Author Topic: Case Study: 5 rental condos in Washington, D.C.  (Read 2563 times)

cjl1978

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Case Study: 5 rental condos in Washington, D.C.
« on: August 22, 2019, 10:11:43 AM »

Having read through the forum, I've screwed together the courage and energy to present my own case studies of the five DC condo apartments my wife and I have purchased and rented starting in 2012. 


As background, we live in a newly-desirable neighborhood of Washington which we love, and having refinanced our home to shift from a 7/1 ARM to a 30Y fixed, we had some cash and decided to purchase an investment apartment.  Finding a tenant who paid rent above our break-even was easy (and even after we purchased four more, that has almost always been the case), and because the apartments are all in high-rise buildings within a few blocks of our house, either the building maintenance took on repairs or I could make a quick trip over to assess what was needed and usually fix it.  We've never lived in any of these ourselves, and have no intention to do so, except maybe in 20 years could see having one as a pied-a-terre if we moved outside DC for some or most of the year in semi-retirement.  Both my wife and I are in our early 40s, and other than these RE investments, have maxed our 401ks almost since entering the workforce 15 years ago, and have additional taxable investments in index funds; we have lots of equity in our home, and no interest in moving somewhere bigger or more expensive. 


The past couple months, we've had a series of repairs in a few of the rental apartments that have been headaches, leaving me to wonder out loud whether the current monthly/annual profits and the deferred, longer-term financial gains are worth it.  I end up handling everything relating to the apartments, and although my day job isn't terribly busy now, it has been in the past and likely will be again in the future -- and I couldn't bear to be a landlord who wasn't responsive or was leaving tenants living in a shitty situation waiting for something key to get fixed.  (Also, the last thing I want after a 15 hour workday is to come home to deal with someone else's sink or whatever.)


Below are the numbers on each of the five units.  The market value figures probably are a little conservative as apartments sell well and quickly in our neighborhood.  Looking at these, my hunch is that we probably should keep renting Condos 1,2,4, sell Condo 3 soon, and consider selling Condo 5 if we're not able to rent it at a more competitive price with the next tenant.  (Although Condo 5's losses do allow us to shelter some of the gains on the other apartments from federal income tax.)


Thanks to anyone willing to share your thoughts, analysis, or suggestions on how to think about these decisions!




Condo 1: 
Market Value: $240k (paid $134k in 2012); Mortgage: 4.25%/30Y, $93k left
Gross Monthly Rent: $1725; Net Monthly Rent (after PITI+HOA): +$481


Condo 2: 
Market Value: $265k (paid $185k in 2014); Mortgage: 4.75%/30Y, $128k left
Gross Monthly Rent: $1800; Net Monthly Rent (after PITI+HOA): +$547


Condo 3:
Market Value: $300k (paid $237k in 2016); Mortgage: 4.75%/30Y, $178k left
Gross Monthly Rent: $1825; Net Monthly Rent (after PITI+HOA): +$10


Condo 4:
Market Value: $240k (paid $193k in 2016); Mortgage: 4.25%/30Y, $147k left
Gross Monthly Rent: $1705; Net Monthly Rent (after PITI+HOA): +$246


Condo 5:
Market Value: $265k (paid $257k in 2018); Mortgage: 5.5%/30Y, $202k remaining
Gross Monthly Rent: $1680/mo; Net Monthly Rent (after PITI+HOA): -$371











Jon Bon

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #1 on: August 22, 2019, 10:35:18 AM »
Correct me if any of this is wrong:

1. Monthly CF on these properties is ~0
2. You self manage and hate it
3. You are sitting on a bunch of equity
4. You are already rich

Why are you (still) holding these?

waltworks

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #2 on: August 22, 2019, 10:42:23 AM »
Yeah, I'm not sure I've seen a lot of worse rental portfolios that were actually intentionally purchased as rentals. That's horrible.

Sell 'em as soon as the leases are up. Or before if you can get the tenants to move.

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Papa bear

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #3 on: August 22, 2019, 11:35:59 AM »
How much are those HOA fees and what do they cover maintenance wise?  How much deferred maintenance are you responsible for?

It looks like, based on purchase price, you arenít dumping money down the drain, but based on market value, these things are winners to sell as someone elseís primary residences.  Iíd go that route. 


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waltworks

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #4 on: August 22, 2019, 12:15:44 PM »
How much are those HOA fees and what do they cover maintenance wise?  How much deferred maintenance are you responsible for?

I have never heard of an HOA covering interior appliances/paint/carpet/etc. So I'd say you could cut maintenance and capex in half or so (assuming the HOA is well run and you never get hit with assessments...) on your assumptions.

That's still going to result in horrible money-losing numbers across the board on these places, though, even if you're self-managing for free and assume no vacancy ever.

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ecchastang

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #5 on: August 22, 2019, 12:22:46 PM »
Factoring in any amount of maintenance and vacancy, you are at best breaking even between the 5.  Condos will also never appreciate at the same rate as SFH.  Probably best to cut your loses. 

BlueHouse

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #6 on: August 22, 2019, 02:10:52 PM »
I'll just add that in Washington, DC as soon as you purchased the 4th property, they all became subject to DC's rent control laws.  Sorry.

cjl1978

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #7 on: August 22, 2019, 02:13:09 PM »
The HOA fees range from $385 to $600, and I included them in the PITI+HOA figures.  It has covered some but not all of the minor repairs I've had come up.


To be clear -- most months, I spend exactly zero hours landlording.  The confluence of 2-3 units each needing something around the same time is what has irritated me recently.


I've been thinking about these as both producing monthly profit (overall between $700-800) as well as deferred capital gains when I eventually sell them after the tenants effectively have paid down the mortgages for me.  I think the overall picture would be stronger if I cut one or two of the under-renting ones -- I'm surprised everyone's assessment is so bad!  I thought that the minimal investment of 20% of the purchase price in exchange for the modest monthly cash flow plus long-term gains were a good proposition, but sounds like people disagree!


But maybe the bigger message I should be taking away is that if I don't enjoy it and the profits aren't amazing, I should dump it, put the money in an index fund and forget about it, and spend the hours living life?




cjl1978

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #8 on: August 22, 2019, 02:13:50 PM »
I'll just add that in Washington, DC as soon as you purchased the 4th property, they all became subject to DC's rent control laws.  Sorry.


Correct -- except that I own some and my wife owns some!  So we've stayed under the threshold.

Villanelle

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #9 on: August 22, 2019, 02:23:29 PM »
I live in the DMV area.  The investment property market here is shit.  And frankly, your properties don't seem to be an exception. You are nowhere near the 1% guideline.  The supposed profits you cite are before vacancy and maintenance. 

Also, it sounds like you don't even actually want to be a landlord.  So you basically have a crappy business that doesn't interest you.  Why would you continue?  You'll do better*, with less stress and time overall, putting that money in a basic Vanguard portfolio.

Sell all of them.  Today. 

*Statistically, long term.
« Last Edit: August 22, 2019, 02:27:12 PM by Villanelle »

oldtoyota

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #10 on: August 22, 2019, 02:54:36 PM »
I live in the DMV area.  The investment property market here is shit.  And frankly, your properties don't seem to be an exception. You are nowhere near the 1% guideline.  The supposed profits you cite are before vacancy and maintenance. 

Also, it sounds like you don't even actually want to be a landlord.  So you basically have a crappy business that doesn't interest you.  Why would you continue?  You'll do better*, with less stress and time overall, putting that money in a basic Vanguard portfolio.

Sell all of them.  Today. 

*Statistically, long term.

I am sorry you don't love it and that the profit margin is small.

Can you rent them on AirBNB and earn more?

I'd go mad if I had a property only earning $10 (am I right that's what the $10 means??).

cjl1978

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #11 on: August 22, 2019, 03:34:05 PM »



I am sorry you don't love it and that the profit margin is small.

Can you rent them on AirBNB and earn more?

I'd go mad if I had a property only earning $10 (am I right that's what the $10 means??).



Airbnb not allowed I'm afraid.


Why am I wrong to think about it as more than the immediate profits?  The mortgage gets paid hundreds per unit per month in principal, so when I do sell them isn't that just a deferred gain?


Villanelle

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #12 on: August 22, 2019, 04:02:13 PM »



I am sorry you don't love it and that the profit margin is small.

Can you rent them on AirBNB and earn more?

I'd go mad if I had a property only earning $10 (am I right that's what the $10 means??).



Airbnb not allowed I'm afraid.


Why am I wrong to think about it as more than the immediate profits?  The mortgage gets paid hundreds per unit per month in principal, so when I do sell them isn't that just a deferred gain?

I'm not sure what exactly you are asking here.  I think one of the main problems is that your supposed profit doesn't take everything in to account.  If your place is empty for even three weeks, you've lost 5 months worth of profit.  (And a three week vacancy is very, very common. Time to paint--which you haven't accounted for in your supposed profit analysis, new carpet every few tenants, a week or two to  for the new people to move in, and that's if you find a tenant almost immediately upon the previous one leaving) If the refrigerator dies, that's another month.  (On property 4). 

You might be in the black at this exact moment if you look only at what you have taken in and what you have spent, but that's not the way rental property accounting works.  There are expenses you can be quite sure will come up eventually, and you've accounted for none of them. 

ysette9

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #13 on: August 22, 2019, 04:43:50 PM »

Condo 1: 
Market Value: $240k (paid $134k in 2012); Mortgage: 4.25%/30Y, $93k left
Gross Monthly Rent: $1725; Net Monthly Rent (after PITI+HOA): +$481
147 equity

Condo 2: 
Market Value: $265k (paid $185k in 2014); Mortgage: 4.75%/30Y, $128k left
Gross Monthly Rent: $1800; Net Monthly Rent (after PITI+HOA): +$547
$137 equity


Condo 3:
Market Value: $300k (paid $237k in 2016); Mortgage: 4.75%/30Y, $178k left
Gross Monthly Rent: $1825; Net Monthly Rent (after PITI+HOA): +$10
$122 equity

Condo 4:
Market Value: $240k (paid $193k in 2016); Mortgage: 4.25%/30Y, $147k left
Gross Monthly Rent: $1705; Net Monthly Rent (after PITI+HOA): +$246
$93 equity

Condo 5:
Market Value: $265k (paid $257k in 2018); Mortgage: 5.5%/30Y, $202k remaining
Gross Monthly Rent: $1680/mo; Net Monthly Rent (after PITI+HOA): -$371
$63 equity
So you are earning $913/month on (63 + 93 + 122 + 137 + 147 = $562k equity. If my cell phone calculator math is approximately right that is almost a 2% return assuming no vacancies or maintenance or repairs. You could sell and put your equity in a savings account and get a better return. Are you in real estate for the property appreciation?

Another Reader

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #14 on: August 22, 2019, 04:46:25 PM »



I am sorry you don't love it and that the profit margin is small.

Can you rent them on AirBNB and earn more?

I'd go mad if I had a property only earning $10 (am I right that's what the $10 means??).



Airbnb not allowed I'm afraid.


Why am I wrong to think about it as more than the immediate profits?  The mortgage gets paid hundreds per unit per month in principal, so when I do sell them isn't that just a deferred gain?

I'm not sure what exactly you are asking here.  I think one of the main problems is that your supposed profit doesn't take everything in to account.  If your place is empty for even three weeks, you've lost 5 months worth of profit.  (And a three week vacancy is very, very common. Time to paint--which you haven't accounted for in your supposed profit analysis, new carpet every few tenants, a week or two to  for the new people to move in, and that's if you find a tenant almost immediately upon the previous one leaving) If the refrigerator dies, that's another month.  (On property 4). 

You might be in the black at this exact moment if you look only at what you have taken in and what you have spent, but that's not the way rental property accounting works.  There are expenses you can be quite sure will come up eventually, and you've accounted for none of them.

He is trying to say that having no or even negative cash flow is ok because the mortgage pay down and the appreciation are going to bail him out.

That might be true in San Francisco, Manhattan or maybe Honolulu, but not many other places.  Even there, it helps to buy at the bottom and sell when things start to top out.

cjl1978

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #15 on: August 22, 2019, 08:37:31 PM »


He is trying to say that having no or even negative cash flow is ok because the mortgage pay down and the appreciation are going to bail him out.

That might be true in San Francisco, Manhattan or maybe Honolulu, but not many other places.  Even there, it helps to buy at the bottom and sell when things start to top out.


This is what I was trying to say -- that factoring in the mortgage paydown, the return on my original 20% down payment (my only significant cash outlay) was better than just the monthly profits showed.  (Vacancies have been almost nil, and we haven't made any major repairs or replacements so those costs have been low.)  I wasn't including appreciation, but the properties have in fact appreciated as the neighborhood went from somewhat rough to very desirable over a pretty short period (there was a massive waterfront project built since we bought the first apartment).


Still, I get the points folks are making, and appreciate the push.  I'm going to start with getting rid of 2 of them over the next year, and see if I can pump up the cash flow of the other three -- if not, then they'll head to the sale pile too. 




Jon Bon

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #16 on: August 23, 2019, 06:36:00 AM »


He is trying to say that having no or even negative cash flow is ok because the mortgage pay down and the appreciation are going to bail him out.

That might be true in San Francisco, Manhattan or maybe Honolulu, but not many other places.  Even there, it helps to buy at the bottom and sell when things start to top out.


This is what I was trying to say -- that factoring in the mortgage paydown, the return on my original 20% down payment (my only significant cash outlay) was better than just the monthly profits showed.  (Vacancies have been almost nil, and we haven't made any major repairs or replacements so those costs have been low.)  I wasn't including appreciation, but the properties have in fact appreciated as the neighborhood went from somewhat rough to very desirable over a pretty short period (there was a massive waterfront project built since we bought the first apartment).


Still, I get the points folks are making, and appreciate the push.  I'm going to start with getting rid of 2 of them over the next year, and see if I can pump up the cash flow of the other three -- if not, then they'll head to the sale pile too. 




Most serious investors ignore any unrealized capital gains on a rental property. The transactions costs and taxes make selling a losing proposition. So most folks focus on operating income.

So why I (and others) don't like the condos is the operating return is about 2% which is terrible. You could beat that lending money to the government risk free with zero work. Appreciation cannot be counted on, we saw this in the 2006 bubble. LOTS of bad investors were buying anything completely, ignoring rents, and just banking on wild appreciation to bail them out. Otherwise know as speculating.

Another way to put it is that my RE investments are mostly immune to any appreciation/deprecation price swings. The cash they generate every month is what drives their value, NOT on what I hope I can get someone to pay for it at a future date.

Lastly you are aware of how the tax deprecation and real appreciation on going to effect the tax bill when you sell right? It makes the strategy of making money when selling the property that much worse.

I don't know your situation but it sound likes you are doing pretty awesome. RE can be a pain trust me I know, but I am well compensated for it. Sounds like you too feel the pain from time to time. You seam to have massive retirement accounts, you dont need this poorly performing business in your life.

Rental properties should be like blue chip dividend paying stocks. NOT the newest tech stock with a hot app.

SeattleCPA

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #17 on: August 23, 2019, 07:52:45 AM »
Most serious investors ignore any unrealized capital gains on a rental property...

I guess whether someone wants to count or measure the impact of appreciation on returns is a personal choice. But quick Excel spreadsheet calculations of OP's case study numbers suggest to me that his annual return for most of this properties runs 20% or more. (I measured using =RATE function treating a generous estimate of the down payment as the PV argument and the currrent market value as the FV argument and assuming the PMT argument equals zero.)

That seems pretty good.

I don't do so much real estate work anymore, but back when that's all I did professionally, we always focused on the project IRR which equaled the cap rate plus the appreciation rate.

E.g., if income capitalization rate equals 4% and the appreciation rate equals 2%, project IRR equals 6%.

BTW if you're not at least considering appreciation--for example, considering that a property's appreciation rate may equal zero or may be declining--that would seem like a way to overestimate the true returns in areas that aren't growing...


Another Reader

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #18 on: August 23, 2019, 08:05:25 AM »


He is trying to say that having no or even negative cash flow is ok because the mortgage pay down and the appreciation are going to bail him out.

That might be true in San Francisco, Manhattan or maybe Honolulu, but not many other places.  Even there, it helps to buy at the bottom and sell when things start to top out.


This is what I was trying to say -- that factoring in the mortgage paydown, the return on my original 20% down payment (my only significant cash outlay) was better than just the monthly profits showed.  (Vacancies have been almost nil, and we haven't made any major repairs or replacements so those costs have been low.)  I wasn't including appreciation, but the properties have in fact appreciated as the neighborhood went from somewhat rough to very desirable over a pretty short period (there was a massive waterfront project built since we bought the first apartment).


Still, I get the points folks are making, and appreciate the push.  I'm going to start with getting rid of 2 of them over the next year, and see if I can pump up the cash flow of the other three -- if not, then they'll head to the sale pile too. 




Most serious investors ignore any unrealized capital gains on a rental property. The transactions costs and taxes make selling a losing proposition. So most folks focus on operating income.

So why I (and others) don't like the condos is the operating return is about 2% which is terrible. You could beat that lending money to the government risk free with zero work. Appreciation cannot be counted on, we saw this in the 2006 bubble. LOTS of bad investors were buying anything completely, ignoring rents, and just banking on wild appreciation to bail them out. Otherwise know as speculating.

Another way to put it is that my RE investments are mostly immune to any appreciation/deprecation price swings. The cash they generate every month is what drives their value, NOT on what I hope I can get someone to pay for it at a future date.

Lastly you are aware of how the tax deprecation and real appreciation on going to effect the tax bill when you sell right? It makes the strategy of making money when selling the property that much worse.

I don't know your situation but it sound likes you are doing pretty awesome. RE can be a pain trust me I know, but I am well compensated for it. Sounds like you too feel the pain from time to time. You seam to have massive retirement accounts, you dont need this poorly performing business in your life.

Rental properties should be like blue chip dividend paying stocks. NOT the newest tech stock with a hot app.

There is a lot of truth to this.  However, unlike dividends, the income is not passive.  You are operating a business, because that's what rental real estate is, especially if you own multiple properties.  You have to work to get the income or dividend.  There is also some truth to the idea that the market value of the underlying business assets is interesting, but not all that useful once the business is large enough to produce a lot of income.  Yes, you may acquire additional assets and you may occasionally trade out less productive assets for more productive assets, but it's in the context of growing your business or operating it more efficiently.  The value of the underlying business assets may fluctuate with the market, but the income produced by the business should be relatively consistent if managed correctly.

So, while the return on the current value of my portfolio is not great, the return on invested capital is.  Like today, the return on current value in 2006 was not high.  In 2009-2012, the return on current value was outstanding.  It was a great time to pick up additional properties (business assets) and that is what I did.  When (not if) another speculative collapse occurs, I will buy more with reserved capital.

It's possible to make money in real estate without being a long term business operator.  Waltworks is a good example of this.  He saw an opportunity to buy assets that were grossly underpriced relative to their long term desirability and income potential.  He held them for a few years, collected the income, and sold them when the appreciation justified incurring the selling expenses and tax hit.  Good for him and the other folks that did this.  They helped create the bottom and stabilize the market.  However, they are short term investors, not business operators. 

Waltworks would look at my portfolio and say I should sell everything today because I don't achieve 1 percent of current value on the portfolio.  Pay the selling expenses and taxes and pocket the net proceeds!  My answer is I don't think like a short term investor or speculator.  I think like a business owner.  Come back in ten or fifteen years and let's see how I did as a business operator.

Papa bear

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #19 on: August 23, 2019, 11:18:57 AM »
Most serious investors ignore any unrealized capital gains on a rental property...

I guess whether someone wants to count or measure the impact of appreciation on returns is a personal choice. But quick Excel spreadsheet calculations of OP's case study numbers suggest to me that his annual return for most of this properties runs 20% or more. (I measured using =RATE function treating a generous estimate of the down payment as the PV argument and the currrent market value as the FV argument and assuming the PMT argument equals zero.)

That seems pretty good.

I don't do so much real estate work anymore, but back when that's all I did professionally, we always focused on the project IRR which equaled the cap rate plus the appreciation rate.

E.g., if income capitalization rate equals 4% and the appreciation rate equals 2%, project IRR equals 6%.

BTW if you're not at least considering appreciation--for example, considering that a property's appreciation rate may equal zero or may be declining--that would seem like a way to overestimate the true returns in areas that aren't growing...

Looking at this from the POV of an accountant =).  OP has a nice overall return on the properties.  But you can't eat appreciation (not that you can eat rent, but the analogy is still fair).  The issue with real estate and having it sustain you personally is that it is expensive and difficult to access paper gains.  Looking at this from a finance perspective, valuing real estate for FIRE should be about calculating free cash flow from operations, net of taxes.  That's what really matters.   

OP's properties don't do well from FCF perspective.  To access the returns, OP must either sell the properties or borrow against the value.  Neither of which are fast, easy, or cheap.

SeattleCPA

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #20 on: August 24, 2019, 12:14:48 PM »
... you can't eat appreciation (not that you can eat rent, but the analogy is still fair).  The issue with real estate and having it sustain you personally is that it is expensive and difficult to access paper gains.  Looking at this from a finance perspective, valuing real estate for FIRE should be about calculating free cash flow from operations, net of taxes.  That's what really matters.

I agree the liquidity matters. Or that it does when one moves past the accumulation phase.

But these thoughts...
1. Earning a higher, leveraged rate of return during accumulation makes a big difference. E.g., earning 20%+ annual IRRs for a few years means in the end OP will end up at retirement with a lot more income during retirement. (He may need to restructure or liquidate a property, sure. But he'll come out way ahead of someone who earns a steady 6% cap rate but who gets basically no appreciation.)
2. There should be a relationship between appreciation rates and cap rates and rent increases. So a low cap rate or high appreciation rate probably signals expectations of future higher rental rates. The inverse should be true too. And some high cap rate properties would, despite superficial attractiveness, suck as a retirement income source. E.g., a 7% cap rate coupled with a 3% depreciation rate means a pretty low return once someone is a decade or two into retirement.
3. As the "Rates of Return of Everything" paper shows, real estate should work really well as a component in someone's portfolio. So this discussion shouldn't just be about the cap rate.  It also should look at the effect of the real estate on someone's overall portfolio. My barely more than back of the envelope calculations suggest that a big-ish allocation to rentals "saves" someone in the 1966 scenario, which is the one that the 4% SWR fails in if you're using a traditional asset allocation.

mozar

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #21 on: August 24, 2019, 10:30:33 PM »
What neighborhood are you in? Unless these are all studios i think you are under charging. Have you talked to a property manager about what you can get? 1680 is a steal, pm me if you are looking for a tenant.

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #22 on: August 25, 2019, 12:14:00 PM »
What neighborhood are you in? Unless these are all studios i think you are under charging. Have you talked to a property manager about what you can get? 1680 is a steal, pm me if you are looking for a tenant.

I'm thinking it's not in DC proper (or anywhere inside or close to the beltway).  If he paid $257k in 2018 (for the most recent, but they are all very low purchase prices), it seems like these are not great properties, and the rents may be appropriate, though they do seem like VERY small numbers.  Still, your question is a good one.  Maximizing rent on at least the best two of the properties might make push them a little more toward decent numbers, so it's worth looking in to. 

OP, what have your rents looked like on each property (amount of increase) for the last 3 years?  When leases are up (when is that?) will you raise rents, and if so, how much?  And what do you use to determine that?

mozar

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #23 on: August 28, 2019, 09:36:21 AM »
Good point. I can't think of anywhere in DC off hand you can buy a condo for 275k. I have seen them once in a while in NE but they are like unicorns (did I really see that?).

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #24 on: September 01, 2019, 12:55:11 PM »
I think the overall picture would be stronger if I cut one or two of the under-renting ones -- I'm surprised everyone's assessment is so bad!  I thought that the minimal investment of 20% of the purchase price in exchange for the modest monthly cash flow plus long-term gains were a good proposition, but sounds like people disagree!

You're triggering the age-old cash flow vs. appreciation argument, about which lots of people are very passionate. I think both strategies are reasonable, but neg CF in the short run is riskier and more stressful. That's why you're likely to get a lot of positive CF proponents here on MMM. Neg CF properties require transfers of cash from a day job so they keep you tied down.

I had a situation a few years ago with two neg CF properties in DC. I was living in Asia and had a property manager totally neglect the properties, leaving them vacant for several months. After a couple months I found a new manager who was amazing -- fixed them up and got them rented. Come to find out the power was shut off and the ice makers had melted all over the kitchens. There was mold. Fixtures had been broken. Light bulbs were burned out. It was bad. Over three or four months I was probably $20K in the hole and it was stressful dealing with all of this from the other side of the planet.

(Trigger-warning for positive CF acolytes) Fast forward a couple years later and I sold one of the rentals and cleared 20% annual ROI after neg CF and taxes.

The point is that being a landlord, especially self-managing, isn't easy, but you're adding value which is why you get double-digit ROI. It's not a passive investment. My opinion is that your rental portfolio is reasonable and that you should keep it as long as you're not RE and each unit is outperforming alternatives on a risk-adjusted basis.

Fuzz

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cjl1978

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #26 on: September 18, 2019, 06:51:39 AM »
What neighborhood are you in? Unless these are all studios i think you are under charging. Have you talked to a property manager about what you can get? 1680 is a steal, pm me if you are looking for a tenant.


They're in DC proper -- in Southwest, a few blocks from the new Wharf development.  And yes, they're all studios save one.

cjl1978

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #27 on: September 18, 2019, 06:54:54 AM »
I'm thinking it's not in DC proper (or anywhere inside or close to the beltway).  If he paid $257k in 2018 (for the most recent, but they are all very low purchase prices), it seems like these are not great properties, and the rents may be appropriate, though they do seem like VERY small numbers.  Still, your question is a good one.  Maximizing rent on at least the best two of the properties might make push them a little more toward decent numbers, so it's worth looking in to. 

OP, what have your rents looked like on each property (amount of increase) for the last 3 years?  When leases are up (when is that?) will you raise rents, and if so, how much?  And what do you use to determine that?


I have raised rents every year by between 3-8%, and I've had two vacant periods of three weeks (each time doing a renovation) but otherwise no gaps between tenants of more than one week for any of the units.




cjl1978

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Re: Case Study: 5 rental condos in Washington, D.C.
« Reply #28 on: September 18, 2019, 06:57:31 AM »
I think the overall picture would be stronger if I cut one or two of the under-renting ones -- I'm surprised everyone's assessment is so bad!  I thought that the minimal investment of 20% of the purchase price in exchange for the modest monthly cash flow plus long-term gains were a good proposition, but sounds like people disagree!

You're triggering the age-old cash flow vs. appreciation argument, about which lots of people are very passionate. I think both strategies are reasonable, but neg CF in the short run is riskier and more stressful. That's why you're likely to get a lot of positive CF proponents here on MMM. Neg CF properties require transfers of cash from a day job so they keep you tied down.

I had a situation a few years ago with two neg CF properties in DC. I was living in Asia and had a property manager totally neglect the properties, leaving them vacant for several months. After a couple months I found a new manager who was amazing -- fixed them up and got them rented. Come to find out the power was shut off and the ice makers had melted all over the kitchens. There was mold. Fixtures had been broken. Light bulbs were burned out. It was bad. Over three or four months I was probably $20K in the hole and it was stressful dealing with all of this from the other side of the planet.

(Trigger-warning for positive CF acolytes) Fast forward a couple years later and I sold one of the rentals and cleared 20% annual ROI after neg CF and taxes.

The point is that being a landlord, especially self-managing, isn't easy, but you're adding value which is why you get double-digit ROI. It's not a passive investment. My opinion is that your rental portfolio is reasonable and that you should keep it as long as you're not RE and each unit is outperforming alternatives on a risk-adjusted basis.




Thanks for the thoughtful response!  I think one point I did not mention, and perhaps apostasy for this board, is that I have no interest in early retirement.  I work in public policy and love my profession and my job, so plan to stay professionally engaged for at least another decade or two.


At the end of the day what everyone has helped me think through is that these apartments haven't turned out to be lucrative investments -- they've turned out to be a pretty lucrative part-time job.  But while I love my actual job, I don't want a part-time job on top of that!  I'm going to sell the underperformers and look into a property manager for the others.