I'm just curious. Out here in Central Oregon, it's just about impossible to get positive cash flow from rentals.

Here's a fairly typical example:

Three year old duplex just sold for 294,900. Each side rents for 695 a month. Yearly rents are about 5.5% of price.

Single family homes are about the same. A nice new 3/2 1400 sq foot home will cost you a good bit over 200k. Say 250k. You'd be lucky to get 900 a month in rent.

I've seen some really rough looking 30 or 40 yr old properties where rents might approach 8% of price. But you'd have a rough time collecting those rents. And I imagine expenses would kill you.

I know more goes into the equation than just a gross rent multiple. Still, these returns seem pretty low.

Appreciation has of course been strong here. Mid 20% range or more a few years running. The thing is, I'm not sure the low end of the market can keep up with middle end appreciation. I have a hard time understanding multi family appreciation tracking single family when rents have been stagnant for quite a while.

So. How do the numbers look where you are?

Mac

A new 3/2 1400sqft home would also cost about $230-$250k here and would rent for $1,200-$1,800 depending on the marketing skill of the landlord. Those returns are too low for my taste which is why I don't play the rental game.

Basically, there are two ways to get positive cash flow from a rental property:
The capitalization rate exceeds the annual loan constant where the loan-to-value ratio is normal (70 to 80%) AND / OR

The loan-to-value ratio is abnormally low (60% or lower)

The precise formula is that your loan-to-value ratio multiplied by your annual constant must be lower than your cap rate to get positive cash flow.

Thanks for the answers.

24Salem7, I appreciate your responses to these threads. I found a very good book on the calculations behind all this stuff and I'm getting comfortable with the math. I've got a finance background, so it's not too much for me to grasp.

What I continue to ponder is the "value" of this rental investment market. I'm curious about other areas of the country, to see how it compares.

Obviously, with double digit appreciation all the leveraged investors out here are laughing to the bank. But rents aren't appreciating anything like that. They're pretty darned flat. Many here say that as homes become less affordable (they sure have) that demand for rentals will go up. That makes sense to me. But will enough people be satisfied in renting here and taking pretty low wages, or will they look for another place to live? Shouldn't there be a greater spread between newer duplex returns and single family homes used as rentals?

Mac

Hi Mac -

I myself would rather have a duplex. If one side is vacant you still receive partial rent. I have also opened up my rentals for Section 8 housing. My PITI is $1,091 and the combined income is $1,550. We are actually $50 less per side than the neighbors. We only pay for the garbage.
The way a duplex is priced now there is no way it will "pencil". They are priced for owner occupant. With a duplex listed and valued at $250,000 and the rents to receive on them for the area $1,700 (total) figuring 360 months, 6% interest the purchaser would have to put down 25% ($62,500)to receive a positive of approx. $280.00 per month. If the duplex was rented 100% & no problems what so ever, it would take approx 18.5 years to get the $62,500 back.
With the loans out now, buyers want everything for nothing. They want to put as less as possible down. So with only 10% down there would only be a positive of approx. $57.00 per month. That would be okay in a perfect world but there will be repairs, tax increases, etc.
Oh well - We can only do what we can. I am glad I bought early and maintain them.

Basically? 27Salem7, this is quite possibly the most complicated explanation of "more in than out" that I've ever heard.

Ignore him... we know what you said.

Another free Cash Flow calculator is available from http://www.narreia.com/ I have played with it for a couple of days and it appears to be very good and looks a heck of a lot better than my excel sheets!!!

Almost forgot to address the original question. In my area is have a very wide variation. In lower end SFD homes it is often very good Cash Flow and ROI. In the Beaches area Condos, it is impossible to have positive Cash Flow but very high ROI could be possible... that is one of the situations where Realdealer's simple view would be totally wrong... but he isn't a licensed agent nor an effective investor so just pass the inputs by whey they are obviously short sighted and simplistic...

I wasn't trying to be nasty. Just pointing out that investing is simple, either you sell for more than you buy, or you get more cash flow in than expenses out. Preferably both.

You can make it more complicated if you want, but it's really a very simple.

RealDealer, I didn't take your comment as nasty. I considered it quite poignant. Just as I valued 24/7 and RealtyCheck's points.

Your definition of cash flow is powerful because it cuts through the jargon of this industry. It makes the business accessible to more people.

As a real estate professional, I need to be up to speed and completely comfortable with jargon. It's the language of my industry. It's shorthand in some cases, and more descriptive in others. It's not pure smoke screen.

There's risk to over simplifying investment decisions. I never liked Peter Lynch's approach in his book on stock investing. "Just buy a good company" and you'll outsmart the clever crowd. Price is important. Jim Cramer slides on this issue some too, ignoring macro regularly, though his trading advice seems pretty well thought out.

I think you go beyond those approaches. You say you need cash flow, or buy low sell high. You gotta make money somehow. The thing is, it really is complex, and the tradeoffs can be quantified (even if the numbers are based on pure speculation). I think a complex quantified approach is better as a rule, so long as it isn't a crutch that hides the real game...which is all speculative.

And cash flow is just one aspect of a real estate investment. An investor who operated purely on cash flow would be broke fast. I think it's important to familiarize myself with the bigger investment picture, and all the pieces that make it up.

Thanks again to everyone who responded. It's a shame this thread didn't take off into survey of sorts. Fifty contributions of returns and descriptions of the markets, all around the country. It would have been interesting.

Mac

Mac, there may be a risk in over-simplifying, just as there's a risk in over-complicating. But in all my years investing I've never seen anyone fail because of following a simple investment plan. While I've seen literally tens of thousands never even get started because they built every little detail up into a huge complex obstacle that they couldn't overcome.

I don't agree that investing (in real estate) is inherently speculative. As a rule I don't buy anything that won't immediately turn a profit in either cash or cash flow or both.

To me speculation is "investing" based solely on what MIGHT happen, such as prices continuing to rise.

RealDealer,

I agree. I'm new in this business, but I've been involved in investments in my past job, and I agree that the basket cases are often those that crunch too many numbers and get too complicated in an effort to feel important, smarter than the next guy, or whatever. And then get stage fright.

I don't disagree with your basic premise. It's just that with your experience, what may feel like a gut decision or an obvious choice, is really a complex analysis.

Few opportunities are pure cash flow, or pure equity growth. An investor has choices to make, and must compare one opportunity with another.

Cash flow is a snapshot. There's nothing guaranteeing rents going forward. Just as there is nothing guaranteeing appreciation. Rents may be more predictable than price growth. But both are risky. And have some degree of speculation in them.

Just cause it pencils today, doesn't mean it will tomorrow.

There's speculation in every financial choice we make. Just as every single one of us is an investor. Money under the mattress? You've just placed a bet. Deciding positive cash flow is an investment while dreams of appreciation offset by negative cashflow is speculative? You've just placed a bet.

I truly value you're insight here. Explaining things in simple terms is harder than swapping jargon.

I just think the most honest approach to this stuff is to call it all for what it is. An educated gamble.

If you crunch your numbers right, you just might get ahead of the game. I have no doubt you do crunch the numbers right. I think it's important everyone does.

Mac

Most investors here are just looking to break even. Some are putting greater than 20% down to get cashflow, but that's their choice. Some investors from CA and FL say they don't mind losing a few hundred dollars a month after putting down 20% because they plan to sell within 3-5 years. They're looking more for appreciation and to get started in investing. About 1/3 are doing a 1031 exchange.

Mac, technically everything is a gamble because nothing can be absolutely guaranteed. But some things come close. I agree that cash flow isn't one of them and neither is appreciation. How about a nice big cash down payment from your tenant/buyer?

The kind of deal I look for goes something like this. Buy on a lease option with nothing down and $1,200/month. Sell on a lease option with $10k down and $1,800/month. If the t/b pays you make money. If they don't pay you make more money. If they buy the house you make money. If they don't buy you more money, unless the market crashes in which case you don't exercise your option either.

It's hard to lose in a situation like that. So it's not really a speculation in my opinion.

Dee, "here" meaning Austin or this forum? All I can say is I wish you luck that the market keeps going up!

A duplex I just sold rented for $550 per side, it sold for $95k. So using your formula that would be 13.8% of the pruchase price.

We typically have cap rates of 8%-13%.

In Las Vegas appreciation equity is nearly the only reason to buy a residential investment property. Homes used to get $1 per square foot to rent and rents almost always covered mortgages. But today, you'll spend $300 to $400 on a 2000 square foot home and only get $1200 to $1500 to rent that home. Very small homes are getting $1 or more per square foot, but they are also selling for over $200 per square foot.
--A

In the North Dallas area homes can and do cash flow often when bargins, wholesale buys, and rehabs are selected carefully.

Some new home can rent for the mortgage payment. With 20% down you are definately in a good position. Some CA investors have bought multiples from a single builder.

$120k home = $1400 rent

I've known two investors in rentals out here, one big (30+ units) and one small (half a dozen) that have sold here and bought in Texas. They're doing commercial stuff out there. Good cap rates and solid future I'm told.

I'm really pleased that others have now joined in on this thread. Thanks very much!

Real Dealer, that's a very strong case you make for your investment. It reminds me of what the smart money did back when I worked in the stock market. Risk arbitrage. Playing deals, and when no deals were around, they bought value stocks. Always took a freebie IPO that was a favor for being good customers. This was late 90s to early 2000s.

I think it's important to note that your last post was both highly instructive and also pure jibberish for the common guy on the street. The concepts behind it aren't all that complicated. But they require a familiarity with the jargon of the business. The way you make your money is understandable to a novice like me who takes the time to learn what you're talking about. It's a great bet. But it's no longer so simple as you put forth in that earlier post.

And how would you compare that situation with a similar one, maybe a bit more upfront, or a bit more later? I suspect math would come into it.

Your approach may be a layup. Right now. Competitive markets have a way of catching up to inefficiencies. If it's so good, low risk at every angle and solid returns, money will find it.

And then you'll be stuck comparing that approach to a similar contract with different terms, and deciding against that and a pure appreciation play, and also a cash flow shot. How will you decide where to put your capital? After you've compared it to returns in other investments? With good solid analytics, and a healthy respect for the speculative aspect of it all.

This is good stuff here. I thank all of you, especially Real Dealer, for sharing.

Mac

When it comes to money:
More is better than less, sooner is better than later, and more sooner is best.

This simple little rhyme manages to explain the very complex concept of the time value of money, in a way that you can use practically in your day to day life. How many people do you know who can grasp the reason why $100 is worth more now than it will be a year from now? And yet this rhyme says it so simply "sooner is better than later".

But I do see your point about understanding the jargon and the concepts. If I didn't understand the time value of money, would I truly appreciate the simplicity of the above rhyme? Probably not.

Regarding the investment play I mentioned. The risk is low in all but the most important area, personal risk. Finding these deals takes more persistance and determination than the majority of people have. I've seen plenty of competition come and go over the years.

It's not a true "CAP rate" without taking expenses in mind, but I'll stick with your percentage idea just to keep things simple. Here I would say we average about 8%. Some more expensive new construction ($500K and up) will be closer to 6%. You can find some run down duplexes and small apartment buildings for up to about 12%- but you really have to consider upkeep expenses and management headaches with those. GRM (gross rent multiplier) is what you're really looking for I think.

Carla, I didn't use Cap Rate because the basic info provided in MLS out here doesn't give enough data to calculate it. An experienced investor or Realtor in this field would know the Cap rates. I come across them some, especially on commercial stuff in Loopnet. But as a novice, I'm stuck with simpler and less informative gross figures.

I used Gross Rent Multiplier here, but not the term, because I think a multiplier is a harder concept (slightly) than a "gross yield" of sorts. Same numbers, just one the inverse of the other (if I remember my math terms right, which I probably don't).

Cap Rates as I understand them are a little better, and very commonly used, since they take all but interest expenses into account. You couldn't include interest expenses because one loan to another is apples to oranges. And I think they leave out tax savings for the same reason.

I'm not telling you anything you don't know, obviously, just practicing with the concepts.

I've been looking at Internal Rate of Return on a lot of this stuff, to get closer to the concept RealDealer gave us in his fine saying about sooner and more is better (to paraphrase).

Right now, I'm just learning the concepts of course.

Your GRM or 1/GRM is indeed instructive. Your rents are a lot higher than ours for any given price.

Mac

Alfred,

Also, try taking a look at some 4-plexes in your area. In our local market, buying a 4-plex with 20% down and the right loan, makes the majority of the properties in our area bring in a positive number.

Not the greatest cashflow on the planet, but our focus is on property appreciation, which is HUGE in our market.

Hey guys/gals,

I'm from Portland, Oregon. Same deal, Homes are selling for outragous prices, and the rent doesn't seem to be keeping up. I am originaly from Seaside, Oregon, where it is even worse. You can spend 500k for a piece of junk anywhere else. I am definetely worried about how I am going to keep a posotive cash flow in this area.

Hey I am in the same boat (see my posting). As long as interest rates stay low and old George W doesn't make more mistakes. We should be OK.

Remember Hurricane season is coming and that starts the energy prices and next is... you guesed it^^^^^up go interest rates.

Henry