Real Estate Monthly Rate of Return

Hi All,

I've been investing in the stock market for many years,
and been happy with the returns. However, I was recently
approached with a more secure investment opportunity
where I can buy a real estate to offer as rental property.
I never invested in real estate before, and I will
certainly do a lot of research if I decide to do it.
However, I would only like to know for now what kind
of monthly return can be expected from it. For example,
for each $100k of a rental property value you invest,
what's the minimum rent you would accept, and the maximum
reasonable rent that the tenant can be expected to pay?

Thanks!


-AA

Re: Real Estate Monthly Rate of Return

I have been investing in real estate for a copule of years now. I
invest for the long-term. Meaning that I am looking to landlord (or
pay someone to do that) and not flip properties. With this mindset, in
the market that I have been investing in (various parts of Texas), I
have been able to net $400 or so of positive monthly cash flow for each
$100K of mortgage. If I was able to do the deals without mortgages
(which I wouldn't do), the positive cash flow would be somewere around
$1200 or so of positive monthly cash flow for each $100K. So for what
rent I would accept, I would add up all expenses (plus allowance for
managment fees and monthly amount to pool funds for repairs) and then
add in the monthly cash flow that I would want. I then compare that to
prices in the papers etc. for what similar properties are renting for
in the area. If the numbers do work out, then that property is
immediately off of the table. If the numbers do work, then I do the
rest of the necessary due dilligence (i.e., inspect further, look for
value propositions, etc.).

Hope that helps.



Gary Brolis

Re: Real Estate Monthly Rate of Return

Hi Gary,

Thank you for your elaborate response. Your numbers sound very
reasonable. In fact, your $1,200 estimate is very close to %1.25
monthly rate which I read in most real estate investment articles
and posts. In my case, I wasn't thinking about switching to real
estate investments. However, a student organization approached me
to help them out secure a rental property since they are having
difficulty finding a place to rent. Most landlords don't like to
rent expensive properties for undergraduate students, especially
if they don't have a credit history. Since I know these kids very
well, and I'm comfortable with their financial situation, I
promised them that I'll consider it. However, I'm setting my rate
of return at %1.50 instead of %1.25 for two main reasons:

1. Undergraduate students are considered higher risk tenants by
most landlords, so there must be a little premium for that matter
(not sure how much premium the market sets for this particular
reason).

2. Real estate is not really my thing, and I'm already doing well
in stock market. Although I like trying out my luck in different
kinds of investment, I think I should have some premium too for
locking my assets in real estate during favorable stock market
conditions.

So what do you think? Does %1.50 sound reasonable in this particular
case?

Best regards,


-AA


wrote:
> I have been investing in real estate for a copule of years now. I
> invest for the long-term. Meaning that I am looking to landlord (or
> pay someone to do that) and not flip properties. With this mindset, in
> the market that I have been investing in (various parts of Texas), I
> have been able to net $400 or so of positive monthly cash flow for each
> $100K of mortgage. If I was able to do the deals without mortgages
> (which I wouldn't do), the positive cash flow would be somewere around
> $1200 or so of positive monthly cash flow for each $100K. So for what
> rent I would accept, I would add up all expenses (plus allowance for
> managment fees and monthly amount to pool funds for repairs) and then
> add in the monthly cash flow that I would want. I then compare that to
> prices in the papers etc. for what similar properties are renting for
> in the area. If the numbers do work out, then that property is
> immediately off of the table. If the numbers do work, then I do the
> rest of the necessary due dilligence (i.e., inspect further, look for
> value propositions, etc.).
>
> Hope that helps.
>
>
>
> Gary Brolis
>
>

Re: Real Estate Monthly Rate of Return

"A. A." <
> Hi All,
>
> I've been investing in the stock market for many years,
> and been happy with the returns. However, I was recently
> approached with a more secure investment opportunity
> where I can buy a real estate to offer as rental property.
> I never invested in real estate before, and I will
> certainly do a lot of research if I decide to do it.
> However, I would only like to know for now what kind
> of monthly return can be expected from it. For example,
> for each $100k of a rental property value you invest,
> what's the minimum rent you would accept, and the maximum
> reasonable rent that the tenant can be expected to pay?

You will find a lot of chance involved, and you cannot really predict in
advance what your monthly return will be. The rent you can expect varies
widely with geographical area, and you do not have much control over it.
Whether or not your cash flow will be positive or negative depends more on
the size of your down payment than anything else. As in stocks, I like to
think in terms of total return (dividends plus capital gain) and not worry
too much about monthly cash flow just based on rent minus expenses.

Re: Real Estate Monthly Rate of Return

Don wrote:
> "A. A." <
>> Hi All,
>>
>> I've been investing in the stock market for many years,
>> and been happy with the returns. However, I was recently
>> approached with a more secure investment opportunity
>> where I can buy a real estate to offer as rental property.
>> I never invested in real estate before, and I will
>> certainly do a lot of research if I decide to do it.
>> However, I would only like to know for now what kind
>> of monthly return can be expected from it. For example,
>> for each $100k of a rental property value you invest,
>> what's the minimum rent you would accept, and the maximum
>> reasonable rent that the tenant can be expected to pay?
>
> You will find a lot of chance involved, and you cannot really predict in
> advance what your monthly return will be. The rent you can expect varies
> widely with geographical area, and you do not have much control over it.
> Whether or not your cash flow will be positive or negative depends more on
> the size of your down payment than anything else. As in stocks, I like to
> think in terms of total return (dividends plus capital gain) and not worry
> too much about monthly cash flow just based on rent minus expenses.

I fully understand that. The reason for my question is not
really to set my expectation for how much I will make per
month, but to set a rental amount for my potential tenants.
I haven't bought the property yet, and there are several
properties we are considering (myself and potential tenants).
They are asking how much they will have to pay per month
for each property. Is there a conservative rate that I can
start with? I'm thinking like %1.5 is conservative on average,
but I could be wrong since I don't have much experience in
real estate market conditions. Is there a quick rental
valuation model based on property price that can give rough
estimate the range of rental amount that an owner can ask for?
I know that there are professional real estate appraisal and
valuation agencies who do this kind of work for living, but
I'm only looking for a rough estimate for now. Once I decide
to go ahead with the investment, then I can hire a professional
to give me a more accurate perspective of the particular
property I'm interested in.


-AA

Re: Real Estate Monthly Rate of Return

"A. A." <> wrote in message
news:0roMf.18678$

> I fully understand that. The reason for my question is not
> really to set my expectation for how much I will make per
> month, but to set a rental amount for my potential tenants.
> I haven't bought the property yet, and there are several
> properties we are considering (myself and potential tenants).
> They are asking how much they will have to pay per month
> for each property. Is there a conservative rate that I can
> start with? I'm thinking like %1.5 is conservative on average,
> but I could be wrong since I don't have much experience in

I think the answer is "whatever the market will bear," or something similar.
Just look in the classified ads in the papers or ask property managers what
rents you can expect to get in your city for comparable properties. Of
course, if you want to give these tenants a break because they are students
or friends, that is another question, and once you have found out the above,
you could always reduce it $100/month or so depending on your generosity.
But also do some planning as to what the rents will be after these tenants
have moved out, and what you will be able to sell the building for
eventually.

Re: Real Estate Monthly Rate of Return

A. A. wrote:
>
> I've been investing in the stock market for many years,
> and been happy with the returns. However, I was recently
> approached with a more secure investment opportunity
> where I can buy a real estate to offer as rental property.
> I never invested in real estate before, and I will
> certainly do a lot of research if I decide to do it.
> However, I would only like to know for now what kind
> of monthly return can be expected from it. For example,
> for each $100k of a rental property value you invest,
> what's the minimum rent you would accept, and the maximum
> reasonable rent that the tenant can be expected to pay?

There is not a good linkage between amount down on a
property and amount of rent charged.

To find amount down, look at the current asking prices in
the area, figure in some amount to offer under that, and
the financing available will determine the amount down.
The financing will then tell your your cash flow out. Figure
about 20% more than that for RE tax, insurance and such.

To find current rent prices, look in the newspaper. That's
the cash flow in. Charge higher than that and you'll get
few renters. Again, take some percent off that for
landlord overhead like repairs, lawyers and such.

Depending on geography the price to purchase might be
close to a match or very far away from a match. More
down, more chance of a match. So bascially you're
looking for inflation to eventually raise the rents for a
positive cash flow, or you're looking for a don't-wanter who
isn't going to hold out for market price.

Re: Real Estate Monthly Rate of Return

Doug Freyburger wrote:

> There is not a good linkage between amount down on a
> property and amount of rent charged.

What I mean by property value is full property value,
not amount down used for financing. Please assume that
the property will be bought in cash, not financed.

I think there is some kind of linkage between property
value and rent amount. If you buy a property for $100k
and ask for $10k monthly rent, which is 10% of property
value, then that would be too much on average. If you
ask for $100 monthly rent, which is 0.1% of property
value, then this is too little on overage. I'm looking
for that percentage number which can be considered not
too much and not too little on average. I know this
percentage ranges from one market to another, and
subject to man other factors. However, I'm only interested
in the average that most avid real estate investors
consider reasonable (assuming no financing involved).

Of course, many might be tempted to reply to my question
that avid investors would not buy a property in cash and
will always finance. Please let's rule out the financing
option for now, just for the sake of argument.


-AA

Re: Real Estate Monthly Rate of Return

A. A. wrote:
> Doug Freyburger wrote:
>
> > There is not a good linkage between amount down on a
> > property and amount of rent charged.
>
> What I mean by property value is full property value,
> not amount down used for financing. Please assume that
> the property will be bought in cash, not financed.

There is not a good linkage between full sales price and
rental rates either. Taking down payments and mortgages
into account gives you positive or negative cash flow.
Paying it off in advance gives you larger or smaller return
on investment.

Rental incomes are going to be lower than good mutual
funds percentage wise most of the time. The advantage
is going to be the combination of inflation growing the
rental rates slowly across time and depreciation masking
rental income in the first years.

Stocks don't depreciate, rental units do. Big tax difference.

Re: Real Estate Monthly Rate of Return

If the purpose of your inquiry is to establish rental rates as you say,
I would strongly recommend not using an ROI method. Someone else in
this thread was making a similar assertion. Markets, meaning where
supply meets demand, determine that. Your probable rates can only be
determined by what renters are willing to pay, given what the other
rents are for comparable units. So, simply find out what the rents are
for comparable properties, and the asking prices for those
income-producing properties on a sale basis, and do some division to
find out what the ROI is.

Seth