Still making money in RE

[Arif]

Here's a decent article about making money off real estate:

http://money.cnn.com/2006/05/12/real_estate/reguide_moneymag_atlanta_0606/index.htm

Basically, if your buying properties in good middle class areas and rent them out (with positive cashflow) for a long time (pay down principle and low appreciation) then you'll do fine as a long term investment. Unless you're willing to buy rehabs or build, the time of just sitting on your butt in a home and doubling your money is over.
Have a nice day

 

[macdaddy]

"The Shaws, who have a daughter, Morgan, 18 months, purchased two small three-bedroom homes for $130,000 each and rented them for $1,100 a month. That's enough to easily cover the mortgage payments of $750 a month plus about $150 worth of insurance and property tax costs."

If they put 20% ($26000) down then their return isn't all that attractive. If they have no maintenance or repair costs and the houses are occupied continually then they make $2400/year. If they invested the $26000 elsewhere it seems like they could make inflation + 5% which would be an adjusted $1300/year in a more liquid investment with little downside. If they didn't put 20% down then it looks like they have an ARM loan which could rock the boat in a couple years.

My experience is that houses like the one described can easily become money pits, and if you have bad tenants, or need a management company to take over, then it's most likely a loss for the year. Compared to the returns on multiplexes a SFH is not worth it unless you see appreciation on the horizon. The best part about them seems to be that they force people, like the ones described in the articles, to save rather than spend, and if they keep that up for 30 years then they will have a lot to show for it.

 

[wabmester]

I'd buy it. When calculating the cap rate, you don't include mortgage interest. They're getting $13K/year from a $130K investment. Of course, you have to reduce that $13K by operating expenses, so figure $10K/year, and you're still looking at close to an 8% cap rate, which these days is pretty good.

 

[Nords]

"The Shaws, who have a daughter, Morgan, 18 months, purchased two small three-bedroom homes for $130,000 each and rented them for $1,100 a month. That's enough to easily cover the mortgage payments of $750 a month plus about $150 worth of insurance and property tax costs."
If they put 20% ($26000) down then their return isn't all that attractive.

I wonder where an 18-month-old gets the money, let alone the motor skills to sign the closing documents.

Although I've seen many landlords who'd be awed by her intellectual prowess...

 

[macdaddy]

A cap rate of 8% is wonderful if you can borrow money at 6% or if your alternative investment opportunity is a MM at 2.5%. But it looks like they borrowed money at close to 8% and now Citi pays 4.75% on cash deposits. I'm curious, why would you buy? Rates are headed up, ARMs haven't adjusted and prices haven't declined as much as they should. 8% cap rates on SFHs (brand new mid-level construction) are all over the place in NC, SC, TN, and GA, from companies like Beazer who continue to have "24 hour/one day only" sales every other week. If you move away from new construction you can find 10% cap rates but the potential for more repair costs. The kind of people who rent these homes have not seen salaries increase so I don't think there is much space for rents to increase. On top of which, appreciation is maxed out and people are stretched too thin. Rates will ultimately force prices down. The time to buy is when the cheapest loans available are 10% and prices have been flat after initial declines and several subsequent years of hefty inflation. It looks like we may be at the start of that cycle (rates headed up, inflation and possible recession on the horizon)... so I'm curious why you'd jump in the water now rather than wait it out. I don't have a crystal ball, this is just my opinion.

 

[Arif]

No one in there right mind should buy rental property with an ARM. UNLESS then know they are going to sell the property before they're faced with higher pmts. Although I wouldn't take 8% as an acceptable return, (I am also willing to do/ buy what most folks won't) for a novice your pool of deadbeat tenants SHOULD be lower at rents of 1100 per month in Atlanta. So for a low headache investment this would be a good deal. I prefer more headaches myself.

BTW- Not sure if that 8% mortgage is accurate but if it is, there financing is out of line. I don't see why they couldn't get 6.5-7% especially if they're putting down 10-20%.

 

[wabmester]

I'm curious, why would you buy?

It's been so long since I've seen anything like an 8% cap rate on a SFH, or even an MFH in our county that I'd probably snatch it up in a second if I saw one. But, you're probably right -- those with more patience than me will probably be rewarded for waiting. A REIT with that kind of yield would be even better, since I really don't want to be a landlord.

 

[tryan]

two small three-bedroom homes for $130,000 each and rented them for $1,100 a month. That's enough to easily cover the mortgage payments of $750 a month plus about $150 worth of insurance and property tax costs.

Nope ... don't see how this works. Need the rent to also account for:

5% vacancy
15% maintenance
2% water

Managment fee ... ferget about it (12%). You get to do it all yourself.

 

[ESRBob]

I'd also be skeptical of "$150 per month in insurance and property tax costs". Just got my bills for both, and they are only headed one direction...

 

[wabmester]

A question for those of you who are giving their deal a thumbs down:  have you recently found deals that flow cash after 20% operating expenses and ~7% interest?   Or even better, after 12% management fees as well?

If so, where are you finding them?   I looked into foreclosures a while back, but in our area, they get bid up to market value by overzealous hordes.

 

[macdaddy]

The market for SFHs and condos sucks because there is too much money chasing the same returns.

I'm looking at some multiplexes.

One for sale for 1.1m is a 13 unit multiplex, 7% CAP rate - but the expenses are inflated. Cut expenses down to normal and the CAP rate is 10%+.

Another is 2.2m for 120 units only 65% occupied. 12% CAP rate and a lot of upside potential if the property can be improved - it's in an area with rental demand, just has terrible current management. Sounds like a lot but with that return, 85% LTV financing is available at 8% for 10 years. (12% - 8% = you are making money).

In order to find the deals, from what I have seen, you need to move up in price until you are clear of all the speculators who don't really know what they are doing. I dont think it's ever been the case in history that you could buy a house at market value, pay a management company 12% to look after it, and be cash flow positive...

 

[bwtucker83]

I agree with macdaddy. Not only are multiplexes more profitable they are easier to deal with.

For 1 million dollars you could buy 7 or 8 SFH's Or you could buy 13 to 24 apartment units. The apartments will be easier to manage since they are all right next to each other so you get discounted prices from property managment companies. Cheaper managment, easier management, higher returns and cap rates. Also, I believe it is a lot easier to find undervalued properties in Apartment complexes (just like the cases macdaddy spoke about).

 

[tryan]

have you recently found deals that flow cash after 20% operating expenses and ~7% interest? Or even better, after 12% management fees as well?

Nope ... that's why I've been a seller since 2000. Simply too much liquidity out there.

I dont think it's ever been the case in history that you could buy a house at market value, pay a management company 12% to look after it, and be cash flow positive...

I did the management company thing for 5 years with 9 units while I was at mega-corp. You're exactly right ... my positive cash flow went to break-even. It wasn't so much the mangers fee (12% of all rents) as much as the maintenance costs (paying a plumber $60 for a toilet clog or to light a pilot). Also didn't help that they took a months rent for each vacancy they filled. 12% is just the start.

 

[Arif]

I'd also be skeptical of "$150 per month in insurance and property tax costs". Just got my bills for both, and they are only headed one direction...

GA taxes are really low. In some places it's 1% of appraised value and insurance is around $500 per year. You're right that both are headed higher the other side of it is are rents headed higher to pay for those increases. In Texas, rents in the area I'm invested in aren't thus the flight of my equity from TX to GA.

I agree with macdaddy. Not only are multiplexes more profitable they are easier to deal with.

For 1 million dollars you could buy 7 or 8 SFH's Or you could buy 13 to 24 apartment units. The apartments will be easier to manage since they are all right next to each other so you get discounted prices from property managment companies. Cheaper managment, easier management, higher returns and cap rates. Also, I believe it is a lot easier to find undervalued properties in Apartment complexes (just like the cases macdaddy spoke about).

Yeah but you also have to deal with 13 to 24 water heaters, toilets, HVACs, etc. Add to that tenants that don't get along and it can get volatile. When I looked at my real estate portfolio of both SFHs and multis it was a wash on the cashflow side with the SFHs experiencing WAY LESS vacancy, maintenance, and management. If all I had were 7 or 8 SFHs I would manage them from Panama without a PM. That's how low maintenance they are. I guess it really boils down to what you want to do and your own personal circumstances.

FWIW- My new plan is to pay off a few of the SFHs and the multis then sell the rest.

 

[tryan]

SFHs experiencing WAY LESS vacancy, maintenance, and management. If all I had were 7 or 8 SFHs I would manage them from Panama without a PM.

That's been my experience ... add to it that SFH command 15-20% high rents for the same # of bedrooms.

Only have 6 left ... no plans to move to Panama.