What annual dollar return makes you take interest? I’m running calculation’s based on a % return and cash flows that range widely. As you all know, better than me, you can manipulate the projected returns based on term of loan, rental payments, down payment, etc.
If you were new and starting out. What dollar amount should I look for? It seems like anything less than net $5k in profit is not worth the time and effort throughout the year.
When I ran our numbers last year, we had several houses that ended up around 3k profit for the year (prior to accounting for depreciation). With rent around 550-600/mo, you’re not going to see a profit of 5k/house. Another thing different about us vs. a lot of other people is that our loans are for shorter terms. That reduces cash flow because our payments are higher (10 year amortizations vs. 30 yrs). You have to consider that too. My goal is for free and clear properties in a short time frame, not paying interest over 30 yrs. Numbers are important obviously because you want your properties to take care of themselves financially and give you a profit, but don’t get so bogged down that you get analysis paralysis. Trying to get deals where the rent is at least double the mortgage payment (on 10 yr ams) has been a good rule of thumb for us.
Also consider when you expand your business by buying more houses, that will be a money suck because you’ll have rehab costs to get it ready to rent and carrying costs during that time where that property isn’t making you any money.
I try to get a 10% Cash On Cash return before any appreciation and/or depreciation and/or other tax benefits. That means if it cost me $100000 out of my pocket to purchase, rehab, etc, I want $10K profits for the year. If I mortgaged the property and only took $10K out of my pocket for downpayment, closing costs, rehab, etc I want $1K in profit for the year. When I say profit, I mean PROFIT after all expenses. Some investors would not be happy with 10% but in my target area where rents are low in comparison to property values, 10% is a pretty good goal to shoot for. My actual returns range from 8.7% (my first investment property … I overpaid) to 13%.
To clarify the above, this is in reference to long term rental, not flip.