,000 in repair, utility and legal costs, before consideration of lost rent.
I hope new investors find this data useful in their deliberations.
@Andrew Warner - Thanks for sharing these figures and your experience. I think these kind of posts are invaluable for the newbie investor and those considering high risk / high cash flow markets such as this.
I owned 4 properties in Detroit for a few years up to 2016, and was planning to add more- but eventually decided to exit this sector, after trying extremely hard to make it work . I came to the conclusion that these kind of properties cannot provide the cash flow I was looking for, considering the risk and the time intensive management required long distance.
If you have a great PM- hold onto them dearly- they are rare in Detroit and are all the difference for absentee landlords like us. I went through 3 different PMs during my time in Detroit and they all ended in disaster of one kind or another.
A few comments/queries on your figures-
1. If I understand correctly you are all in for 245K and had a net income of 24K giving approx 9.7% return. That looks pretty good on paper but as you mention it was an exceptional year for you. Would be of interest to know what your previous years returns were. ? What is the average ? I would hazard a guess that if it is more around the 6-7% return you are doing well. What would also be interesting to know would be how much time you spend on these properties and "managing your manager"
2.I may be wrong but I dont see any Capex allocations on the expenses side. Capital expenses will come one way or the other and with these houses they are critical. One roof replacement can cost 25% of the value of the asset and easily wipe out a full years profit.
3. Do you have any indication as to capital appreciation- if any ? From my experience with these kind of properties the capital gains are often non existent.
Thanks Saul L - It is so easy to fool yourself as a new investor that these properties will generate very high returns on paper.
To clarify, our properties are in suburban Detroit (Eastpointe and Royal Oak Charter Township), not inside the city limits proper, which I think is slightly better. Appreciate your comments on our PM - yes I think we got very lucky there (although this is our second manager). Re your queries:
1. Yes it is a good return on paper for acquisition cost. I don't have my previous returns to hand, but they would be no where near this good. Vacancy and turnover are an absolute killer. I am not sure but wouldn't dispute your number of 6-7%.
Re our time managing the properties, it varies. Once a month we get statements which my wife punches into a spreadsheet - this then generates a series of queries (eg why were charged this much for....). Then there are ad hoc queries relating to annual income tax, if a house goes vacant etc. I would guess about 3 hours a week, on average, but with great variability.
2. You are correct there are no capex provisions in these numbers, they are the actual cashflow for the year. Having said that the rehab cost for the two houses we rehabbed was $16k each in 2012 and 2013 (from memory one included a roof, which I think cost about $5,000) and we have had no major capex items since. Having said that the costs of fixing up the Royal Oak CT property after a difficult tenant was nearly $5k.
Nevertheless your point is valid - we don't make much out of each house, so any problem is a big chunk of profit. I think one of the key errors many investors make is to scale maintenance / capex to revenue. I think they should be a relatively fixed dollar amount - replacing a hot water heater should cost much the same regardless of the rent being earnt.
3. I think there has been some appreciation. I would peg these houses now at $60-70k each on average, but its hard to tell. We would have got higher appreciation in the better markets within metro Detroit - eg Ferndale or Royak Oak or Grosse Pointe.
Thought I would post another year's data. Same 5 houses, with 2017 and 2018 comparison
|Net Revenue||$ 56,319||$ 53,140||-$ 3,178|
|Management Fees||$ 6,636||$ 6,118||$ 519|
|Insurance||$ 3,939||$ 3,015||$ 924|
|Taxes||$ 12,092||$ 8,579||$ 3,513|
|Repairs, inspections||$ 7,255||$ 4,193||$ 3,061|
|Utilities, Legal Fees, Other||$ 2,435||$ 432||$ 2,004|
|Profit||$ 23,962||$ 30,804||$ 6,842|
...and on a per dwelling basis
|Per Annum||Per Month|
|Management fees||$ 1,224||$ 102|
|Insurance||$ 603||$ 50|
|Taxes||$ 1,716||$ 143|
|Repairs, inspections||$ 839||$ 70|
|Utilities, Legal Fees, Other||$ 86||$ 7|
|Profit||$ 6,161||$ 513|
So much better than 2017 (a year we were still very happy with). A couple of points:
- No vacancy, no turnover - we are having a very good couple of years on that front...property manager seems to be doing an excellent job.
- Tax cash cost is down, but that is in part due to paying more than a year's taxes in 2017. Conversely in 2018 there was a Winter tax bill which will now fall into 2019...so I think the tax position appears a little better than it really is on a proper annualised basis.
- Repairs way down, which is really pleasing. This is probably linked to tenant tenure and good property management.
- No major capex - at some point this will come due (eg new rooves), but is not hurting us yet.
Hope some potential investors find this useful.
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