@Matt R. great post! @Ben Leybovich was not trying to make a specific rule that a rental cannot cash flow at $1000. The broader point is that $30k, $700 rentals:
- Will generally attract C class tenants and require higher capex accruals
- Will not have much room for professional management
- Will not produce the paper returns most investors think they will due the squeeze on IRR by lack of appreciation
- CAPEX is a very REAL expense and is an accrued liability that simply cannot be ignored. Once calculated correctly, it will have a dramatic effect on returns.
- An investment must be judged over the entire hold period which includes the resale and NOT on a yearly cap rate or COC return projection
That being said, I own plenty of $700-$900 rentals and most do very well. But if I were managing from a distance with a PM, I highly doubt that would be the case. The lower end rentals will require a talented owner operator like @Dawn Anastasi to manage the tenants and the repairs. There is a big difference in how much a PM pays to repair a roof than what a local owner operator will pay. These small details are the difference between a 2% return and a 10% return. The margins are just that tight.
This also does not imply that a $1200 rental will guarantee success. Margins will be even tighter during the hold period as the purchase price will be higher at entry. The goal is that this type of asset class will attract and retain a higher tenant class AND drive IRR via capital appreciation at exit.
Regarding the comment by @Jeff G.
My sense is that Ben is extremely knowledgeable with many subjects. However he also makes very polarizing opinions on subjects he has no first hand experience with. My perception from his posts and personal website is that Ben only invested in large multi-families and apartment complexes.
There are lots of people who time and time again prove Ben wrong by saying they have been doing exactly what he is preaching not to do for 20+ years and have been very successful at it.
My only point is this. I am no expert at REI and am actually new at it. BUT Ben has a very narrow niche that he focuses on for his investments. That does not mean that there is only one way to make money in this business, or that every person who invests in other ways is a fool.
I can tell you that Ben has experience in both multifamily and single family. He speaks from a place where he has made these specific mistakes. More importantly, he is good at seeking out other investors and draws on investors with many years of experience and hundreds of units. I have personally sat down with Ben and compared our portfolios by asset and tenant class over 4-5 year holds to compare trends. Yes Ben can have a polarizing opinion but he is not speaking out of his ***.
When you hear stories of the insane returns people claim to be making off $30k rentals or a pitch for a turnkey, ask how long this person has held RE. Ask to see what the model looks like over a 5 year hold that INCLUDES the eventual resale of the property. Calculate the real projected rate of return. Accrue for capex, vacancy and turnover. I think you will see that the guys that have been doing this for a while are not so crazy after all.
