If you have rental property that is paid off, what kind of return on investment can a person hope to gain? Granted, this varies based on tons of issues. The cost of real estate and rent in your city, the quality/quantity of your renters, whether you are renting single family units, multi family units or large apartment complexes; whether you do management and maintenance yourself or hire a property management company to do it etc.
I’m sure I’ve asked this before, but I’ll ask it again. Because I can.
What is the price of the property?
What are the expected annual costs -maintenance, insurance, legal, utilities if included, etc?
What are the prevailing rent rate per sq ft in the area?
What is the expected occupancy rate?
Another big factor is what is happening with property values. When property values are rapidly increasing investors will accept very low returns because they expect to make it up in property appreciation.
I was hoping to skip over that part and go directly to the part where I light my cigars with $100 bills.
Those factors you mention vary wildly from geographic region to region. I tend to think I’d be better off investing in a REIT but those are only offering about 3-6% a year. However I would assume a well bought and well run rental property could push 10% a year (if the property was 80k for a duplex, which is not unrealistic in the midwest, and was renting for 1k a month. Minus maintenance, taxes, etc but predicated on full occupancy).
I sell commercial real estate for a living. As others mentioned your question is useless without input numbers. If you want to run the numbers and have no prior experience in the types of property available in your market you will need to do an Annual Property Operating Data worksheet and Cash Flow analysis worksheet on the investment property in question. And even beyond this there can be unknowns that only hard experience will let you have a handle on.
As a rule of thumb the more labor intensive and PITA a rental property is to manage and maintain the higher the return will be. Rates of cash on cash return can range around 10-12% (or higher) for mid effort to higher effort properties to 6-7% (or less) for net leases to national credit tenants where you effectively just cash the check. Most tend to be between 7-10%.
Buying it right is key, if you overpay it will be a hole that will very difficult to dig yourself out of.
I think you have to add the tax savings into it. By that I mean that if you are employed, you can offset some of the taxes on your income, with the monies spent on the property-upkeep, repairs, landscape, taxes, insurance, etc.
Of course that’s a big assumption. What happens when your rental property sits empty between tenants? In my building, it seems to take them a couple of weeks to refurbish the apartments before they even show them to prospective tenants. And what if someone is occupying the unit but refuses to pay rent? Eviction can take months.
we had a duplex, granted with a small mortgage, had two renters who paid on time, property management fees as it was out of the area, property taxes, insurance and upkeep. Maintenance costs can add up and one of the renters did not pay rent for three months before an unannounced departure. We ended up breaking even after 7 years. Of course that does not account for out time and effort which we donated to the cause…
What do you know that the professionals running the REITs don’t know? If there were a bunch of easily-identifiable rental properties out there that could turn 10% a year, don’t you think the REITs would invest in those?
Exactly. I know you meant that post to be curt, but I’ve wondered the same thing before. With economies of scale, a larger unit (apartment complex as an example) should have a higher ratio of rental income to expenses.
To answer it, I have no idea. However again, I have met people who can earn 10% or so a year. Usually they are people in the midwest where houses are in the 50-80k range and they buy a duplex and rent each unit out for $500/month or so.
On the subject of this, it is likely to be the debt to equity ratio that also plays a big role, the person who owns the house outright has no debt to pay off. Even at low interest rates and a 30 year term the annual amount of the value of the property spent on a mortgage is about 7%.
People also do a crummy job of estimating their own returns in casual conversations, as well: a guy that owns a duplex and rents out half is most likely assuming his best year is the normal rate of return and all the others were flukes. Furthermore, the guy who lost his shirt last year when repair costs exceeded revenues on his property is not going to tell you about it in casual conversation.
Small property owners I know seem to be satisfied to break even on a yearly basis, they just want to avoid losses. They expect their return to come when they eventually sell the property. They certainly want to make money from the property each year, but avoiding losses is more important to them. However, I think that in each of these cases they are carrying a loan and need the annual income to offset that. Long term they would expect a higher annual return when they are no longer paying off the loan.
Are they counting the hours of work they put in? That is, are they counting all income as return on the investment capital, and failing to pay themselves a salary for being the property manager?
I have no doubt that many rental buildings could return 10% if someone did all the management and minor maintenance for free. But in reality those things cost either time or money. REITs choose money, and hire people to do it. Single investors may choose time, but in that case they’ve taken on a side job as a property manager.
Is property management a job you’d like to do? If so, this might be a good investment. If not, I’d stick with the REITs.
And, I’m sure there are some people who make a great return on their property. But unless you have special skills or knowledge in that area, I wouldn’t anticipate making more than the average (or, maybe worse). Of course, one of the best ways to get special skills and knowledge is to start working at it.
There are a lot of factors involved in this question. I know whenever I have these types of questions, I contact my local real estate agent at Capital Residential Group. Perhaps a local agent would be able to provide you with the best advice and a more concrete number for what you can expect.