Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Rental Income ROI
Old 10-29-2015, 09:24 AM   #1
Dryer sheet aficionado
 
Join Date: Jun 2015
Posts: 31
Rental Income ROI

What would you consider an acceptable ROI % for a rental property? For example, say I have a potential rental property worth $150K (paid off - no mortgage) and that's about what I have in it, and the rental income is $1250 per month or $15k annually. If I clear about $12k after taxes/misc expenses that's only an 8% annual return on 150k.

Would that be on the low end of your comfort zone or is that a pretty decent situation in your opinion?
__________________

__________________
hopeisnotaplan is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 10-29-2015, 09:35 AM   #2
Recycles dryer sheets
 
Join Date: Apr 2011
Location: Castro Valley
Posts: 402
I think 8% is excellent. But I'm from CA where the ROI on RE is much lower than other parts of the country. There are many properties in the SF Bay Area that would be lower than 5%.
__________________

__________________
jkern is offline   Reply With Quote
Old 10-29-2015, 09:35 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
calmloki's Avatar
 
Join Date: Jan 2007
Location: Independence
Posts: 5,459
Anyone who wants to guarantee me an 8% return forever I'm in for a pile. For a single house in my area $1250/mo for a $150k house is pretty normal.I strongly question you clearing $12K on $15k rent though. Taxes, insurance, maintenance, reserves for the roof or furnace or whatever, vacancy... think more like clearing $7-8K over the long haul. 5.5-6% + appreciation feels more likely. But that is in my area - some do much better. or not.
__________________
calmloki is offline   Reply With Quote
Old 10-29-2015, 10:04 AM   #4
Recycles dryer sheets
 
Join Date: Jan 2012
Posts: 244
I would look for a minimum CAP rate of 8%. Anything less than that you may as well invest in a REIT and save yourself management hassles. Just my opinion.
__________________
Rickt is offline   Reply With Quote
Old 10-29-2015, 10:12 AM   #5
Thinks s/he gets paid by the post
Dash man's Avatar
 
Join Date: Mar 2013
Location: Limerick
Posts: 1,670
I think 8% is fine if you don't have a mortgage. If it were leveraged I'd want 15% or more to cover the vacancy risk.


Sent from my iPhone using Early Retirement Forum
__________________
Dash man is online now   Reply With Quote
Old 10-29-2015, 10:33 AM   #6
Recycles dryer sheets
 
Join Date: May 2011
Location: Twin Cities
Posts: 434
As others have said, I'd buy more if I could get 8%. That was always my minimum number and over time that has gone up with rent increases to where I'm now at 9.7% with conservative expense estimates.

Which brings me to the issue of your estimates. You are estimating only $3k/year in expenses? That seems really low to me.

I always figure in 3-5% for vacancy
I figure in $800/year for repairs/maintenance per property and these are townhouses where the HOA covers outside maintenance. This week I put in a $2k furnace and an $800 water softener at different units.
I figure in taxes
I figure in a $150/year landlord insurance policy for $1M in liability coverage
I figure in a $100/year budget for possible evictions - never had one luckily
Many cities have a rental license that I have to pay for as well - around $50/year
I also have HOA dues which cover things like lawncare/snow, garbage, water, insurance and outside maintenance.

Your numbers seem low in other words.

As an example, I have one unit that rents for more than yours at $1,290/mo and I figure that I only clear about $9,800/year.
__________________
Fishingmn is offline   Reply With Quote
Old 10-29-2015, 11:04 AM   #7
Thinks s/he gets paid by the post
Senator's Avatar
 
Join Date: Feb 2014
Location: Eagan, MN
Posts: 3,053
My properties, based on the tax values and projected expenses, return between 9% and 15%. I have 4-plexes for the most part, and use a 10% of rents for maintenance, 7% for management, 5% for vacancy. 2 out of 5 of these buildings are paid off and still return these numbers. With these projections, and the actual hard expenses, my expense ratio is 45.52%.

I do most of my own management and maintenance, so I am able to get an even higher return than my projections. As the properties get less doors, expenses go up. My duplexes, which are paid off, bring in 6% - 9%. Overall, between all properties, my ROI is at least 9.17%.

Your 8% is not bad, but the expenses you list are not a good estimate. Unless you bought a major dump and fixed it up, It is near impossible to make money on a single family home. If you count future appreciation, tax benefits, principle paid off each month, etc., it may be closer to your numbers.

I am not saying to sell the rental, but your actual return is not even close to 8%. My minimum is a 12% cash on cash return, or a 8% cap rate. I am generally not buying anymore, but quality of the neighborhood matters too.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
Senator is offline   Reply With Quote
Old 10-29-2015, 11:18 AM   #8
Recycles dryer sheets
 
Join Date: Feb 2015
Posts: 95
Quote:
Originally Posted by Senator View Post
My properties, based on the tax values and projected expenses, return between 9% and 15%. I have 4-plexes for the most part, and use a 10% of rents for maintenance, 7% for management, 5% for vacancy. 2 out of 5 of these buildings are paid off and still return these numbers. With these projections, and the actual hard expenses, my expense ratio is 45.52%.

I do most of my own management and maintenance, so I am able to get an even higher return than my projections. As the properties get less doors, expenses go up. My duplexes, which are paid off, bring in 6% - 9%. Overall, between all properties, my ROI is at least 9.17%.

Your 8% is not bad, but the expenses you list are not a good estimate. Unless you bought a major dump and fixed it up, It is near impossible to make money on a single family home. If you count future appreciation, tax benefits, principle paid off each month, etc., it may be closer to your numbers.

I am not saying to sell the rental, but your actual return is not even close to 8%. My minimum is a 12% cash on cash return, or a 8% cap rate. I am generally not buying anymore, but quality of the neighborhood matters too.
My rental property cost $390k in 2012. I have a mortgage for $195k on it (was originally $300k but I have been paying it down even though its a good deduction against income). Rental income (short term vacation rental) was $60,915 in 2014 and $72,950 this year. Costs are about $40,000 per year including mortgage interest, taxes, insurance, maintenance, utilities, HOA fees, upgrades to furniture, etc. I also use the place 35-40 nights a year for vacations and love it there.

Its also now worth somewhere around $460k

How would you rate this place as an investment? Its my first real estate rental. Short term rental has been headache free and only a few hours a month in time committed to managing it.
__________________
Sittinginthesun is offline   Reply With Quote
Old 10-29-2015, 11:32 AM   #9
Recycles dryer sheets
 
Join Date: Feb 2007
Posts: 71
I would be careful advertising your 40 day vacation usage if you deduct expenses as an investment property. I believe you might be limited to just a few weeks personal use per year.

Sent from my SM-G920V using Early Retirement Forum mobile app
__________________
emi guy is offline   Reply With Quote
Old 10-29-2015, 11:36 AM   #10
Recycles dryer sheets
 
Join Date: Feb 2015
Posts: 95
Quote:
Originally Posted by emi guy View Post
I would be careful advertising your 40 day vacation usage if you deduct expenses as an investment property. I believe you might be limited to just a few weeks personal use per year.

Sent from my SM-G920V using Early Retirement Forum mobile app
We are 100% honest about our personal use and our accountant only deducts a percentage of costs related to days of rental use. I'm a straight shooter when it comes to taxes.
__________________
Sittinginthesun is offline   Reply With Quote
Old 10-29-2015, 11:47 AM   #11
Thinks s/he gets paid by the post
tryan's Avatar
 
Join Date: Mar 2005
Posts: 2,449
Sittinginthesun -

Our numbers are similar except I can only gross ~49k/yr. I have "dual" seasons - skiing and lake front.

Curious how you hit 70k: Are you located such that renting year-round is possible? Where/how do do advertise?

I am on about a dozen websites (Homeaway, vrbo, airbnb, glamping hub .....) but I have come to ~50k as the "ceiling".
__________________
FIRE'd since 2005
tryan is offline   Reply With Quote
Old 10-29-2015, 11:48 AM   #12
Thinks s/he gets paid by the post
Senator's Avatar
 
Join Date: Feb 2014
Location: Eagan, MN
Posts: 3,053
Quote:
Originally Posted by Sittinginthesun View Post
How would you rate this place as an investment? Its my first real estate rental. Short term rental has been headache free and only a few hours a month in time committed to managing it.
It appears you manage it yourself, do you account for a 10% management fee anyway? If not, you are managing for free. It should be used when analyzing a property.

The HOA fees cover much of the maintenance, such as a roof. What about HVAC, Water heater, kitchen cabinets, etc. Do you keep an amount to the side for these major upcoming periodic expenses?

You take in ~$33k on a $390K investment. That is ~8%. The appreciation, depreciation, vacation days used, etc. do not count in my book. They are hard to spend. They are just bonuses.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
Senator is offline   Reply With Quote
Old 10-29-2015, 11:50 AM   #13
Thinks s/he gets paid by the post
tryan's Avatar
 
Join Date: Mar 2005
Posts: 2,449
Forgot to mention we can "work" as many days/nights as we want. "personel use" is limited to 2 weeks if we claim 100% rental.

It's a nice place to "work" ...
__________________
FIRE'd since 2005
tryan is offline   Reply With Quote
Old 10-29-2015, 11:57 AM   #14
Recycles dryer sheets
 
Join Date: Feb 2015
Posts: 95
Quote:
Originally Posted by Senator View Post
It appears you manage it yourself, do you account for a 10% management fee anyway? If not, you are managing for free. It should be used when analyzing a property.

The HOA fees cover much of the maintenance, such as a roof. What about HVAC, Water heater, kitchen cabinets, etc. Do you keep an amount to the side for these major upcoming periodic expenses?

You take in ~$33k on a $390K investment. That is ~8%. The appreciation, depreciation, vacation days used, etc. do not count in my book. They are hard to spend. They are just bonuses.
Property manager fees are cheap and included in the $40k cost as are upgrades to interior which we are constantly doing to keep the place beautiful. Well over 50% of our renters are repeat guest this year.

HOA fees cover nothing but community costs like security, maintenance, etc. I spent little of the income and a major expense like new HVAC or roof wouldn't be an issue.

Why is it 8% when I don't have $390k tied up in the property? Just trying to understand that logic. I initially had about $100k into it, more now with mortgage payments and lump payments against the principle. Could argue its a 33% return on initial investment, no?

Thanks for your feedback.
__________________
Sittinginthesun is offline   Reply With Quote
Old 10-29-2015, 12:01 PM   #15
Recycles dryer sheets
 
Join Date: Feb 2015
Posts: 95
Quote:
Originally Posted by tryan View Post
Sittinginthesun -

Our numbers are similar except I can only gross ~49k/yr. I have "dual" seasons - skiing and lake front.

Curious how you hit 70k: Are you located such that renting year-round is possible? Where/how do do advertise?

I am on about a dozen websites (Homeaway, vrbo, airbnb, glamping hub .....) but I have come to ~50k as the "ceiling".
Tryan we have renters year round and two high seasons (winter and summer). I rent the winter out to a retired couple (two months) and another retired couple (one month). Summer is sought after by Europeans looking for a hot getaway.

VRBO is our only advertisement but its a good one. Had professional photos done and its a really nice place. We also have a lot of great reviews and not a single one less than 5 stars.
__________________
Sittinginthesun is offline   Reply With Quote
Old 10-29-2015, 12:54 PM   #16
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Quote:
Originally Posted by hopeisnotaplan View Post
What would you consider an acceptable ROI % for a rental property? For example, say I have a potential rental property worth $150K (paid off - no mortgage) and that's about what I have in it, and the rental income is $1250 per month or $15k annually. If I clear about $12k after taxes/misc expenses that's only an 8% annual return on 150k.

Would that be on the low end of your comfort zone or is that a pretty decent situation in your opinion?
Are you including depreciation. The rental income you report on your 1040 is a bit different from the net income you get in your hand each year.

FYI I bought a $100k rental apartment in 1997. I get $14.5k a year in rent from it, but after expenses, sewer, insurance, taxes, depreciation I declare between $7k and $8k in income on the 1040. I'm happy with that, particularly as it's worth $250k now. I could put the rent up, but I like my tenant and she's been there for 10 years.....maybe next year. But I just put in a new natural gas furnace and that cost me $4.5k....well more to depreciate I suppose.
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Old 10-29-2015, 01:45 PM   #17
Recycles dryer sheets
 
Join Date: Jul 2013
Posts: 202
During the recession 2009-2010 we bought 3 single family homes in vacation destination areas. They are located within 10 minutes from our primary residence (in a destination area) and 10 minutes from our beach house. Two of them only rent for 11 weeks per year during the beach weeks and the third one rents the entire year. My wife manages the properties and we paid cash for all with no mortgage. The two beach properties lease through local realtors (10% fee - that is the procedure in this area) and the other we rent exclusively through VRBO/Homeaway.

We have been averaging 6-7%. Your expenses seem very low but you know the property. In addition to the rental income we also thought we were buying at a good time and might realize some appreciation. Fortunately, as of this time, that has been the case. Who knows how the real estate market will do in the future.
__________________
phil1ben is offline   Reply With Quote
Old 10-29-2015, 02:01 PM   #18
Thinks s/he gets paid by the post
Senator's Avatar
 
Join Date: Feb 2014
Location: Eagan, MN
Posts: 3,053
Quote:
Originally Posted by Sittinginthesun View Post
Why is it 8% when I don't have $390k tied up in the property? Just trying to understand that logic. I initially had about $100k into it, more now with mortgage payments and lump payments against the principle. Could argue its a 33% return on initial investment, no?
You are correct. It's $33K/Property Equity. If you have $100K into it, it's 33%.

Typically, the less you have invested, the better the ROI. In the old days of 3% down, you could make a killing. Put down $3K, make $3K, 100% return. But the risk was too great, especially for the banks.
__________________
FIRE no later than 7/5/2016 at 56 (done), securing '16 401K match (done), getting '15 401K match (done), LTI Bonus (done), Perf bonus (done), maxing out 401K (done), picking up 1,000 hours to get another year of pension (done), July 1st benefits (vacation day, healthcare) (done), July 4th holiday. 0 days left. (done) OFFICIALLY RETIRED 7/5/2016!!
Senator is offline   Reply With Quote
Old 10-29-2015, 03:02 PM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Ed_The_Gypsy's Avatar
 
Join Date: Dec 2004
Location: the City of Subdued Excitement
Posts: 5,293
This is a very useful and timely thread for me.

We are in a position to buy our DD's condo (half of a duplex in Tucson) from her outright for as little as $75k. We would have 100% equity. It appears to be worth about $110k when in good shape. It is in a gated community on the west side, which seems to be well-sited. We helped her pick it out.

I am eye-balling about $5k to $10k to fix it properly. Our choices are
a) fix it and sell it (May seems to be the best month to sell in Tucson),
b) fix it and rent it out (we would hire a quality property management company since we do not live there; it appears that it should rent for at least $950/mo), or
c) fix it and use in as a winter getaway (not very practical, I think, but if we choose to sell next May, we could have this winter).

All things considered, b) appears to be an attractive choice. We know the condition (it needs work) and have some idea of the costs of fixes, upkeep and management (thanks, Senator!).

We would appreciate any comments on this idea.

Ed
__________________
my bumpersticker:
"I am not in a hurry.
I am retired.
And I don't care how big your truck is."
Ed_The_Gypsy is online now   Reply With Quote
Old 10-29-2015, 03:31 PM   #20
Full time employment: Posting here.
 
Join Date: Aug 2014
Posts: 555
Quote:
Originally Posted by Senator View Post
You are correct. It's $33K/Property Equity. If you have $100K into it, it's 33%.

Typically, the less you have invested, the better the ROI. In the old days of 3% down, you could make a killing. Put down $3K, make $3K, 100% return. But the risk was too great, especially for the banks.
Brings up an interesting question--at what point do you start figuring the ROI based upon a reasonable selling price of the property? Obviously, given a good market, it would make sense to either sell or refinance when the loan/value ratio gets low and buy another property or two.

My wife would not be happy with me buying another property unless we hire out more of the management of the units we have. And we just might do that soon.
__________________

__________________
ArkTinkerer is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Total Portfolio ROI - February 2007 retire@40 FIRE and Money 4 03-08-2007 05:01 PM
Total Portfolio ROI - January 2007 retire@40 FIRE and Money 46 02-11-2007 09:15 PM
Observations on "Actual Average ROI" poll Sam FIRE and Money 31 05-04-2006 01:26 PM
Your average ROI in the last 15 years Sam FIRE and Money 75 05-03-2006 11:37 AM

 

 
All times are GMT -6. The time now is 02:16 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.