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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: fiveoh on April 15, 2012, 05:02:15 PM

Title: Typical ROI for rental?
Post by: fiveoh on April 15, 2012, 05:02:15 PM
Whats a decent ROI for a rental house that is paid off?   What are the typical expenses besides taxes/insurance/hoa?  I.e. 10% for repairs etc...

I was running some numbers on my current house(thinking about renting it out)

approx value 150k

5485 a year taxes/insurance
850 hoa

Similar houses are leasing for 1400

So I basically added 5485+850=6335 / 12 = 528 a month

1400 - 528 = 872 profit a month... thats not including any repair expenses etc

872 x 12 = 10464 profit per year

10464 profit / 150,000 house value = 7%

Basically a 7% yearly ROI.  Seemed kind of low to me but I dont know what the typical one is.  also would like to know any other expenses im missing that might bring that number down.
Title: Re: Typical ROI for rental?
Post by: arebelspy on April 15, 2012, 07:16:37 PM
Typical ROI on a paid off SFR rental may be in the 4-8% range.  Higher on multifamily or commercial.

You are way underestimating expenses with not counting vacancy, maintenance/repairs, capital expenditures, credit loss, management (even if you manage it yourself, you have to subtract out that cost, as it's not part of your ROI, but part of a job of you managing it.. it increases the amount of money you have, but not due to your investment, due to your work), etc.

Typical would be 50% (not counting HOA), meaning 1400/2 = 700/mo.  HOA may save you a little on expenses (if a condo, not a house, due to them often covering capital expenditures like a new roof), but have their own cost, so say 600-650/mo profit.

This is compared to the amount of capital you could have instead of the house (i.e. the value of the house minus commissions and other selling costs), so say 140k, or about 5.4% ROI on your rental.

Not great, not terrible.  Think of it as an inflation protected bond (the value of the house should appreciate with inflation in the long run).
Title: Re: Typical ROI for rental?
Post by: fiveoh on April 15, 2012, 07:50:33 PM
Typical ROI on a paid off SFR rental may be in the 4-8% range.  Higher on multifamily or commercial.

You are way underestimating expenses with not counting vacancy, maintenance/repairs, capital expenditures, credit loss, management (even if you manage it yourself, you have to subtract out that cost, as it's not part of your ROI, but part of a job of you managing it.. it increases the amount of money you have, but not due to your investment, due to your work), etc.

Typical would be 50% (not counting HOA), meaning 1400/2 = 700/mo.  HOA may save you a little on expenses (if a condo, not a house, due to them often covering capital expenditures like a new roof), but have their own cost, so say 600-650/mo profit.

This is compared to the amount of capital you could have instead of the house (i.e. the value of the house minus commissions and other selling costs), so say 140k, or about 5.4% ROI on your rental.

Not great, not terrible.  Think of it as an inflation protected bond (the value of the house should appreciate with inflation in the long run).

 I figured as much which is why I made the post.  Does your 50% expenses include taxes and insurance?  You listed credit loss.... what do you mean by that?  Why would having a rental have a negative impact on your credit?  I appreciate the well informed post and info!   
Title: Re: Typical ROI for rental?
Post by: arebelspy on April 15, 2012, 08:50:57 PM
Yes, it does include taxes and insurance.  It's a rough rule of thumb, but generally averages out to that over time.  It's certainly a good tool to use to realize expenses are more than just taxes and insurance.

Credit loss = unpaid rent. I.e. you'll lose rent due to vacancy, but also due to tenants not paying.  Often it isn't worth the hassle to go after them in court and would cost more than you'd get back, so it's just written off as a loss.

Doesn't affect your credit in any way.
Title: Re: Typical ROI for rental?
Post by: Reido on April 20, 2012, 05:34:13 AM
I looked into renting out my old house as well - I was looking at nearly the same number you've come up with.  I found it was definitely not worth it since my actual return would likely be less than 5% and it would involve effort on my part...

Add in lawsuit risks, etc.  and it simply isn't worth it!

Perhaps other areas of the country - out west for example - might be better...
Title: Re: Typical ROI for rental?
Post by: fiveoh on April 20, 2012, 07:00:48 AM
I looked into renting out my old house as well - I was looking at nearly the same number you've come up with.  I found it was definitely not worth it since my actual return would likely be less than 5% and it would involve effort on my part...

Add in lawsuit risks, etc.  and it simply isn't worth it!

Perhaps other areas of the country - out west for example - might be better...

Despite the lower than I expected return, I'm still considering it just to diversify.  I dont trust the stock market 100% and this seems like a good way to spread some money around.   Not many other choices to get a decent return nowdays...
Title: Re: Typical ROI for rental?
Post by: Reido on April 25, 2012, 03:58:43 AM
Well, I realize this is quite off topic - but this how I've chosen to invest:
http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/

I'm basically pleased that it simply hasn't LOST me any money...
Title: Re: Typical ROI for rental?
Post by: arebelspy on April 25, 2012, 09:20:49 AM
Well, I realize this is quite off topic - but this how I've chosen to invest:
http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/

I'm basically pleased that it simply hasn't LOST me any money...

I'm a big fan of the Permanent Portfolio.

I actually HATE it, when I look at it.  Gold? Overvalued.  Cash?  Earning nothing? Huh?  25% bonds seems high.  And only 25% equities?  Wtf?

But I've become more and more convinced of the brilliance of it over the last few years. 

Right now I'm heavily in real estate due to the current crazy opportunities rarely seen, but my current eventual plan / exit strategy is very likely to involve the Permanent Portfolio.
Title: Re: Typical ROI for rental?
Post by: broyston on May 01, 2012, 09:13:47 PM
It depends where you invest.  If you invest in an expensive area, your ROI will be lower because of the high purchase price.  I live in an area of Northern CA, where you're lucky if you can cashflow at all because the prices are so expensive.  Here, any ROI will be on the back-end.  For example I bought a tiny 888 sq ft home here back in 2000 for $640K.  I didn't cashflow at all, but I sold it around 2005 for $1M. The return on investment came all at the end.

My buy-&-hold portfolio is in East Texas, where I have 55 homes.  These homes are cheap, so they cashflow immediately.  It's in an economically strong, diversified and growing area.  Because of the cashflow, I don't have to rely on appreciation...any appreciation is just gravy. Although the area is so fundamentally strong, I lost no value during the crash...in fact values actually increased.

I consistently generate an operating income of 50+% before debt service, which is a good target.  In a stable area, you should look for a cash-on-cash ROI of at least 8%, which you could leverage up to 12+% with a good FNMA loan & 20% down.

Beware of buy-%-hold investing in geographical areas that aren't stable.  In these areas, occupancy and rental rates could be all over the map for years to come.

See http://bit.ly/zvbP6Y for more detail on a good recipe for investing.

Cheers
B
Title: Re: Typical ROI for rental?
Post by: Praxis on May 15, 2012, 09:25:50 AM

I consistently generate an operating income of 50+% before debt service, which is a good target.  In a stable area, you should look for a cash-on-cash ROI of at least 8%, which you could leverage up to 12+% with a good FNMA loan & 20% down.

Leverage to 12%?  Is that actually profitable?  Seems like one bad tenant can annihilate years of profits overnight.

I just started this, but my first investment purchase is a 20% returner.  Calculating that as one year's rent minus PITI (principal interest taxes insurance) minus all property manager fees divided by my cost of getting in to the house (20% down + repair costs + loan origination fees).  That's with a 5% conventional loan.

I've been trying to set 20% return as my benchmark, figuring the margin'll get annihilated occasionally by repairs.

And I live in a fairly stable region where the prices haven't crashed all that much.
Title: Re: Typical ROI for rental?
Post by: arebelspy on May 15, 2012, 11:06:34 AM
You're leaving out a lot of stuff when you count your net rent as gross minus piti and management.

What about repairs?  Capital expenditures?  Credit loss?  Vacancy?

(That last one is killer.. even one month's vacancy can kill several month's profit.)

And yes, leverage (i.e. a mortgage) often makes ROI go from 8 to 12%, assuming about 25% down, that number doesn't seem unreasonable to me.
Title: Re: Typical ROI for rental?
Post by: Praxis on May 15, 2012, 11:34:21 AM
So how exactly are you calculating it?  I'd be curious to see what ROI I'm getting by that metric.  I know that what I am calculating is max theoretical ROI and real return will be lower.


To estimate ROI, what's your formula?  Is it rent/2 minus PI minus management fees?

By that standard my ROI is single digit despite my rent being over twice my PITI.
Title: Re: Typical ROI for rental?
Post by: grantmeaname on May 15, 2012, 12:36:03 PM
Principal is a return on your investment, right?
Title: Re: Typical ROI for rental?
Post by: Praxis on May 15, 2012, 12:54:54 PM
I prefer not to count it.  It's tiny, locked up, and mostly going to interest the first decade.
Title: Re: Typical ROI for rental?
Post by: illy5603 on May 15, 2012, 01:17:35 PM
Yeah your Cap Rate is low because in spite of your home being paid off, you still have a substantial amount of expenses  relative to the rent you could expect to receive. If I were shopping for a home to purchase as a rental, I would not choose yours but since you already own it, it might not be a bad idea to rent it out. Do consider that the money could probably work harder for you in a different property or leveraged with a mortgage to improve your Cash on Cash ROI.

Some people choose to put a vacancy allowance in their numbers and others choose to put a repair allowance and some put both and some put neither. Whether you put them into your "show off your property" math or not, you would be wise to at least know that they will both at some point come knocking on your bottom line.

For the sake of shopping I leave them out but put them in models just to get a realistic idea of what to expect.

Like broyston, I live in Northern California where buy and hold / cashflow investing is not the easiest thing to make work. We typically make (or lose) our money on market changes. Also, like broyston, I invest out of state, my two properties are in Memphis.