Hello all. It is amazing the wealth of info on this forum, so I thought I would give you guys another chance to show me what you got. I think one of the most popular questions facing every new rental investor is how much should they be looking to profit in a rental property. I know this depends on a lot of things, but if we could break this down by 2 families, 3 families so on and so on… Here in central MA, I think it would be hard to find something that would gross you anything more than 10k a year for a 3 fam. 2 families are almost impossible to rent since most start selling at 200k. Any takers?
My business model called for a minimum cashflow after ALL expenses were paid of at least $125 a month ($1,500 a year). These were smaller, lower-priced single-family houses renting for between $650 and $850 a month.
My properties, however averaged a monthly cashflow of over $250 a month ($3k a year) per unit…
Where are you in Central Mass? Springfield? The cash flow is always better the bigger the downpayment you have. There’s next to no cashflow if you’re close to 100% financing.
Profits in a rental property isn’t just from the cashflow. That’s why most properties don’t have positive cashflow, they make it up from the interest deductions and the depreciation. That’s where you’re going to get more than 10k a year in profits. And if you’re just putting a small amount down, say 30k and you get a 10k return per year, that’s 33% so you can’t really complain too much. Other investors see that too which is why the housing prices in Massachusetts are bid up pretty high.
Henry, good to see another fellow Mass investor. I am in the Springfield area. I absolutely agree with your thoughts on depreciation, deductions and actual returns, however,I have to say that there is plenty of cash flow in western Mass (i consider Springfield western Mass, not Pittsfield) with 100% financing. Leverage is the key. I say use anyone’s money but yours.
Central Mass is tough. The farther east you go the tougher it is in Mass.
<<… (i consider Springfield western Mass, not Pittsfield)>>
And, in the Berkshires, we consider Springfield to be part of the “greater Boston” area…
Keith (former resident of the Berkshires!)
Right now I live in Worcester. I posted this question because I knew depending on where you were in the country, a rental property will yield different profit margins. In central MA (and this questions isn’t reserved for MA investors, but everyone out there) since the selling prices are so hi, it is hard to establish a profit since the monthly mortgage is so hi. Is 150.00 a month typical for what someone would expect to make generally? What numbers should I be looking for when judging good rentals?
It’s really hard to say because it depends on how much of a down payment you’re going to put on the property. The bigger your down payment, the smaller the mortgage so your monthly cash flow will be higher.
I go more by whether the property is worth it relative to other properties. Right now prices have come down a little bit because nothing has been selling but also rates have come down in the last month so right now is a nice time to buy. Of course it could get better later too.
The way to judge rentals would probably be to go by either the cap rate or gross rent multiplier. Gross rent multiplier is probably easier to do. Figure out total rents for the year divided by the selling price. In order to do this, you need to get a good feel for the rents in the area. The rents in the listings tend to be all over the place, some are really low because the owners never raised them, some are really high and are unrealistic going forward.
That said, I do see some good deals once in a while in Worcester. Early on there was one listing that was listed at $220k and I was going to take a look at it, but it was raining that day so I waited til the weekend and it was gone, sold for $225k. Now it’s been fixed up and back on the market for $350k. That was the only really good deal I saw in the last year.
[b]The cash flow is always better the bigger the downpayment you have. There’s next to no cashflow if you’re close to 100% financing.
Profits in a rental property isn’t just from the cashflow. That’s why most properties don’t have positive cashflow, they make it up from the interest deductions and the depreciation. That’s where you’re going to get more than 10k a year in profits. And if you’re just putting a small amount down, say 30k and you get a 10k return per year, that’s 33% so you can’t really complain too much. Other investors see that too which is why the housing prices in Massachusetts are bid up pretty high. [/b]
Henry, no offense, but IMO, the above is largely bull.
If you plan to pay yourself back, then you have to figure in your downpayment into your calculations as well. So, basically, you’re always financing 100%.
The only real profit in rentals is the cashflow. The real cashflow that is. Interest deductions and tax depreciation and even property appreciation are all great and add to the benefit of owning RE, but none of them will pay your bills or put food on the table. I really don’t feel like debating all of the problems with the above way of thinking right now. Maybe propertymanager will choose to chime in here and lay down the landlord laws.
No offense taken. I was merely refering to most properties I see in my area. I think in other parts of the country it’s much easier to find properties with positive cash flow. Just pointing out that you can still make money even if you have negative cash flow, but of course it’s always better to have positive cash flow.
I suppose if you do 100% financing, it’s tricky figuring out what your return on investment is as it would depend on how much time and energy you put into it and how much you value it.
Interest deductions and tax depreciation really do pay the bills and could be used to put food on the table. It’s easy to do, just change your tax withholdings so that instead of getting a big rebate at the end of the year, you end up neutral or owing a little and then you can use that extra money any way you like.
Now property appreciation might be one of those things that might not be there in the short term, but will probably be there if you hold on long enough. I think there was some study that said that people who bought at the height of the market in '92 in certain areas of the country took around 10 years before prices rose back to their previous levels.
You idea of deductions/depreciation only works if you have those to take. My grand tax rebate last year was a whopping $500. Hardly able to eat beanie weanies on that, let alone steak. In other words, I still disagree.
If someone does 100% financing on a property and actually has a positive return at the end of the year, that return is infinite. Pretty easy to figure. I guess that you’re assuming that you don’t put any time and energy into a deal if you DO put money down?
In several of my holds, I’ve got 120% financing on the deals, plus true positive cashflow. Tell me, what does that make my return on investment? Infinite plus?
The key to any investment is in the buy phase. What you’re referring to is basically paying retail and hoping for some positive benefits to come out of it at some time. Since we are on a RE investors’ forum, that idea doesn’t really fly. Yes, it works for the speculators out there, but I don’t consider that true investing, either. Gambling, yes. Investing, no.
If you can’t find discounted properties in your area, then the best advice is to move your investing to another area.
Henry, the basic premise of your investing “strategy” is what the rich use, which works for them. However, it doesn’t work for the masses, which is generally what is preusing these boards. A working class person trying to follow this method will go bankrupt fast.
Why does it work for the rich? Simple. When the rich buy property, they are investing their money into a return (as you mentioned). They can afford to pay retail (and above) and it will still generate a return (even if it is a loss). If they have $200K lying around and they can get 10% in a bank or 30% by owning RE, which is the better choice (for them)?
A working class person can’t (or shouldn’t) follow this plan because any down that they put is usually going to be their life savings. Trading in your life savings for a hundred dollar a month cashflow is plain dumb (far above “not a good idea”). Heck, even using your $833/month cashflow ($10K/year), it’s way too easy to simply breakeven (or worse). What happens when 50% of the tenants are gone or not paying? What happens when the roof needs replaced? A disguntled tenant completely trashes a unit (or two)? Or God forbid, all of them happen at once? Remember, that savings is already gone! What do you do?