- My Forums
- Tiger Rant
- LSU Recruiting
- SEC Rant
- Saints Talk
- Pelicans Talk
- More Sports Board
- Fantasy Sports
- Golf Board
- Soccer Board
- O-T Lounge
- Tech Board
- Home/Garden Board
- Outdoor Board
- Health/Fitness Board
- Movie/TV Board
- Book Board
- Music Board
- Political Talk
- Money Talk
- Fark Board
- Gaming Board
- Travel Board
- Food/Drink Board
- Ticket Exchange
- TD Help Board
Customize My Forums- View All Forums
- Show Left Links
- Topic Sort Options
- Trending Topics
- Recent Topics
- Active Topics
Started By
Message
Rental Properties - expected returns and other questions
Posted on 12/8/11 at 2:03 pm
Posted on 12/8/11 at 2:03 pm
Starting earlier this year, the Missus and I purchased a few homes (Houston area) as investment properties (single residence lease homes). I was/am looking for a decent place to invest after-tax cash. I'm fairly 'scared' of the stock market right now, and, although still invested in Muni Bond mutual funds, I'm hesitant to go "all in" there. I've read a lot, developed my XLS economic models and such, and here is what I see. For a 75% leveraged rental home (at interest rates on the order of 4.5%), the cashflow returns are on the order of 9-13%, assuming no major property or rent collection losses. The cash-on-cash (unlevered) returns are approximately 7-8%. The above assumes about a 1.5% (of value) annual cost for maintenance, as well as insurance, property taxes, home association fees, etc. The returns do not assume any real appreciation in value (assumed to generally pace inflation), although I am hopeful that I have bought near a market low.
There seem to be several very knowledgeable posters here (I'm new here), so I thought I'd ask for honest perspectives on the following:
1. What are views on other attractive, after-tax investment vehicles?
2. Are the rental property returns cited above generally in line with what you've seen elsewhere?
3. As I learned (only after I started
), it seems that I can only have 4 mortgages outstanding, including my residence. I've researched a bit, but there doesn't seem to be an obvious source for financing rental homes above the 4th mortgage. Any ideas?
Thanks.
There seem to be several very knowledgeable posters here (I'm new here), so I thought I'd ask for honest perspectives on the following:
1. What are views on other attractive, after-tax investment vehicles?
2. Are the rental property returns cited above generally in line with what you've seen elsewhere?
3. As I learned (only after I started
), it seems that I can only have 4 mortgages outstanding, including my residence. I've researched a bit, but there doesn't seem to be an obvious source for financing rental homes above the 4th mortgage. Any ideas? Thanks.
3
Posted on 12/8/11 at 2:09 pm to K E V 8 4
quote:
2. Are the rental property returns cited above generally in line with what you've seen elsewhere?
Seem pretty in line. I spend a lot of time examining exactly this trade and have done deep-dives in a lot of different markets (although not Houston).
How distressed are you buying? Is there a fix-up arbitrage you are taking advantage of? What is the price-point you are looking at?
What is your levered cash-on-cash return? I've found that the debt service just chews alive a big portion of your current pay.
What vacancy rates do you assume?
quote:
it seems that I can only have 4 mortgages outstanding, including my residence. I've researched a bit, but there doesn't seem to be an obvious source for financing rental homes above the 4th mortgage. Any ideas?
Yes. Plenty of lenders will go up to 10 (not including your primary residence). Try Cornerstone.
Posted on 12/8/11 at 2:16 pm to K E V 8 4
quote:
1. What are views on other attractive, after-tax investment vehicles?
I like this one a lot. It seemingly has everything - real property, inflation-hedged, cashflow, appreciation potential, etc.
Posted on 12/8/11 at 2:20 pm to Tiger JJ
Thanks for the quick comments JT. Not really buying distressed, but "decent deals" in my opinion (at this point in the market). No huge fix-up arb, but cost-effective improvements (paint, hardware, fixtures, etc.) Price point range has been 80-120K. I've looked at a couple of foreclosures, but haven't pulled the trigger. I'm assuming an occupancy rate of 96%, which might be a tad optimistic. We're signing standard 1-yr leases. Obviously the biggest wildcard is the quality of the tenant, so we'll see how that goes.
I've found the market to be quite efficient, i.e. purchase price vs. rental rates. My simple rule of thumb is to try to land a property where I can make 1.1% of the value in monthly rate (or a ~13% gross return).
Yes, as to cashflow, I've done 15-yr notes and those are slightly cashflow positive unless a large expense (roof, HVAC) pops up.
I'll check Cornerstone (assuming it's easy to find their website?), but I imagine the cost of that debt is a couple of points higher.
Thanks again.
I've found the market to be quite efficient, i.e. purchase price vs. rental rates. My simple rule of thumb is to try to land a property where I can make 1.1% of the value in monthly rate (or a ~13% gross return).
Yes, as to cashflow, I've done 15-yr notes and those are slightly cashflow positive unless a large expense (roof, HVAC) pops up.
I'll check Cornerstone (assuming it's easy to find their website?), but I imagine the cost of that debt is a couple of points higher.
Thanks again.
Posted on 12/8/11 at 2:27 pm to K E V 8 4
quote:
No huge fix-up arb, but cost-effective improvements (paint, hardware, fixtures, etc.)
You might want to check those out. Those are the ones where a move-in ready comp is trading for $100K, but the distressed comp is trading for, say, $65K. You pay $65K, put in $10K and then it's immediately worth $100K. IMO, that is the key to this trade - getting some extra juice simply for having cash that most buyers don't have.
quote:
I'm assuming an occupancy rate of 96%, which might be a tad optimistic.
I think you should assume at least 1 month vacancy, although in my more conservative models, I assume 1.5 months.
quote:
Obviously the biggest wildcard is the quality of the tenant, so we'll see how that goes.
Yes, be willing to accept slightly higher vacancy rates in return for quality tenants. And also, don't make the kinds of improvements that look good but don't actually generate any extra rental value.
Your real problem is going to be the property management if you get this thing up to 10 houses. If you had to pay an outside guy, they would get at least 6% of gross rents (but probably more like 8 or 10). So, you are "saving" that now by doing it yourself, but it could get unwieldy quickly. The flipside is that 3rd party property managers are often quite lousy and hard to manage themselves.
Posted on 12/8/11 at 3:03 pm to K E V 8 4
quote:
at interest rates on the order of 4.5%
How do you get 4.5% rates on rentals? None of mine are anywhere near that. Are you disclosing that the properties will be rentals?
Posted on 12/8/11 at 3:13 pm to Quidam65
I saw rates as low as 4.8% back in April. Wouldn't surprise me to find they are 4.5% now.
Posted on 12/8/11 at 6:36 pm to K E V 8 4
quote:
I'm assuming an occupancy rate of 96%, which might be a tad optimistic.
I recall reading somewhere recently that the Houston residential vacancy rate was ~ 16%, which is high, you might research and see if that was factual or not and build it into your cost structure.
I refi'd my one remaining mortgaged rental house in ATL from a 30-yr to 7-yr ARM/30-yr amort @3.625%. A test house down the street from this property was acquired by a remodeler about 6-months ago, he paid $175k, put $40k into it, and has it listed @ $325k. I intend to do something similar, but do not expect his house to bring that price. The refi net cash flows $400/month, so I am just twiddling my thumbs waiting, the tenants in the specific house have been very good. Personally, I would not buy rentals that do not generate significant net cash flow and have upside sales value, as I do not want numerous unfunded costs to cover out of other cash, ie property taxes, maintenance, vacancy/mortgage, tenant damage, etc. When you start talking new HE AC/furnace, roofs, etc the money would add up quickly. Financial leverage can be an investors ally or biggest enemy, definitely a dual edged sword.
Posted on 12/9/11 at 6:56 am to Quidam65
quote:
How do you get 4.5% rates on rentals?
I financed three rental properties this year. One in Feb, one in March/April and one in September. The first two were ~4.75% (no origination) and the last in Sept was 4.25% (no origination). As I indicated, these are 15-yr loans, not 30, so that might explain the difference. The last one (4.25%), I found a mortgage broker that was more competitive by at least 1/2 pt. Obviously, I did disclose that these were going to be non-owner-occupied. I think the premium for non-occupied is on the order of 0.5-0.75%.
Posted on 12/9/11 at 6:59 am to Tiger JJ
quote:
Try Cornerstone
I e-mailed the CEO directly and he responded as below:
quote:
As a mortgage company not affiliated with a bank or other financial institution, the loans we originate must conform to Agency guidelines and be sold into the Secondary Mortgage market.
I’d recommend Woodforest National Bank, who I believe has a robust mortgage lending operation. They may also have the flexibility to retain ownership of some of their mortgage loans into their own “portfolio”, thus giving them the ability to rely more on the credit quality of the borrower and asset quality of the collateral.
....
I'll try Woodforeest (they're local) and post here if I learn anything of value.
Posted on 12/9/11 at 8:14 am to Quidam65
Quidam65 - who is your lender if I might ask?
Posted on 12/9/11 at 9:54 am to K E V 8 4
Following up on the ability to get "Mortgage #5" that does not conform to the Fannie/Freddie limit of 4 mortgages max... I just got off the phone with Woodforest Mortgage (based in The Woodlands, TX) and he quoted me a rate of 4 5/8% for a 15-yr term. This would require a 30% downpayment. If you have an account with the bank so that they can set up an auto-draw, you get a 1/8% credit and the rate is 4.50%. So, I must say that I was pleasantly surprised to find out that the next mortgage will be very competitive with the others and the non-conforming aspect won't cost an arm and a leg. However, I do need to check the closing costs to make sure they don't bend me over on that side of the deal.
Posted on 12/9/11 at 9:57 am to K E V 8 4
Try another place in Atlanta called Brayden Capital.
Posted on 12/9/11 at 10:10 am to Tiger JJ
Thanks for the recommendation - I'll keep it as back-up. If I can find a local bank that is competitive, I'd rather do that - all other things equal.
Posted on 12/9/11 at 10:19 am to K E V 8 4
You should be able to get it up to 10 + 1. And if you split them with your wife, maybe as many as 20.
Posted on 12/9/11 at 10:20 am to Tiger JJ
I do want to underline what tirebiter said, though...to the extent possible, you should be trying to take advantage of some kind of distressed premium...aka buying "below market". You don't want a fair deal - you want a good deal. A good buy is going to provide you with a good margin of safety.
Posted on 12/21/11 at 1:25 pm to mtrench
OK - a brief ressurection of this thread for an update. I was pursuing mortgage #5 with Woodforest Bank (TX) and (see above) was quoted a decent competitive rate with reasonable closing costs. Just now I received this e-mail from the guy I was dealing with:
So, I have yet to identify a SINGLE source of funding for taking on a mortgage after #4. Any suggestions would be appreciated.
(These lenders seem to be a bunch of sheep - lending money at ridiculously easy requirements and now refusing to lend to someone with good credit and 30% down??)
quote:
I’m sorry to inform you of this, but we have further defined our internal guidelines to address this very situation. The bank has decided to stick with the guidelines that Fannie Mae and Freddie Mac have imposed with mortgage counts. I was able to confirm that you could represent the proposal to us after a 2 year plus history of renting and perhaps it could be approved through our commercial channel.
So, I have yet to identify a SINGLE source of funding for taking on a mortgage after #4. Any suggestions would be appreciated.
(These lenders seem to be a bunch of sheep - lending money at ridiculously easy requirements and now refusing to lend to someone with good credit and 30% down??) Posted on 12/21/11 at 4:53 pm to K E V 8 4
There is still risk involved no matter how it's portrayed. My insurance renewal on one property is quoted +21% over last year, with zero claims ever. Time to shop.
Posted on 12/21/11 at 4:55 pm to K E V 8 4
they are butt hurt, bad
Page 1 of 2
Popular
Back to top
Follow TigerDroppings for LSU Football News