is this rental property is this worth it ?

[Mrwannabemmm]

In my area in ca , i can get a house for 500 k and get a rent of about 2400 a month . Do u think thats a good roi. If not than whats the roi i should get on a good rental vs the stock market index funds.

[iamlindoro]

Here's a post I wrote on the topic that may help:

http://forum.mrmoneymustache.com/real-estate-and-landlording/evaluating-a-rental-property/

Frankly, this is a terrible ROI.  $2400/mo on $500K not only doesn't hit 2% of purchase price in rents per month, not only does it not 1%...it doesn't even hit .5%!  That is to say, a good rule of thumb is to be getting 1% of your purchase price in rents per month, but that's far too low even for me.  2% is doable in the midwest and in the south, and without purchasing a lean-to in a warzone.  1% on a property of $500K would be $5000 in rents per month.  Generally, 1-2% is done on lower purchase price properties (50-100K).

I am also in CA, and my properties are out of state.  I get ~2% of purchase price on them per month.  The annual Cash ROI is in the 18-20% range, and the total ROI is 21-23% or so.  I want to be over 15% in cash ROI to even consider a rental versus index funds.

[iamlindoro]

thnxs , i i have been looking at florida , but then i keep hearing how in terms of appreciation potential ca is the place to invest in ?
if i may ask what states are you investing in and how do you manage those properties from so far ?

I have properties in Ohio and Tennessee.  I employ Property Managers for a variety of reasons: I'm far away, I don't want to be bothered by the everyday annoyances of managing a property, I could end up incapacitated someday and it should still be a cash flowing asset for my family, and because we hope to RE abroad.

CA does have great appreciation in some places, but you need to know whether you're investing for appreciation or cash flow.  I invest for cash flow (to create a monthly paycheck for myself in early retirement).  Appreciation can be profitable, but it's also completely speculative.  The market could crash again and then you'd feel pretty silly if you're putting money into an asset that doesn't cash flow.

[sammybiker]

Everything that @iamlindoro said is spot on.

You would be bleeding significant cash every month with this property (after management, repairs, taxes, insur, vacancy and that mortgage payment), so much that even appreciation probably wouldn't save you after sales commission. 

[MaikoTsumi]

thnxs , i i have been looking at florida , but then i keep hearing how in terms of appreciation potential ca is the place to invest in ?
if i may ask what states are you investing in and how do you manage those properties from so far ?

Appreciation is just icing on the cake and shouldn't be used in your purchase analysis, unless you like gambling. Personally I'm into investing.  I don't know what I'd do if I lived in California, but the market in Texas is very good with low costs and (for now) an expanding job base.  Lots of southern states have boringly good cash flow on investment properties with flat to little appreciation.   

[Fishindude]

I'd want at least double that.
You will be paying income tax, property tax and upkeep out of that, netting you squat.

[jinga nation]

Rajesh, I don't intend to scare you away from Florida with my post. I live in Tampa Bay and invest in Residential RE locally. Prices have gone up in the past 24 months that make it hard to hit the 2% rule. 1% may be achievable, but have the property vacant for 45+ days and you can say goodbye to hitting ROI for that year.

SFH are going for high prices (but not boom time prices) but rents are low on SFH due to a lot of local competition and pricing to make them affordable. Thus you might be lucky to make 0.75% in some neighborhoods. Condos and townhomes are good potential investments but a bad HOA and special assessments can make you miss your ROI target. The media says rental market is hot, but tenants won't pay over a certain price. Many potentials can't even satisfy the income to rent ratio.

As Maiko said, don't think of appreciation, only look at ROI on your equity. If you want paper appreciation then real estate is not your cup of chai.

[tvan]

I would totally give you 2400 of rent for a 500k house. 

That's a bad sign.  :)

[CashFlowDiaries]

If those are common numbers for your area in CA then you will not be able to find good ROI.  If you want to invest in real estate for cash flow, you will need to start purchasing in a different state.  That is what I had to do and I am now about to buy my 4th out of state rental property.   Well im in the super early stages of it but its exciting.

Feel free to reach out to me if you have any specific questions or anything about it.

[clarkfan1979]

I bought in Fort Myers, FL about 3.5 years ago. I paid 95k for my primary house and had 18K in repairs. It recently became a rental last month for 1600/month and I pay 120/month for property management. Mortgage is 650 including taxes and insurance. Today, I think it could sell around 180K to 200K.

My neighbors house sold for 220K about 1 year ago with no rehab. He rents it out for 1800/month. I think you could hit 1% in my old neighborhood but it would have to be a foreclosure that needed work.