A "guaranteed" 50% ROI per year? - Posted by JP

Posted by Brad J on March 08, 2005 at 15:26:17:

30% ROI just from the cashflow? That doesn’t seem possible …

A “guaranteed” 50% ROI per year? - Posted by JP

Posted by JP on March 08, 2005 at 11:28:26:

Someone made a post recently about having 500k and they are trying to figure out what to do with it. It seems to me that the simplest and most profitable thing to do would be to just buy a bunch of rental properties and hold them awhile.

With 500k, at 10% down you could buy 20 250k houses and control 5 million worth of property. At an average 5% per year appreciation you would be making 250k per year just in apprecation, for a 50% yearly return on your money. Actually as each year passed you would be making more than that because you’d be getting 5% on a higher amount.

This doesn’t even take into consideration any positive cashflow. For the sake of example I’m assuming you would use a management company to handle all the properties, and after factoring in the cost for that and any repairs etc you wouldn’t see any positive cashflow. If you did it would just increase your return even more.

This seems like a no-brainer. If I had 500k I think that’s what I would do. How can you beat an average 50% ROI every year with hardly any work or effort (once you purchased the 20 properties)?? Every few years you could pull cash out and buy more and more houses if you wanted to.

Re: A “guaranteed” 50% ROI per year? - Posted by jlaass(commercial pm)

Posted by jlaass(commercial pm) on March 08, 2005 at 18:47:18:

I’d buy a commercial building. PM costs are only 3-6% and the NNN tenants pay for the repairs. The owners in my portfolio have done very well over the last 8 years…one pulls out $45,000 monthly Net Income (AFTER the mortgage) is paid. This leaves only their income taxes to pay. Not bad for only visiting the property twice in 8 years!

Re: A “guaranteed” 50% ROI per year? - Posted by sptk

Posted by sptk on March 08, 2005 at 13:12:21:

?Guaranteed? is very optimistic. ?Possible, if everything goes right? is more realistic. For instance you are going to have closing costs and start up costs for these units. Maybe several thousand dollars for each house (times 20 houses). Loan closing costs, paint, carpets and the thousand and one things it takes to make the place shine. I?ve yet to see a renter who thought that the last renter?s ?reasonable wear and tear? was good enough for them to pay full retail. (Every renter thinks that their ?reasonable wear and tear? is plenty good enough for the next renter.) Renters often want you to hold the property for a week or two or three so that they can wait for their 30 days notice to run out. This expense money is no longer available to leverage. You also need working capital. Keeping $100,000 would be reasonable to start. You could always invest it later is things go really well. In my neck of the woods 60% LTV is break even cash flow (maybe), not 90% LTV.

Landlording is less work than a full time job, but way more work than a CD, stock or bond purchase. Comparing CD ROI with Real Estate ROI is apples and oranges. I personally consider capital gains as something like ?windfall profit? more than ROI. It?s just so iffy.

Levers work both ways. If the properties go down 5% a year for two years ($500k loss), you are starting on a downward spiral toward losing all your money. Renters have this funny idea that rents should be lowered when housing prices go down and you are losing money. Scenario: Inflation goes up, interest rates go up, mortgage rates go up, housing prices go down. Can you wait out the years it may take for housing prices to go back up with inflation?

Don?t kid yourself. Property managers want to make 10% for depositing the rent check and running an occasional credit check. They aren?t going to get on their hands and knees and scrub the tile grout in the bathroom (the way I?ve done numerous times). (Good renters just won?t deal with dirty bathrooms or kitchens.) At best they will hire people to do this and bill you full scale. At worst they will blow it off, and wait until the property hasn?t rented for months, which proves that you need to lower the rent. A really good, contentious handyman (who actually does the work) is work far more important than a property manager, who, well, orders people around. This is most people?s fantasy job. These good handymen can be very hard to find. I?d find one before starting on this venture.

Your plan isn?t too bad, though. Just slow it down a little. Buy a house and rent it for a year. If that goes well, then buy 2 more and rent them for a year. By then you will be so up to speed, you certainly won?t need advice from me :slight_smile: Buy more as desired.

Good Luck.

Re: A “guaranteed” 50% ROI per year? - Posted by JP

Posted by JP on March 08, 2005 at 18:53:55:

Aren’t NNN type deals general pretty low ROI i.e. 5-8%? One guy pulls out 45k monthly sure, but how much does he have invested? I’d love to hear the details around that deal, just to get an idea of how a real world deal works, and what is necessary to make that kind of cash. Thanks!

Well said sptk F/U question - Posted by Rosendo

Posted by Rosendo on March 08, 2005 at 15:16:30:

Have you researched Dallas Froth Worth Area regarding ROI. I have not researched yet but I’m hearing 30% ROI on 4-plexes and apartments on 20% down. Do you think this is realistic or a pipe dream?

Thannk you,

Re: A - Posted by jlaass(commercial pm)

Posted by jlaass(commercial pm) on March 08, 2005 at 21:20:23:

It was left when the owner’s spouse died. I don’t know the purchase price but my mentor looked at it for 13-14million a few years ago. They are locked into financing w/a severe prepayement penalty so they are holding it now. They’ve had it for at least 15 years.