ROI of 4% too low in Riverside ?

Question

Brent Coombs · Answer

@Peter Bui, only $4,800 per year to cover vacancy, repairs and cap ex? (Seems too low to me). Also, will you actually be able to lock in 4.3% fixed interest for 30 years - for an investment property? Also, who's getting paid to Property Manage? Even if you're doing it all yourself, it's not passive, so you should allow about 10% deduction from the Rent.

Lastly, are you sure you're only up for 2% closing costs? Just askin'...

Vinci S. · Answer

@Peter Bui DM me when you get a chance. I've got some experience with renting to students here in Riverside.

Josh Dillingham · Answer

@Peter Bui those are some pretty small margins.  one month of unexpected vacancy or one cap ex item could wipe out your cash flow for an entire year.  It sounds like you may be emotionally attached to this particular property which can be dangerous.  if I were going to make less that 6% cash on cash return on an investment I would stick my money in the stock market and not worry about being a landlord.

Ali Boone · Answer

4% is low but in SoCal I would take it because here you're lucky to get a positive cash flow at all.

But...

You sure this property is at 4%? Doesn't look like it would cash flow to me.

Even if it is 4% (which seems unlikely), I assume that is the Cap Rate you are calculating? You want your Cash-on-Cash Return instead of Cap Rate. I'd almost guarantee that's zero or negative, and that's the one that matters.

https://www.biggerpockets.com/renewsblog/2013/01/1...

SoCal is tough.

Peter Bui · Answer

Thanks for the feedback! @Josh Dillingham So either wait for a higher ROI or I would have to rent it out for higher/find a lower selling property. Would it be bad if I say I am ok with breaking even in cash flow, accounting for capex to break even with cash flow, as long as I have a paid off house in the end that I can sell?

Peter Bui · Answer

@Ali Boone @Immanuel Sibero

So i guess it would help if you guys had more information. Heres the analysis! Please give some feedback on if I miscalculated or did not account for something:

5 Bed, 2 Bath, 1550 sft

Purchase Price: 340000 (lets say it was this low, this is just for analysis practice purposes)

Closing cost: 6800

Downpayment: 68000 (20%)

Interest Rate: 4.3

Monthly Mortgage: 1346

Rent Income: 2500 (Already have renters who are ok with this price, brothers and roomates, they are actually paying more right now)

Monthly Expenses

____________________

Property Taxes: 321

Insurance: 80

Vacancy: 100

Repairs (just in case): 100

Capital Expenditures: 200

Total: 801

Cashflow per month: 2500 - (1346+801) = 353

Caprate: 5.88%

CACR/ROI: 5.66%

Do you think this is still too low?

I am thinking if I offer lower, getting a higher Caprate and or ROI, and call it good considering it is SoCal

Thanks a lot!!

Peter Bui · Answer

@Immanuel Sibero, ahh that makes sense. Well I am near a university, and from my experience, there is almost always a way to get people to rent out your home. at least for me i have a sibling who goes to college near by and will be renting it out for the next 4 years. And after that I will just have to figure it out. With that being said, I might would even go less than 8%. Would that be risky you think?

Thanks for the feedback!

Peter

Immanuel Sibero · Answer

@Peter Bui

There really is not enough information to answer your question. From a high level perspective, evaluating investments is not all about return. There is another aspect of investments that is rarely discussed because it's not quantifiable so it's difficult to measure. I'm referring to RISK. Investment is about balancing return vs risk. For example, in my market I would be fine with 8% ROI in high growth, good school, path of progress areas. However, 30 miles south of me is borderline war zone, shrinking demographics, high crime areas, ROI is 20% but I wouldn't invest there.

So, would I invest in a property with 8% ROI? Well, tell me more about the risks...

Also, it might be helpful to join your local investor group and meetups. You would be able to get an idea what kind of returns local investors are expecting.

Cheers... Immanuel

Peter Bui · Answer

@David Friedman, @Brent Coombs

Ahh makes sense, so for just analysis purposes, if i were to offer and obtain the house for 350,000 and double the ROI to 8% covering the interest from my loan now, in your opinion, would you invest in the property?

Thanks!

Brent Coombs · Answer

@Peter Bui, with PITI costs alone being more than $2k/m, how will you get any positive ROI?

ROI of 4% too low in Riverside ?

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