I have been reading alot of these posts about returns, what is expected or otherwise.
I have to say, I am a little concerned on what I have been reading, about what the expected return is or should be.
So the realist in me, requires that I get to the bottom of things and lay it out for the whole world to see.
The reality of the situation is this, I have been communicating by email with a handful of investors from this board and for some reason the expected ROI is 15%, or thereabouts. I will bluntly say this is absurd!
Here are the FACTS!
I want to be careful here, and not break any rules in advertising, so I apologize now if it seems that way. I will not reveal my actual costs, as those I have been speaking with already know, and I will not disrespect this board by intentionally advertising on it.
Purchase Price: Under 40K fully renovated
Insurance: Right around $800 Per year
PM Fees: 9% Monthly
Taxes: Under $1200 Year
Repairs: 15% month
Vacancy Rate: 1 Month Per Year
Rent Income: $800 Per MonthIf you calculate those above numbers as they are, you end up with a 18.13% ROI or Cash on Cash. So where does it all go?
1. Property Management – For some reason PM's feel the need to inject themselves into YOUR investment property. They do this by taking massive markups on maintenance calls, as if they have skin in the game or something. I refer to this as GREED! If you recall my earlier posts about PM, I see this far too often.
They also kill the returns by leaving the property vacant for too long of a period. This one I don't understand at all. Most legitimate PM's use online software, to manage these properties. The software has built in reminders to alert us, that we have leases expiring, mine alerts me up to 90 days. The PM should be able to determine within 60 or 90 days if the current tenant is renewing the lease or not. If the tenant is not renewing, you should be marketing that property at the 45 days to go mark, to give you ample time to have a tenant ready to go. I have never had an issue telling a new tenant that they can't move in for 45 days, as long as you are completely honest with them, they will tell you if they can wait that long or not.
2. Renovations – You want to kill your return, get this wrong and say goodbye to your cash flow. This alone will explain the high estimates on maintenance that the "guru's" all preach you should calculate into your property. Why? Because they never discuss what a professional renovation really is. The fact here is simple, if you do not have proper construction knowledge of a home, or the basic working knowledge of a home, do yourself a favor and research it or ask questions. Make sure your "team" member that you are putting in charge of locating homes for you, has a construction background and can spot problems as they see them. It's not simply about paint colors and carpet choices, it is so much more than that.
Let me ask everyone this, why do a majority of us buy NEW cars versus OLD cars?
If you do not have a professional renovation done, I can promise you and can SHOW you proof, these properties will fail 9 times out of 10! You will end up doing 2 renovations on them, to get the items fixed in the home when the tenants move in, that was not addressed during the renovation, because the problems did not manifest themselves.
The average time to get the property back on track after a poor renovation, 2-3 years!
3. Brokers– I have no issue with paying fees to brokers for bringing buyers to me, I have a good size broker network that does in fact get paid. The issue here is when 1 broker becomes 3 brokers, and they tack on 15K in fees…I have to ask, FOR WHAT? Say bye to your return, simple as that.
4. Insurance– This one is a small amount in comparision to the others, but I will share with you a few tips on how to maintain your insurance rates down.
I always recommend NOT insuring your property for the replacement value of the home, this just tacks on several hundred dollars to the premium and is really not necessary. I always recommend insuring for 25-30% over your investment total, this will insure you have your investment dollars returned, and you will have the money to pay the demolition expenses if the worst case scenario happens. The insurance company I use, calculates replacement value in KC at $50 per square foot (that's way low, but I'm not telling them, as it's more like $75-175 per sq foot depending on the location) this means for a 1200 square foot home, I'm insuring it for $60,000! If the home suffers damage to it from a storm or fire, and the city determines is not salvagable, the only thing you are required to do, is demolish it and haul off the trash. You will have to maintain the lot, but what you can do is simply donate the lot to a church or charity group and take a tax write off, and eliminate the headache. The demolition typically costs between $6-8K for a single story home up to 1500 square feet. The costs do go up obviously for multi story homes or those homes with more square feet.
The reality is you will not get a replacement home built for 60K, you will have to come out of pocket for the balance, and it just does not make financial sense. Get your money out of it and get another one for half that price!
These 4 items alone are enough to cause massive shrinkage in your return, and it usually can be traced back to PM and renovations. There is nothing hard about doing a professional renovation, and it is not that expensive to do what I do to these homes. What it boils down to usually is the company turning out the properties, either is not aware of these hidden problems, or just don't care, it's not their problem after all.
Bottom line is this, 15% returns is very mediocre in this current real estate market, especially on a single family home, as this is simply not acceptable. Maybe 4 years ago before this mess started, it would be fine. If your not getting high teens, look at your finances, see what your paying for maintenance. If you just had a home "renovated", why do you have maitenance calls at all, you should have warranties on "new" items, if in fact they were replaced. A professionally renovated home should easily go 1-2 years without any maintenance calls, short of neglect or abuse, new parts very very rarely fail within this time frame, and if they do it's covered by the manufacture.
Take Care!
John
Hi John,
Good post. I have some comments.
1) Property Management – Property Management is a necessary evil for long distance property owners. The simple fact is no one will care about your property as much as you would, but you have to have a property manager involved if you own a property overseas. The best thing to do is find a property manager that is recommended by other investors.
2) Renovations – The best thing to do here is go with a contractor who is licensed, insured and bonded with the local government. Call the local city and confirm that their license and insurance is active. Ask the contractor for 3-5 references and follow up with every single reference.
3) Brokers – Agreed with your comments on brokers.
4) Insurance – I agree with you on this. For all my properties, I have insurance to cover my investment, demolition and about 25% money on top of it to walk away with some cash if the property needs to be demolished.
One thing I don’t completely agree with is about the last paragraph. No matter how well you renovate the house, you can’t always make the house fully “tenant-proof”. There will always be some maintenance calls. There are always be some water leaks, some toilets, bath tubs, kitchen sink, etc that need to be rodded. The best thing to do is keep a separate reserve for these maintenance calls, because it’s not a matter of if, but a matter of when you get these calls.
Another thing that can make or break a deal that not many people think about is real estate taxes. On a good deal, it should not take more than 2 months of rental income to cover annual property taxes.
Also, I agree that in this market where there are TONS of GREAT deals, anything less than 15% net ROI is not worth investing your time and effort
Otherwise, a great post.
baruchmax wrote:Hi John, Good post. I have some comments. 1) Property Management – Property Management is a necessary evil for long distance property owners. The simple fact is no one will care about your property as much as you would, but you have to have a property manager involved if you own a property overseas. The best thing to do is find a property manager that is recommended by other investors. 2) Renovations – The best thing to do here is go with a contractor who is licensed, insured and bonded with the local government. Call the local city and confirm that their license and insurance is active. Ask the contractor for 3-5 references and follow up with every single reference. 3) Brokers – Agreed with your comments on brokers. 4) Insurance – I agree with you on this. For all my properties, I have insurance to cover my investment, demolition and about 25% money on top of it to walk away with some cash if the property needs to be demolished. One thing I don't completely agree with is about the last paragraph. No matter how well you renovate the house, you can't always make the house fully "tenant-proof". There will always be some maintenance calls. There are always be some water leaks, some toilets, bath tubs, kitchen sink, etc that need to be rodded. The best thing to do is keep a separate reserve for these maintenance calls, because it's not a matter of if, but a matter of when you get these calls. Another thing that can make or break a deal that not many people think about is real estate taxes. On a good deal, it should not take more than 2 months of rental income to cover annual property taxes. Also, I agree that in this market where there are TONS of GREAT deals, anything less than 15% net ROI is not worth investing your time and effort Otherwise, a great post.baruchmax,
I appreciate your comments.
The one thing I will comment on is about taxes. Keep in mind that everyone is allowed to protest your taxes on real estate. The fact is that all values have declined, regardless if your living in an area that sees very little foreclosure. Every county has a tax appeal process that you (representative) can make your case to. If you believe your RE taxes are too high for that area, you can request a hearing in front of the board of appeals and make your case. You or your representative have to bring in comparables of recently sold properties within a .5 mile of your location, and any other factual data to support your claim. The board in most cases will rule right then and there. If you have done your homework, you can get a reduction in your taxes.
I appealed my taxes on my personal home and was able to get a 75K deduction in value, not what I want to hear if I am trying to sell it, but it did reduce my taxes about $700 year.
Just because you live out of country or even state, does not mean you can't do some homework yourself, before deciding on hiring an attorney to represent you. If you visit realtor.com, which is basically an extension of the MLS system for us non realtors who don't have access to the MLS, your able to pull up a comparison of properties sold. I will caution you on this though, don't take the MLS for being the all mighty value indicator. The MLS system is very bias, as it only accounts for those properties that have been sold thru the MLS. By definition, this is not a true comparable. The best way to reach a true value, is search the county records, all legal RE transactions go thru the county, so they will see all those transactions that occur outside the MLS. This is a much slower process, as you have to search house by house, but much more reliable as a value indicator.
The other site I caution you against is Zillow, very unreliable for values. Their values are all over the place, because they take into account those properties that sold at the courthouse steps. The problem here is simple, when a bank decides to foreclose in Missouri, state law requires that property to be auctioned off at court. For those properties that the bank has no desire to let go of, they will bid the amount owed on the loan, which is almost always more than the house is worth today. This is a legal RE transaction and will be recorded in the county as such. The problem, is zillow picks up on this as a retail transaction and enters into their database, this is why on Zillow, has a huge window on their values. I have personally seen a 40K difference between high and low, how do you arrive at a value on that?
Keep in mind if your already paying under $1000 in RE taxes, don't expect a massive deduction, the county won't be far off on their estimates, but I have seen a deduction of $125 or so, yearly. Not a huge money maker, but hey, cash flow is cash flow!
John
I think the base issue with a lot of these homes in the upper mid west is that they are 30 to 60 years old.
And the tenant's are rough on them period.Here is how I rehab houses for our program because I own them and have to maintain them.
1. new sewer from the st. to the house. ONe of the major issues with tenants is clogged sewer if your sewer line is 20 or 30 years old it will fail.
2. New plumbing old plumbing has bad water pressure and if there is copper your inviting theft.
3. New electrical if it has not been updated in the last 10 years or so.
4. New roof if it is over 10 years old.
5. redo hardwood whenever able, if its rough paint it. Limit carpet as much as possible.
6. Basic paint job on interior if exterior is fine, I do not spend the money just making it look nice as I am not trying to create a perfect looking house for a potential investor I am creating a funcational house for a tenant that is going to be much rougher on a house than most owners. Save the fancy paint and cabinets for when you want to sell.
I agree on insurance. there is more profit just taking 20k than you would ever see rebuilding in these neighborhoods. And the lots as stated are worthless liablities.
Property managers by and large if they are small time 100 unit or so. Can only make money 3 ways letting fee, monthly charge and mark up for repairs. Now if a property manager is also selling you the house then they are making 5 to 15k profit on the flip and can factor that in, but as a buyer your going to pay for it either coming into the transaction or maintaning it.
I submit that the reason you are seeing people talk about ROI less than 18 to 15% is because thats reality in most instances and much worse probably 50% of the time, there are only so many perfect scenerios out there.
If you jump up in asset class you will have much less headaches but your returns are 8 to 10 generally and thats great, for a house that actually may have some retail value down the road.
Quick investment thoughts
Newer homes 3 bed 2 bath or larger = future appreciation ( speculation of course ) good cash flow less headaches
Older investment homes = Great cash flow , higher turn overs and more head aches. Not always….
I do deal with both types of these investment homes( for my own portfolio and our clients ) but would much rather buy what we call the prettier homes factoring in future appreciation with cash flow( no we don't offer 15 to 18 % returns there.) When we collect rents over $850 dollars per house. Seems the whole process is much easier, less head aches and less turn over. Not saying that the lower end homes are horrible. It does however come with higher risk , reward factor built in. Along with many sleepless nights.
The lower end I still play there but after dealing with newer nicer homes always hard to step back. Again not knocking any one for doing what they do. I am just agreeing with Jay, lower end homes bring more head aches. Sorry don't care what any says there. My partner and I own plenty of these lower end investments so I can relate what I have gone through.
again just my two cents
Alex
Alex, The play really is to take all these foreign investor that have an appitited for these low end highmaintenance rentals kind of like (kim kardasian) pool them all up into a 504 D and go ahead and invest in the hood, it where they want to be anyway.
However with you as general partner and in charge of performance and day to day maybe thats one way the OZ investor can buy the low end stuff and have it managed professional and have a change of collecting their rent.
Just a thought
JLH
Alex SC wrote:Quick investment thoughtsNewer homes 3 bed 2 bath or larger = future appreciation ( speculation of course ) good cash flow less headaches
Older investment homes = Great cash flow , higher turn overs and more head aches. Not always….
I do deal with both types of these investment homes( for my own portfolio and our clients ) but would much rather buy what we call the prettier homes factoring in future appreciation with cash flow( no we don't offer 15 to 18 % returns there.) When we collect rents over $850 dollars per house. Seems the whole process is much easier, less head aches and less turn over. Not saying that the lower end homes are horrible. It does however come with higher risk , reward factor built in. Along with many sleepless nights.
The lower end I still play there but after dealing with newer nicer homes always hard to step back. Again not knocking any one for doing what they do. I am just agreeing with Jay, lower end homes bring more head aches. Sorry don't care what any says there. My partner and I own plenty of these lower end investments so I can relate what I have gone through.
again just my two cents
Alex
Alex,
I completely understand your point about "less" headaches in higher valued homes, I wouldn't say there are no headaches but fewer for sure.
The problem with settling for lower returns, especially under 15% as a high, and worse if it's around 10%, is the fact that the NET return calculated there, only accounts for the property. The issue is, there is still one more expense to pay, and it can get pretty expensive in a hurry. It's the wonderful corporation that is the IRS!
At a miniscule 40K NET per year, you are thrown into the 25% tax bracket (according to my CPA, he actually said it was like 36K), and the reality is, it's not hard to hit a NET NET income of 40K per year, when you have rental property. One property can generate in the area of 10K gross per year, by itself. If your getting low double digits in NET returns on the property, this will no doubt throw you into single digit NET NET returns, and make the risk just not worth the reward. I don't know how comfortable anyone would be with rental properties only producing single digit returns, after ALL expenses. We all know rental properties never duplicate the exact same results, but if you keep adding to your portfolio, it will be difficult for you to stay out of the 25% tax bracket, and more than likely you will be graduated to higher tax brackets.
Now most of us know that any new business is given a 3 year pass, if you will, to start making money, or the IRS will want to have a discussion. As my accountant told me when I started in real estate, in the 1st 3 years of business your chance of getting audited is less likely than hitting the lottery twice. After 3 years, in Real Estate, you should almost expect it! I was audited my 4th year in Real Estate, nothing more than a routine audit, and my CPA and IRS agreed, that they owed me an additional $700, give or take. Other than the 3.5 hours of feeling like I was on trial for my life, it was really no big deal. LOL!
I'm not sure where the low end homes comes in, or I guess the appropriate thing to do, is what is the definition of low end?
It's no issue getting mid to high 5 figure homes in KC for well under market value. These homes are in B to A+ neighborhoods, and would make great rentals or great flips. The difference with these areas, is the cash flow is well protected, as the RE taxes are drastically lower because of all the foreclosures. In KC, when you approach homes over 6 figures in value, they will NOT cash flow, the RE taxes are murderous, and destroy any hope of cash flow. I manage a home in one of our suburbs, this home has a current assessed value of 175K, the owner was not willing to sell it, as he would of taken about a 75K hit. He was forced to relocate as his job moved him to Arizona. It is rented for $1400 per month, which is about $150 over market value for that area, as this home has some awesome features. The home is only 6 years old, is, yet his NET cash flow per month, is a pathetic, $227! The RE taxes are absolutely killing him, along with his insurance. Now fortunately this is not an investment property for him, so he's not concerned with his return. The reality here of course is, if maintenance issues come up (and they have not as of yet, since everything is new in this house), but as the house gets older, maintenance issues will come up, and he will more than likely have to come out of pocket for those repairs.
Obviously everyone has a different strategy, and they all can be productive, without question. I have always kept the two strategies apart from each other, as they are 2 totally different strategies. I always buy homes to rent, that are under 100K in value, to get the cash flow. If I am looking to flip, I only purchase those homes with a value over 100K. In KC anyway, homes with a value over 100K and closer to 150K are selling like crazy, those homes under 100K are selling, but not near the pace, on a retail level that is.
I appreciate your comments, I really enjoy reading your replies, always well thought out and professional.
John
John how are you. Like wise the old tax man is coming. For sure after 3 years. So true.. Bottom line you can make and lose money in real estate. I am only 15 years in this business. I don't have the mortgage or bank back ground like others. I have purchased and rehabbed homes from $10k to $5m . Now not going to lie the higher priced rehab homes over $1m was worse then dealing with the $10k rehab project.
Don't get me wrong I buy both ends of the spectrum today for cash flow ( hoping for future appreciation). The 67 house package my partner and I have been working on now going on 3 years. Is in a 5 block radius. All located in a small area of Rock hill , SC..Just below Charlotte NC. Yes even as a head ache I see major profit for long term. And for the town of Rock hill, this area is a war zone but we don't have crime here to be honest. Charlotte yes Rock hill far and few. Still little quiet town . Heck my road if I see two cars go by , I think some thing big is going on. ( yes I am a laid back country boy from NY )
So likewise KC or any other market at the end of the day comes down to the team the investors choose to work with and can they handle the types of products they sell.
John your homes and you work ethics , have heard nothing but good things about you.( No I don't work with John or not affiliated in any way ) . The boys over at Peak ( Jp and Shane ) stay in constant touch with them. Actually conference call yesterday about partnering with some financing for other markets.
Well stay in touch and hope all is well
Alex
PS We still flip if the deal has tremendous up side..Besides once it gets in your blood it is hard to not buy , rehab and flip…Working on purchasing a lake house. Tax value $2.7 m came on market for $700k we offered $400k rehab $400k . Would wait unit spring to put on market at $1.8 looking for $1.4m So yes we still do the flips and no cash flow there on that house.LOL
Alex SC wrote:John how are you. Like wise the old tax man is coming. For sure after 3 years. So true.. Bottom line you can make and lose money in real estate. I am only 15 years in this business. I don't have the mortgage or bank back ground like others. I have purchased and rehabbed homes from $10k to $5m . Now not going to lie the higher priced rehab homes over $1m was worse then dealing with the $10k rehab project.Don't get me wrong I buy both ends of the spectrum today for cash flow ( hoping for future appreciation). The 67 house package my partner and I have been working on now going on 3 years. Is in a 5 block radius. All located in a small area of Rock hill , SC..Just below Charlotte NC. Yes even as a head ache I see major profit for long term. And for the town of Rock hill, this area is a war zone but we don't have crime here to be honest. Charlotte yes Rock hill far and few. Still little quiet town . Heck my road if I see two cars go by , I think some thing big is going on. ( yes I am a laid back country boy from NY )
So likewise KC or any other market at the end of the day comes down to the team the investors choose to work with and can they handle the types of products they sell.
John your homes and you work ethics , have heard nothing but good things about you.( No I don't work with John or not affiliated in any way ) . The boys over at Peak ( Jp and Shane ) stay in constant touch with them. Actually conference call yesterday about partnering with some financing for other markets.
Well stay in touch and hope all is well
Alex
PS We still flip if the deal has tremendous up side..Besides once it gets in your blood it is hard to not buy , rehab and flip…Working on purchasing a lake house. Tax value $2.7 m came on market for $700k we offered $400k rehab $400k . Would wait unit spring to put on market at $1.8 looking for $1.4m So yes we still do the flips and no cash flow there on that house.LOL
Alex,
Small World!
JP & Shane fund some of my homes, in fact they are doing a deal for me on Monday on a 6 plex we just bought.
I'm glad to hear they speak kindly of me…hehe!
Take Care!
John
Hello all
New to the game since 2008 and have been working in the greater Kansas city area. This forum has been a good learning tool and look forward to learning more about investors from over seas.
Kyler
[email protected]Email me if your interested in seeing properties for sale.
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