Is SFR investing worth the return? An IRR analysis

Member since 2024 · 1k+ posts · 351 votes

Dave cool article but there are other benefits like ability to get Loans based on the STR etc which you can use to scale up.

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Bryan MaddexBusiness Member

Lender · Charlotte, NC · Member since 2015 · 160 posts · 76 votes

2y

I would suggest that 6% is too low which will likely make you lean further away from SFRs. Also, it is hard for many properties to cashflow with 20% down with todays rates if you do single family long term rentals.

Appreciation is likely on the low side for the coming years (with a massive inventory shortage across the nation).

Short term rentals are a way to increase cashflow, but more and more markets are saturated with STRs which has eroded this strategy. There are plenty of CASH COW properties out there tho.

Single Room Occupancy (SRO) or PadSplit / CoLiving are able to make a ton of income, especially if you modify the house with a couple extra bedrooms.

I am not experienced with multifamily syndications but will be exploring them a bit more now. Thank you for putting this together!

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Randall AlanPro Member

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

2y

@Dave Vona

I understand your disclaimers as to your process (only looking at IRR)… but isolating one factor really does you a disservice as to how to invest.

I’ll just start out by saying I’m not a fan of syndications and own a number of single family rentals just to mark my position from the outset; but the answers as to “why” may provide enlightenment to you, so I will throw a few out for your consideration.., some of which you mention, so it seems you must be aware of them.

As an investor, your goal is typically to maximize your return and minimize your risk. In single family real estate you do this by choosing an investment that will perform and then using insurance to protect it. There is really no risk of you losing your investment as long as it is insured and you do your job as a landlord … fill the property, collect rent, maintain it. If you financed your investment it was likely with a fixed rate loan.

Syndications start off with a lot of unspoken ifs… if we can force appreciation, if variable rates don’t go up, if no unexpected surprises as to the estimates we based our proposal on, etc.

To me, the biggest flaw in the single point IRR analysis is to ignore the risk of being a passenger on the bus with a syndication in the first place. You are surrendering not only control of your money, but also any directional control of the investment as well… like the ability to exit the investment when you want to. Sometimes it's surrendering the ability to get your money back at all… see this thread on Norada Capital

https://www.biggerpockets.com/forums/960/topics/1196567-nora...

Unrelated to any investment I have made or even real estate, I have watched both my parents fall victim to clever marketing scams where they lost a combined 6 figure sums - both from in person marketed investments… so not something like a phone scam… but was a private placement “opportunity” not unlike how a syndications are offered, where management siphoned off investor money and used it for their own purposes. The only reason I mention this is to say - you can never really know who you are dealing with in an investment like a syndication. Private placements are inherently risky by that very fact - they are not regulated or audited to the degree that a publicly traded company is. If someone rigged the game before you even came on board you are along for the ride. Management is free to make whatever decisions they think are in their best interest… hopefully that consideration extends down to the LPs, and usually they do. But where there are large sums of money present, there is opportunity for decisions to be made that are not in the best interest for the LPs - and given the distance LPs are from a typical investment - you are at the complete mercy of the GPs as to what you know or learn about your investment. Those risks do not usually exist when you own single family rentals - there is no one between you and your investment. You can exit it when you want to. You control the investments that go into your property. You receive all the profits - but are also responsible for any failures you may run into. Personally, I need that level of control to feel comfortable investing relatively large sums of money and is thus the reason why I’m not a fan of syndications.

my 2 cents….

Randy

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Ian IppolitoBusiness Member

Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes

2y

Quote from @Dave Vona:

Hi, I'm trying to decide whether I continue to actively invest in single-family (or small multifamily) long-term rentals or invest with a multifamily syndication. I decided to run IRR (Internal Rate of Return) calculations for the SFR (single-family residence) investing in order compare with the IRR targets I see proposed by syndication operators.

The target rate I often see on syndication sites is around 15-18% IRR (and sometimes higher for new development projects). This includes some amount of cash flow and then a larger payout once the property is sold or refinanced after X number of years. My intention was to see how this rate compared to the IRR of a SFR investment using several property assumptions and different purchase models.

Based on my calculation, I was surprised to find that the IRR on a SFR was not as high as I expected, especially if held for the longer-term.

I realize there is more to an investment than just the return. Most investors will also take into consideration risk, time invested, control over the asset, the ability to do a cash-out refinance, and other factors. However, I wanted to focus on just IRR for this analysis.

Please note, I did not include the tax benefits from deprecation. From my understanding the 15-18% IRR promoted by syndicators generally does not include these tax benefits either, so it is still a fair comparison.

Assumptions
I had to make a few assumptions about the property and mortgage interest rate:
Property value = $180,000
Rent = $1680
Mortgage Interest Rate = 6%

I also made assumptions related to other costs such insurance, taxes, property management, maintenance, capital expenses and vacancy. Both rent and expense growth was set at 2%. For simplicity, I did not include closing costs or loan points in the purchase price numbers, but did include a fee of 10% of the sale price to cover closing costs, commissions, and minor repairs.

Models
Below are two tables showing the IRR for the traditional rental, using a 20% down payment, and the BRRRR models using a 75% LTV loan. My models only go down to 80% market value (i.e. a 20% discount) since this seems like a reasonable goal for the "average" investor in 2024. I compared a 2.5% and 5% property appreciation rate at 5-, 10-, 15- and 20-year intervals. The IRR is assuming there was an initial investment amount, some cash flow each year, and then a sale of the property in the year indicated.

Traditional SFR rental using 20% down

BRRRR using 75% LTV loan

Observations:

1. In nearly every case, the IRR continues to decrease the longer the property is held even though the cash flow is increasing. This is because the earlier years see a large jump in IRR due to the leverage used, however this effect diminishes in later years.

2. After 20 years, the 5% appreciation rate use-cases only make a difference of roughly 2-2.5% in the IRR.

3. After 20 years, only the 80% BRRRR use-cases offer greater than a 20% IRR.

Questions

1. Is it worth investing in SFRs for a part-time, non-professional investor? Unless you're able to consistently purchase properties at a 20% or more discount using the BRRRR strategy, the longer-term IRR is going to be under 20%. A consistently higher appreciation can make up for a lower purchase price discount, but 5%+ appreciation for 5-10 years is typically not the case in markets that offer some amount of cash flow.

2. If you do invest in SFRs, is it better to hold the properties for a shorter period (less than 10 years) to increase your IRR?

3. If the IRR is not greater than 20-25%, which applies to most of the above models over the long-term, are you better off investing in a syndication which is much more passive than buying and managing a portfolio of SFRs?

Please let me know your thoughts on my analysis and any comments you have on the SFR vs syndication investing questions. Thank you.

Dave,

First, I have 7 figures invested in both single family rentals and syndications (i.e. crowdfunding). And I personally believe both have their pros and cons and neither is the 100% superior to the other (and I like having both in my portfolio).

Having said that, there are some issues/problems with your comparison.

The range of IRR's syndication/crowdfunding deals is much wider than just 15-18%.

Generally there is a higher projected return for taking higher risk. And generally there is a lower projected return for taking lower risk.

So for example if you were investing in a core real estate strategy ( one of the safest) it would be nowhere near as high as 15 to 18% IRR (and closer to 5-8%). And as you mentioned, you can also pick higher risk deals that have higher IRR.

So you're not really comparing apples to apples here.

Also, most likely the syndication/crowdfunding deal you are comparing to is a completely different real-estate asset class than single family (i.e. probably multi-family,office, self storage,mobile home parks or something else).

If so then each real estate asset class has different risks. And if that's not taken into account, then it's also not an apples to apples comparison.

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Evan Polaski

Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes

2y

@Dave Vona, there are a lot of challenges here in comparing the two.

I have invested in SFR and syndications, granted syndcations only started about 4 yrs ago, where SFRs were 14 yrs ago.

The biggest challenge in comparing these two, from a very technical aspect, is you are using syndicators 15-18% projections on value add properties (and the rent increases that can come with them) versus a more turnkey approach.

So let's look at most syndicators in the value-add space and for completed deals:
I would say, many groups hit roughly 25% IRRs for their LPs, often with a roughly 2-3 yr hold. You are looking at 5-20 yr holds. As you show, shorter hold = higher IRR.

Most will project an initial rent bump in the 15-30% range after their renovations, then show annual increases of 3-5% thereafter, while underwriting expenses to grow at 2-3%. You are holding expense and revenue growth the same.

So at the end of the day, you are putting in very generic assumptions in your SFR model, then comparing to broad syndicator returns, which have vastly different assumptions. If you control for similar assumption theories in your model relative to "typical" value-add syndicator, you will likely see higher returns from SFRs.

Randall lists a lot of risks that come with with syndication investing versus direct ownership. And that is true, but that is also sort of like saying "to mitigate the risk of investing in Apple, and relying on their decisions, I will start my own tech company" (okay, that is a bit extreme, but you get the idea). And there are syndicators out there that have long, strong track records, that spend more time operating than marketing, that aren't selling their guru courses and the syndications are just social proof as to why you should spend $30k on their course.

But the flip side of this risk is time. The more hands off you become in single family rentals, the more they start to look like syndications, i.e. trusting wholesalers or realtors to send you deals, buying based off their packages, hiring management companies and trusting them to do everything correctly, etc. Just like syndicators, there are a lot of good realtors and management companies, but if you are susceptible to their marketing and don't do your due diligence, you will also learn that there are a lot of people in these professions that are more in it to close a deal versus make sure you get a good deal.

While my syndication experience has been mixed, it is a very different approach than single family rentals.

To answer your questions:
1. Both are for full-time professionals. Owning rentals and managing (asset or property) requires a hands-on approach. SFR PMs are notoriously bad. I had to review and argue expenses almost monthly on my financials. Syndications, on the other hand, require a different type of DD. You need to understand deal dynamics, sponsor's approach, etc.

2. If IRR is your target, then early exit is always best. IRR is not really relevant for flips, because time lines from purchase to sale are typically about 6 months, or less, but even average flips are going to be well into the 30s IRRs on all cash deals, and even higher if financed.

3. This is clearly personal preference, and a bit about contingent on your point of view on where market is going. I think MOST multifamily is still overheated. While cap rates have risen, you are still seeing groups buying in the low to mid 5%s for 70's-90's product. The assumption is rates will come down, bringing cap rates with it. I personally believe rates will slowly come down to long-term historic averages in the mid-upper 4% range, but I don't think cap rates will compress much under 5, and that is going to be for the best product in the best locations. Why? Finance 101 states debt is only used when it can create larger returns than the interest cost associated with that debt. If rates are 4.75%, and the deal is not generating at least 5% in-place yield, it is better to buy cash.

Additionally, rates will come down because job market softens. Soft job market means tenants are pinching pennies. You are seeing it already, the nicely renovated units are having to compete on price with vintage units, because we are in a market where a lot of people are worried about their job prospects, not anticipating getting raises, on top of groceries costing 30% more than they used to. All of a sudden, those quartz countertops are not worth the extra $200-300 more per month.

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V.G JasonPro Member

Investor · Member since 2022 · 3k+ posts · 3k+ votes

2y

The IRR only view is just too simple and other assumptions are too generic.

The reality is you always want your money sort of levered with assets against the USD. Ideally, in the 20-40% range. Enter real estate as a form of an asset.

Real estate steps into the factor with two forms of strength: scarcity & utility. Real estate values come with value-add and location. And real estate risk decreases with control and location. Syndications you lose full control and are significantly more risky by that notion.

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Dave VonaPro Member

OP

Real Estate Investor · Centennial, CO · Member since 2015 · 106 posts · 38 votes

2y

Thanks for all your feedback. I know my model didn't take into account every factor. It just seems that with all the work and risk involved in finding your own property, managing contractors, and then finding and managing the property manager, the return on the SFR investment should be signifcantly higher than the syndication. The 80% BRRRR scenario was much higher, but those deals not easy to find and implement anymore.

@Randall Alan

I agree that you really need to do your due diligence on the GP prior to investing in a syndication. There are both dishonest operators, as well as incompetent ones, that could lose your entire investment. However, there are also syndicators with a great track records and reputations (Praxis and Ashcroft are a couple operators that I’m aware of).

The reason I did this analysis is because my two SFR rentals are not doing well. I'm losing a lot of money, which I partly blame on my inexperience and partly on my property manager. I feel that inexperience on the investor's part can be a risk in either SFRs or multi-family syndications.

@Ian Ippolito

Thanks for pointing out that syndications have a wider range of IRRs. I haven’t really taken into account risk-adjusted returns. I really like the idea of investing in both SFRs and syndications, if I had enough time and capital to do that.

@Evan Polaski

My SFR model did include a 2% annual growth for expenses and for rent. And even with increasing rents each yearr (and appreciation), the IRR trends downward.

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Ian IppolitoBusiness Member

Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes

2y

Quote from @Dave Vona:

Thanks for all your feedback. I know my model didn't take into account every factor. It just seems that with all the work and risk involved in finding your own property, managing contractors, and then finding and managing the property manager, the return on the SFR investment should be signifcantly higher than the syndication. The 80% BRRRR scenario was much higher, but those deals not easy to find and implement anymore.

@Randall Alan

I agree that you really need to do your due diligence on the GP prior to investing in a syndication. There are both dishonest operators, as well as incompetent ones, that could lose your entire investment. However, there are also syndicators with a great track records and reputations (Praxis and Ashcroft are a couple operators that I’m aware of).

The reason I did this analysis is because my two SFR rentals are not doing well. I'm losing a lot of money, which I partly blame on my inexperience and partly on my property manager. I feel that inexperience on the investor's part can be a risk in either SFRs or multi-family syndications.

@Ian Ippolito

Thanks for pointing out that syndications have a wider range of IRRs. I haven’t really taken into account risk-adjusted returns. I really like the idea of investing in both SFRs and syndications, if I had enough time and capital to do that.

@Evan Polaski

My SFR model did include a 2% annual growth for expenses and for rent. And even with increasing rents each yearr (and appreciation), the IRR trends downward.

You're welcome.

Thanks for explaining the background and now I completely understand why you're looking at syndications/crowdfunding sponsors.

Definitely one of their advantages is that (...assuming you choose well) you can hire someone who will avoid the rookie mistakes so many new investors make when owning property on their own...and has years more of experience and expertise than you could ever acquire.

Best of luck to you.

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Stuart UdisPro Member

Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes

2y

IRR calculations will always benefit the shorter round trip investments, so not the best deal metric to focus on. I would like to focus on the SFR investment strategy. Despite its popularity, very few actually understand the asset class and how to achieve optimal returns. I also recognize there are different motivations behind SFR investing. For instance high net worth investors may want "A" location homes for tax benefits and wealth preservation. For the purpose of this exercise lets focus on the other 99% who invest in SFR homes which is for the highest yield outcomes. Here's the breakdown of the 99% SFR investors:

1. Investor buys in a market that has poor fundamentals and is stagnant. Normally those who invest in these neighborhoods are hyper focused on completing the BRRRR method, cash flow or acquiring as many doors as possible. These investors never experience meaningful appreciation, achieve inconsistent cash flow & loans are slowly paid down with most moving on from the asset before any meaningful debt paydown occurs.

2. Investor buys in a market that has fundamentals that suggest the neighborhood will experience a more significant appreciation event but investor sells prematurely.

3. Investor buys in market with the correct fundamentals and experiences a sudden and significant appreciation bump. This normally occurs in a short window of time when the neighborhood experiences the most significant changes and home ownership increases. Thereafter the appreciation levels off to more normalized rates. Investor sells immediately after the sudden appreciation event.

4. Investor buys in the example 2&3 market, but continue to operate the rental after the appreciation event occurs rather than sell and re-invest in an asset that will generate a better rate of return on your equity.

These are the possible outcomes for 99% of SFR investors. Most fall under category 1, followed by category 4, then 2 and finally category 3. Those who fall under category 3 achieve best results but they are an extreme minority. If you happen to fall under category 3, chances are you will hit a home run and out perform LP investments in syndications by a wide margin. Identifying the fundamentals to achieve the investor 3 result is not difficult but very few understand this should be the goal of a SFR investor.

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Evan Polaski

Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes

2y

@Dave Vona, I understand that you are increasing both rents and expenses. My point was: when you grow both by the same percentage, you never create actual efficiencies in operations. Your expense ratio remains flat, and therefore doesn't really create much value in the deal.

Compare your 2% rent and expense assumption to what most syndicators underwrite: 5% rent growth after an initial renovation bump; and 2-3% expense growth; and you get vastly different outcomes.

As to whose assumptions more closely tie to reality is to be determined, but if you used assumptions more in line with what syndicators are using, I think you will find the return projections narrow dramatically, if not flip to SFRs.

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Dave VonaPro Member

OP

Real Estate Investor · Centennial, CO · Member since 2015 · 106 posts · 38 votes

2y

@Stuart Udis

Thanks for breaking down those different buy and hold options. They are very nuanced perspectives that I hadn't really considered. So far, I fall into option #1, trying to BRRRR and not really looking at the neighborhood fundamentals. If I decide to continue with SFRs, and not syndications, I think I need to look more closely at the approach #3 that you describe. As you noted, that will provide the best return compared to other SFR strategies. At some point, when pure cash flow is more important, then looking at a longer buy and hold strategy may make sense.

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Dave VonaPro Member

OP

Real Estate Investor · Centennial, CO · Member since 2015 · 106 posts · 38 votes

2y

Quote from @Evan Polaski:

@Dave Vona, I understand that you are increasing both rents and expenses. My point was: when you grow both by the same percentage, you never create actual efficiencies in operations. Your expense ratio remains flat, and therefore doesn't really create much value in the deal.

Compare your 2% rent and expense assumption to what most syndicators underwrite: 5% rent growth after an initial renovation bump; and 2-3% expense growth; and you get vastly different outcomes.

As to whose assumptions more closely tie to reality is to be determined, but if you used assumptions more in line with what syndicators are using, I think you will find the return projections narrow dramatically, if not flip to SFRs.

Evan, I see what you're saying. I agree, if I was able to get higher rent growth then the SFR IRR would be much higher than the syndication. When doing a BRRRR with an SFR, the rents are increased from the pre-rehab standpoint, but I've already built that rent number into my calculations. After that, I'm usually relying on the market to increase rents. If I can purchase properties in the right neighborhoods, then I could possibly see the higher-than-average rent growth.

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

2y

@Dave Vona

hello. very detailed and thoughtful post. i know you said this post was about IRR only, and you recognize that there are other factors involved in choosing a strategy, like control over the asset. I think those are critically important. but i'll throw something out along the 'return' lines.

one of my personal goals is to minimize capital outlays on all RE purchases. so i only BRRRR or buy on seller finance. period.

with a seller finance purchase, you can minimize any up front outlay. and with a BRRRR, if done correctly, as you know, you get all my capital back. there's no 'cash flow' in a BRRRR right now - what you get is the equity you've forced.

i couldn't be less interested in contributing $X, waiting several years, and hoping i get $X back plus a return on top of that. but YMMV.

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Dave VonaPro Member

OP

Real Estate Investor · Centennial, CO · Member since 2015 · 106 posts · 38 votes

2y

@Nicholas L. I appreciate your input. Yes, seller financing is another approach to reduce the amount of cash invested, which pushes up the total return (or IRR). I guess I looked at this as more of an advanced strategy. If I can learn to market to out-of-state home owners, I can then see if any are interested in seller financing (or subject-to) type sales.

You commented, "i couldn't be less interested in contributing $X, waiting several years, and hoping i get $X back plus a return on top of that. but YMMV." Are you referring to a syndication? There are some multi-family syndications that offer cash-flow prior to the refi or sale of the property at end of the hold period.

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Nicholas L.Pro Member

Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes

2y

@Dave Vona

yes, I think seller finance is a more advanced strategy. it took me a few years, but i finally found some deals and i am working on a strategy / buy box for more.

yes, good point on syndications - definitely there can be cash flow as you noted. still, though, with a syndication you're just turning money into (hopefully) more money. with SFRs and smaller deals, you have control of the asset. but that just moves away from your question, which was more about return and less about the other factors.

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Mike H.

Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes

2y

I'm not as familiar with IRR and syndication returns. I'm assuming that if you're saying their return is 15 to 18%, then if you put in 100k, you'll end up getting 75k back in 5 years when they sell and all their payouts and the sale is returned?

But here's the thing. If you buy a sfh rental right (70 to 75 percent LTV), you should be all in at next to nothing after you refi. If thats the case, how can you possibly compare the returns on rental property to anything? Nothing comes close to being infinity does it?

Here's what I can tell you. I started with 43k heloc back in 08/09. I kept buying, rehabbing and holding the homes until just about when covid hit when I started selling. I was up to 83 homes. Never flipped/sold a one until covid. Now I did refi a few to pull money out to help my growth along the way.

But essentially I turned a 43k heloc into a portfolio that, had I not sold any properties would have been worth well over 16million dollars with loans of close to 7million. So that 43k turned into 9 million dollars in net worth. Granted. thats net worth and not actual cash. And it required a lot of time and effort on my part whereas the syndication stuff is purely passive.

But there's no way anybody can tell me that sfh rentals - if they are bought right at 70% ltv or better - are not going to return way more than anything else on the planet when you factor in how little money you actually have to put into them to begin with and then you let appreciation and principal paydown and rental profits pile up.

Oh by the way, up until i started selling, i hadn't paid income taxes on any of the rental profits for almost 14 years and even after I started selling, my carry forward losses covered everything up until last year when they finall ran out.

If you buy right, sfh rentals are the best long term investment you will ever make. Period. Its not even close.

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Chris Barrett

Investor · Madison WI · Member since 2021 · 177 posts · 103 votes

2y

Agreed with Mike. But to the OP, you're comparing two different things with different risk profiles. Comparing IRR of two different "products" isn't as helpful as comparing IRR to two different properties, for example.

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Michael Battaglia

Member since 2023 · 5 posts · 0 votes

2y

Quote from @Stuart Udis:

IRR calculations will always benefit the shorter round trip investments, so not the best deal metric to focus on. I would like to focus on the SFR investment strategy. Despite its popularity, very few actually understand the asset class and how to achieve optimal returns. I also recognize there are different motivations behind SFR investing. For instance high net worth investors may want "A" location homes for tax benefits and wealth preservation. For the purpose of this exercise lets focus on the other 99% who invest in SFR homes which is for the highest yield outcomes. Here's the breakdown of the 99% SFR investors:

1. Investor buys in a market that has poor fundamentals and is stagnant. Normally those who invest in these neighborhoods are hyper focused on completing the BRRRR method, cash flow or acquiring as many doors as possible. These investors never experience meaningful appreciation, achieve inconsistent cash flow & loans are slowly paid down with most moving on from the asset before any meaningful debt paydown occurs.

2. Investor buys in a market that has fundamentals that suggest the neighborhood will experience a more significant appreciation event but investor sells prematurely.

3. Investor buys in market with the correct fundamentals and experiences a sudden and significant appreciation bump. This normally occurs in a short window of time when the neighborhood experiences the most significant changes and home ownership increases. Thereafter the appreciation levels off to more normalized rates. Investor sells immediately after the sudden appreciation event.

4. Investor buys in the example 2&3 market, but continue to operate the rental after the appreciation event occurs rather than sell and re-invest in an asset that will generate a better rate of return on your equity.

These are the possible outcomes for 99% of SFR investors. Most fall under category 1, followed by category 4, then 2 and finally category 3. Those who fall under category 3 achieve best results but they are an extreme minority. If you happen to fall under category 3, chances are you will hit a home run and out perform LP investments in syndications by a wide margin. Identifying the fundamentals to achieve the investor 3 result is not difficult but very few understand this should be the goal of a SFR investor.

Stuart ,

I really enjoyed reading your reply to Dave. I’m a newbie, and your #3 scenario is the a type of investor I’d like to be. I know you said its the minority of people that get those results however, what would help me to learn in my research and education, on how to get there? I’ve been reading different book bigger pockets put out, reading forums and listening to podcasts , but just out of curiosity, do you have any other ideas for me to get to where I want to be ? in terms of my research and making those correct decisions. I just like the philosophy of buying and renting it out and holding in for a very long time I’m 46 years old I can hold from 10 to 20 years.

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Stuart UdisPro Member

Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes

2y

@Michael Battaglia The #3 scenario is not the minority because it's difficult, its the minority because very few who invest in SF homes truly understand the asset class. SF homes are an incredibly inefficient asset to own and rarely do they perform over an extended period of time like your spreadsheet suggests they should. My advice is to focus on the fundamentals of the real estate. From there ask yourself who will buy the home from you and for what reason? If the answer is another investor & you reasonably believe it will be an investor for the foreseeable future, you may want to reconsider whether it is a SF home you want to own as a rental.

Ironically most investors don't slow down to ask themselves that simple question but will prepare a multi tab excel spreadsheet justifying the reason behind purchasing the low barrier home that lacks fundamentals because it meets the 1% rule or is a good BRRRR candidate because that's what they are taught. Sometimes simpler is better.

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Dave VonaPro Member

OP

Real Estate Investor · Centennial, CO · Member since 2015 · 106 posts · 38 votes

1y

@Mike H. thanks for sharing, and congratulations on a very successful ~15 years of real estate investing. I agree if you can purchase properties at 70-75% ARV, that is going to provide a much better IRR than passive investing in MFH syndications.

The IRR takes into account all of the cash flows and the profit when you exit the property. It assumes that the cash flows are invested at the same rate as the IRR, which is not always the case, but it is one of the metrics used when assessing a syndication. You can see in my 80% BRRRR columns that the IRR does go way up because you would only leave a small amount of capital in the property. At a 75% LTV refinance, you're only leaving 5% of ARV invested in the property is purchased at 80% ARV.

I only ran the analysis down to 80% ARV because the investing environment has changed so much. The price-to-rent ratio has gone from a nation-wide average of 92 (in 2012) to 134 (in 2024). This affects whether a property will cash flow. The mortgage interest rates have gone from ~3-4% to 7%. And there are millions of more investors competing for the same deals. It seems that finding properties at a 25%+ discount rate, that can also at least breakeven on cash flow, has been become nearly impossible in most markets, unless it is a very rough neighborhood.

I'm just not sure I can find these types of deals in 2024. So I wanted to compare what seems realistic in this environment to the passive returns possible through syndications.

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Stuart UdisPro Member

Attorney · Philadelphia · Member since 2018 · 2k+ posts · 3k+ votes

1y

@Mike H. I believe its important to clarify the infinite return component of the BRRRR strategy. You have to sell the properties and generate a profit first. Simply achieving a 70-75% LTV appraisal and refinancing out your cash flow doesn't mean a profit will be earned. It seems you selected your markets wisely and have actually been able to realize gains when you sold. This is a stark contrast to most on BiggerPockets who are chasing the BRRRR method to "scale" and achieve infinite returns but instead buy in stagnant low barrier markets.

Perhaps they experience a few years of cash flow. However in many of these lower cost markets, cap ex can't be absorbed and one cap ex event is equal to 2-3 years of cash flow. Next, when they sell their properties they sell at a break even and sometimes at a loss because its difficult to achieve refinance appraisal results when transacting in arms length transactions in these lower barrier stagnant market. I believe this post summarizes this point quite well. Clearly the investor achieved a 70-75% LTV appraisal but he isn't making any money. Buying at 70-75% LTV alone does not mean you purchased the asset correctly or made a good investment decision. Quite possibly the single biggest misconception that gets investors into trouble.

https://www.biggerpockets.com/forums/311/topics/1216224-advi...

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Mike H.

Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes

1y

Quote from @Stuart Udis:

@Mike H. I believe its important to clarify the infinite return component of the BRRRR strategy. You have to sell the properties and generate a profit first. Simply achieving a 70-75% LTV appraisal and refinancing out your cash flow doesn't mean a profit will be earned. It seems you selected your markets wisely and have actually been able to realize gains when you sold. This is a stark contrast to most on BiggerPockets who are chasing the BRRRR method to "scale" and achieve infinite returns but instead buy in stagnant low barrier markets.

Perhaps they experience a few years of cash flow. However in many of these lower cost markets, cap ex can't be absorbed and one cap ex event is equal to 2-3 years of cash flow. Next, when they sell their properties they sell at a break even and sometimes at a loss because its difficult to achieve refinance appraisal results when transacting in arms length transactions in these lower barrier stagnant market. I believe this post summarizes this point quite well. Clearly the investor achieved a 70-75% LTV appraisal but he isn't making any money. Buying at 70-75% LTV alone does not mean you purchased the asset correctly or made a good investment decision. Quite possibly the single biggest misconception that gets investors into trouble.

https://www.biggerpockets.com/forums/311/topics/1216224-advi...

I'm not suggesting that buying at 700 to 75% ltv is a guarantee at anything. But if you're buying in a decent area (i.e. average schools, decent area, consistent appreciation even if its just 3 or 4% on avg), then you're going to do extremely better than 15 to 18%.

Here in the midwest, you might be a 3/2, 1,500 sq ft house thats worth 200k. If you can get it and be all in for 140k, you can refi and pull all your money out. AT a loan for 140k, you're looking at payments of about 900/mo. Taxes here in illlinois are pricey so add another 400/mo. Insurance 100/mo. Rents for that home are going to be 1800 to 2100.
You should net about 200/mo

Deprreciation would mean your rental income plus a little more of your regular income would be tax free. So your 2500 in income is actually worth about 3400 a year in taxable income (keep in mind that 15 to 18% return from syndication would be taxable income) Principal paydown would be about 1500 a year. And then appreciation should be 8k or so a year.

And oh by the way, you're sitting on 60k in equity right off the bat.

I don't trust giving my money to anybody and hoping they hit their numbers. They all are required to tell you that nothing is guaranteed. So while they take their management fees, their incentive to produce is nowhere near what I would like.

If you're buying at 70% ltv you're going to be hard pressed not build some real wealth. Again, war zone type areas or even areas with poor schools and dwindling populations would not fit the model. But you don't need to be in expensive areas either.

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