Direct Real Estate Returns

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megabad
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Joined: Fri Jun 01, 2018 4:00 pm

Re: Direct Real Estate Returns

Post by megabad » Sat Jul 14, 2018 7:00 pm

WanderingDoc wrote:
Sat Jul 14, 2018 6:25 pm
I skimmed through your post. So you don't include capital appreciation in real estate, but you include it in index funds? Don't make me laugh. Especially index funds which are tied up in retirement accounts which one won't access for 40 years? I can access my real estate capital appreciation TAX FREE right now through a cash out refinance or 1031 exchange. Fair is fair.
That is your choice and is totally fine. Including price appreciation would simply shift my desired return and wildly increase the volatility of said return. I do it this way for simplicity. As I said, I don't consider it until the cap rate gets out of whack and I need to sell or exchange. When the property is sold, the appreciation (or depreciation) certainly matters.

The fact that you can acquire additional debt (through cash out refinancing) does not affect my calculations and is certainly not unique to real estate. The ability to access real estate equity for me is actually more difficult than retirement accounts at the moment, but this also does not have an impact on my calculations either way.

In other words, I don't understand your particular logic for including appreciation, but I see no real difference either way. To each his/her own. Truth be told, I expect long term real price appreciation to be almost negligible across my real estate portfolio, so that is why I don't bother with it. But my prediction could easily be wrong.

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corn18
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Re: Direct Real Estate Returns

Post by corn18 » Sat Jul 14, 2018 7:19 pm

WanderingDoc wrote:
Sat Jul 14, 2018 4:44 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 4:34 pm
KyleAAA wrote:
Sat Jul 14, 2018 4:25 pm
20% is extremely doable with leveraged rentals and perhaps even if you use property manager, if you buy well. Real estate isn't for everyone, but 20-30% is realistic.

Ignore the "Real estate pays you 5 ways instead of just 1 way" people. The number of ways an investment pays is irrelevant. The key is leverage, which is generally easier to get on favorable terms with real estate vs other assets.
Will banks lend on 20% down, with no recourse?
They will lend on 25-30% down, with non-recourse financing. In general though, this is on loan amounts of $1M or more. Some exceptions. I am comfortable with recourse financing. If you put down as little as you can, you have less capital in the deal, ie. the bank takes the risk, not you. Also, if you buy cash-flowing real estate, you can mitigate risk greatly no matter what property values do - you still get paid.
Now I am cornfused. Everyone is quoting 20% down payments for ROI calculations, yet you have to put 25%-30% to get a loan in real life? Seems disingenuous.

WanderingDoc
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Joined: Sat Aug 05, 2017 8:21 pm

Re: Direct Real Estate Returns

Post by WanderingDoc » Sat Jul 14, 2018 7:27 pm

corn18 wrote:
Sat Jul 14, 2018 7:19 pm
WanderingDoc wrote:
Sat Jul 14, 2018 4:44 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 4:34 pm
KyleAAA wrote:
Sat Jul 14, 2018 4:25 pm
20% is extremely doable with leveraged rentals and perhaps even if you use property manager, if you buy well. Real estate isn't for everyone, but 20-30% is realistic.

Ignore the "Real estate pays you 5 ways instead of just 1 way" people. The number of ways an investment pays is irrelevant. The key is leverage, which is generally easier to get on favorable terms with real estate vs other assets.
Will banks lend on 20% down, with no recourse?
They will lend on 25-30% down, with non-recourse financing. In general though, this is on loan amounts of $1M or more. Some exceptions. I am comfortable with recourse financing. If you put down as little as you can, you have less capital in the deal, ie. the bank takes the risk, not you. Also, if you buy cash-flowing real estate, you can mitigate risk greatly no matter what property values do - you still get paid.
Now I am cornfused. Everyone is quoting 20% down payments for ROI calculations, yet you have to put 25%-30% to get a loan in real life? Seems disingenuous.
Non-resource commercial financing I said. It's not commonly used among small-time investors.

Who is "everyone"? Mostly I have been using the 20% down assumption. You can put 5%, 10%, 20%, or 30% down. It depends on the deal and the terms of the loan. The multiple profit centers of real estate don't change if the LTV is different.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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corn18
Posts: 844
Joined: Fri May 22, 2015 6:24 am

Re: Direct Real Estate Returns

Post by corn18 » Sat Jul 14, 2018 7:35 pm

WanderingDoc wrote:
Sat Jul 14, 2018 7:27 pm
corn18 wrote:
Sat Jul 14, 2018 7:19 pm
WanderingDoc wrote:
Sat Jul 14, 2018 4:44 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 4:34 pm
KyleAAA wrote:
Sat Jul 14, 2018 4:25 pm
20% is extremely doable with leveraged rentals and perhaps even if you use property manager, if you buy well. Real estate isn't for everyone, but 20-30% is realistic.

Ignore the "Real estate pays you 5 ways instead of just 1 way" people. The number of ways an investment pays is irrelevant. The key is leverage, which is generally easier to get on favorable terms with real estate vs other assets.
Will banks lend on 20% down, with no recourse?
They will lend on 25-30% down, with non-recourse financing. In general though, this is on loan amounts of $1M or more. Some exceptions. I am comfortable with recourse financing. If you put down as little as you can, you have less capital in the deal, ie. the bank takes the risk, not you. Also, if you buy cash-flowing real estate, you can mitigate risk greatly no matter what property values do - you still get paid.
Now I am cornfused. Everyone is quoting 20% down payments for ROI calculations, yet you have to put 25%-30% to get a loan in real life? Seems disingenuous.
Non-resource commercial financing I said. It's not commonly used among small-time investors.

Who is "everyone"? Mostly I have been using the 20% down assumption. You can put 5%, 10%, 20%, or 30% down. It depends on the deal and the terms of the loan. The multiple profit centers of real estate don't change if the LTV is different.
Can I get 10 loans for $150k with 20% down? I have only held one mortgage at a time and it's always been a VA loan with 0% down. Seems I could get infinite returns on one rental with that setup.

WanderingDoc
Posts: 958
Joined: Sat Aug 05, 2017 8:21 pm

Re: Direct Real Estate Returns

Post by WanderingDoc » Sat Jul 14, 2018 7:51 pm

Yes, you can get 10 (Fannie/Freddie) loans at 20% down. +10 for the spouse if you have one. I have reached financial independence long before the 10th loan, so I am just shuttled my capital to 100% passive large apartment/self storage/etc. syndications.

corn18 wrote:
Sat Jul 14, 2018 7:35 pm
WanderingDoc wrote:
Sat Jul 14, 2018 7:27 pm
corn18 wrote:
Sat Jul 14, 2018 7:19 pm
WanderingDoc wrote:
Sat Jul 14, 2018 4:44 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 4:34 pm
Will banks lend on 20% down, with no recourse?
They will lend on 25-30% down, with non-recourse financing. In general though, this is on loan amounts of $1M or more. Some exceptions. I am comfortable with recourse financing. If you put down as little as you can, you have less capital in the deal, ie. the bank takes the risk, not you. Also, if you buy cash-flowing real estate, you can mitigate risk greatly no matter what property values do - you still get paid.
Now I am cornfused. Everyone is quoting 20% down payments for ROI calculations, yet you have to put 25%-30% to get a loan in real life? Seems disingenuous.
Non-resource commercial financing I said. It's not commonly used among small-time investors.

Who is "everyone"? Mostly I have been using the 20% down assumption. You can put 5%, 10%, 20%, or 30% down. It depends on the deal and the terms of the loan. The multiple profit centers of real estate don't change if the LTV is different.
Can I get 10 loans for $150k with 20% down? I have only held one mortgage at a time and it's always been a VA loan with 0% down. Seems I could get infinite returns on one rental with that setup.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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corn18
Posts: 844
Joined: Fri May 22, 2015 6:24 am

Re: Direct Real Estate Returns

Post by corn18 » Sat Jul 14, 2018 7:57 pm

WanderingDoc wrote:
Sat Jul 14, 2018 7:51 pm
Yes, you can get 10 (Fannie/Freddie) loans at 20% down. +10 for the spouse if you have one. I have reached financial independence long before the 10th loan, so I am just shuttled my capital to 100% passive large apartment/self storage/etc. syndications.
I wish I had not spent like a madman in my younger years and had some RE income right now. @52 and retiring in 3 years, I don't think I want to start now, but I can certainly see the awesomeness of leveraging an appreciating asset. I love it when the market goes up 0.5% and hate it when it goes down 0.5% and I have absolutely no control over it.

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knpstr
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Location: Michigan

Re: Direct Real Estate Returns

Post by knpstr » Sat Jul 14, 2018 8:40 pm

corn18 wrote:
Sat Jul 14, 2018 7:35 pm
Can I get 10 loans for $150k with 20% down? I have only held one mortgage at a time and it's always been a VA loan with 0% down. Seems I could get infinite returns on one rental with that setup.
Yes you can.

I have done a "nothing down" deal but used private money. So I earn cash flow and did not invest 1 cent of my own money. I do manage the property, which typically is less than 1 hr per month of work on average for that property. So that is technically infinite returns.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

KyleAAA
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Contact:

Re: Direct Real Estate Returns

Post by KyleAAA » Sat Jul 14, 2018 9:15 pm

knpstr wrote:
Sat Jul 14, 2018 8:40 pm
corn18 wrote:
Sat Jul 14, 2018 7:35 pm
Can I get 10 loans for $150k with 20% down? I have only held one mortgage at a time and it's always been a VA loan with 0% down. Seems I could get infinite returns on one rental with that setup.
Yes you can.

I have done a "nothing down" deal but used private money. So I earn cash flow and did not invest 1 cent of my own money. I do manage the property, which typically is less than 1 hr per month of work on average for that property. So that is technically infinite returns.
There is technically no such thing as infinite returns. Your return is undefined if you put $0 down, not infinite. Those two concepts are completely unrelated.

WanderingDoc
Posts: 958
Joined: Sat Aug 05, 2017 8:21 pm

Re: Direct Real Estate Returns

Post by WanderingDoc » Sat Jul 14, 2018 11:53 pm

Kyle has been the only person to date on 3 different forums that has fervently pointed out that the returns are "undefined", not infinite. I also have 2 properties where I pulled out all the money I had in the deal through a cash out refinance, having $0.00 in the properties, yet still getting monthly checks. Math whizz's aside, the returns are infinity.

If I had a total of $1.00 in a real estate deal and it returned $1000.00 per year, the return on investment is 100,000%. Kyle - check my math.

That was the cost of a stamp to mail escrow docs, if that makes you feel any better. :wink:
KyleAAA wrote:
Sat Jul 14, 2018 9:15 pm
knpstr wrote:
Sat Jul 14, 2018 8:40 pm
corn18 wrote:
Sat Jul 14, 2018 7:35 pm
Can I get 10 loans for $150k with 20% down? I have only held one mortgage at a time and it's always been a VA loan with 0% down. Seems I could get infinite returns on one rental with that setup.
Yes you can.

I have done a "nothing down" deal but used private money. So I earn cash flow and did not invest 1 cent of my own money. I do manage the property, which typically is less than 1 hr per month of work on average for that property. So that is technically infinite returns.
There is technically no such thing as infinite returns. Your return is undefined if you put $0 down, not infinite. Those two concepts are completely unrelated.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

KyleAAA
Posts: 6626
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Direct Real Estate Returns

Post by KyleAAA » Sun Jul 15, 2018 1:15 am

WanderingDoc wrote:
Sat Jul 14, 2018 11:53 pm
Kyle has been the only person to date on 3 different forums that has fervently pointed out that the returns are "undefined", not infinite. I also have 2 properties where I pulled out all the money I had in the deal through a cash out refinance, having $0.00 in the properties, yet still getting monthly checks. Math whizz's aside, the returns are infinity.

If I had a total of $1.00 in a real estate deal and it returned $1000.00 per year, the return on investment is 100,000%. Kyle - check my math.

That was the cost of a stamp to mail escrow docs, if that makes you feel any better. :wink:
KyleAAA wrote:
Sat Jul 14, 2018 9:15 pm
knpstr wrote:
Sat Jul 14, 2018 8:40 pm
corn18 wrote:
Sat Jul 14, 2018 7:35 pm
Can I get 10 loans for $150k with 20% down? I have only held one mortgage at a time and it's always been a VA loan with 0% down. Seems I could get infinite returns on one rental with that setup.
Yes you can.

I have done a "nothing down" deal but used private money. So I earn cash flow and did not invest 1 cent of my own money. I do manage the property, which typically is less than 1 hr per month of work on average for that property. So that is technically infinite returns.
There is technically no such thing as infinite returns. Your return is undefined if you put $0 down, not infinite. Those two concepts are completely unrelated.
100,000 is a lot smaller than infinity. It is not a minor point: your returns are not infinite.

WanderingDoc
Posts: 958
Joined: Sat Aug 05, 2017 8:21 pm

Re: Direct Real Estate Returns

Post by WanderingDoc » Sun Jul 15, 2018 1:18 am

KyleAAA wrote:
Sun Jul 15, 2018 1:15 am
WanderingDoc wrote:
Sat Jul 14, 2018 11:53 pm
Kyle has been the only person to date on 3 different forums that has fervently pointed out that the returns are "undefined", not infinite. I also have 2 properties where I pulled out all the money I had in the deal through a cash out refinance, having $0.00 in the properties, yet still getting monthly checks. Math whizz's aside, the returns are infinity.

If I had a total of $1.00 in a real estate deal and it returned $1000.00 per year, the return on investment is 100,000%. Kyle - check my math.

That was the cost of a stamp to mail escrow docs, if that makes you feel any better. :wink:
KyleAAA wrote:
Sat Jul 14, 2018 9:15 pm
knpstr wrote:
Sat Jul 14, 2018 8:40 pm
corn18 wrote:
Sat Jul 14, 2018 7:35 pm
Can I get 10 loans for $150k with 20% down? I have only held one mortgage at a time and it's always been a VA loan with 0% down. Seems I could get infinite returns on one rental with that setup.
Yes you can.

I have done a "nothing down" deal but used private money. So I earn cash flow and did not invest 1 cent of my own money. I do manage the property, which typically is less than 1 hr per month of work on average for that property. So that is technically infinite returns.
There is technically no such thing as infinite returns. Your return is undefined if you put $0 down, not infinite. Those two concepts are completely unrelated.
100,000 is a lot smaller than infinity. It is not a minor point: your returns are not infinite.
But nonetheless, a decent return? 8-)
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

KyleAAA
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Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Direct Real Estate Returns

Post by KyleAAA » Sun Jul 15, 2018 1:20 am

WanderingDoc wrote:
Sun Jul 15, 2018 1:18 am
KyleAAA wrote:
Sun Jul 15, 2018 1:15 am
WanderingDoc wrote:
Sat Jul 14, 2018 11:53 pm
Kyle has been the only person to date on 3 different forums that has fervently pointed out that the returns are "undefined", not infinite. I also have 2 properties where I pulled out all the money I had in the deal through a cash out refinance, having $0.00 in the properties, yet still getting monthly checks. Math whizz's aside, the returns are infinity.

If I had a total of $1.00 in a real estate deal and it returned $1000.00 per year, the return on investment is 100,000%. Kyle - check my math.

That was the cost of a stamp to mail escrow docs, if that makes you feel any better. :wink:
KyleAAA wrote:
Sat Jul 14, 2018 9:15 pm
knpstr wrote:
Sat Jul 14, 2018 8:40 pm


Yes you can.

I have done a "nothing down" deal but used private money. So I earn cash flow and did not invest 1 cent of my own money. I do manage the property, which typically is less than 1 hr per month of work on average for that property. So that is technically infinite returns.
There is technically no such thing as infinite returns. Your return is undefined if you put $0 down, not infinite. Those two concepts are completely unrelated.
100,000 is a lot smaller than infinity. It is not a minor point: your returns are not infinite.
But nonetheless, a decent return? 8-)
On an investment of $1? Not really, no. It’s meaningless to say you have a return on investment when you have no investment so of course an infinite return is a mathematical impossibility. It is not even impressive to say you have a 1000000% return on investment if you start with a tiny amount of capital.

WanderingDoc
Posts: 958
Joined: Sat Aug 05, 2017 8:21 pm

Re: Direct Real Estate Returns

Post by WanderingDoc » Sun Jul 15, 2018 2:17 am

KyleAAA wrote:
Sun Jul 15, 2018 1:20 am
WanderingDoc wrote:
Sun Jul 15, 2018 1:18 am
KyleAAA wrote:
Sun Jul 15, 2018 1:15 am
WanderingDoc wrote:
Sat Jul 14, 2018 11:53 pm
Kyle has been the only person to date on 3 different forums that has fervently pointed out that the returns are "undefined", not infinite. I also have 2 properties where I pulled out all the money I had in the deal through a cash out refinance, having $0.00 in the properties, yet still getting monthly checks. Math whizz's aside, the returns are infinity.

If I had a total of $1.00 in a real estate deal and it returned $1000.00 per year, the return on investment is 100,000%. Kyle - check my math.

That was the cost of a stamp to mail escrow docs, if that makes you feel any better. :wink:
KyleAAA wrote:
Sat Jul 14, 2018 9:15 pm


There is technically no such thing as infinite returns. Your return is undefined if you put $0 down, not infinite. Those two concepts are completely unrelated.
100,000 is a lot smaller than infinity. It is not a minor point: your returns are not infinite.
But nonetheless, a decent return? 8-)
On an investment of $1? Not really, no. It’s meaningless to say you have a return on investment when you have no investment so of course an infinite return is a mathematical impossibility. It is not even impressive to say you have a 1000000% return on investment if you start with a tiny amount of capital.
There is an investment, obviously. If I have none of my capital in a deal, which provides passive monthly income and tax incentives to me year after year, I'll take that as many times as I can get it. One can't even dream to achieve this with paper.

If you could get $1000 yearly after giving up $1 once, you would. At least, any sane individual would.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

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knpstr
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Location: Michigan

Re: Direct Real Estate Returns

Post by knpstr » Sun Jul 15, 2018 8:33 am

KyleAAA wrote:
Sat Jul 14, 2018 9:15 pm
knpstr wrote:
Sat Jul 14, 2018 8:40 pm
Yes you can.

I have done a "nothing down" deal but used private money. So I earn cash flow and did not invest 1 cent of my own money. I do manage the property, which typically is less than 1 hr per month of work on average for that property. So that is technically infinite returns.
There is technically no such thing as infinite returns. Your return is undefined if you put $0 down, not infinite. Those two concepts are completely unrelated.
My mistake. I have undefined returns. :moneybag
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

KyleAAA
Posts: 6626
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Re: Direct Real Estate Returns

Post by KyleAAA » Sun Jul 15, 2018 1:17 pm

WanderingDoc wrote:
Sun Jul 15, 2018 2:17 am
KyleAAA wrote:
Sun Jul 15, 2018 1:20 am
WanderingDoc wrote:
Sun Jul 15, 2018 1:18 am
KyleAAA wrote:
Sun Jul 15, 2018 1:15 am
WanderingDoc wrote:
Sat Jul 14, 2018 11:53 pm
Kyle has been the only person to date on 3 different forums that has fervently pointed out that the returns are "undefined", not infinite. I also have 2 properties where I pulled out all the money I had in the deal through a cash out refinance, having $0.00 in the properties, yet still getting monthly checks. Math whizz's aside, the returns are infinity.

If I had a total of $1.00 in a real estate deal and it returned $1000.00 per year, the return on investment is 100,000%. Kyle - check my math.

That was the cost of a stamp to mail escrow docs, if that makes you feel any better. :wink:

100,000 is a lot smaller than infinity. It is not a minor point: your returns are not infinite.
But nonetheless, a decent return? 8-)
On an investment of $1? Not really, no. It’s meaningless to say you have a return on investment when you have no investment so of course an infinite return is a mathematical impossibility. It is not even impressive to say you have a 1000000% return on investment if you start with a tiny amount of capital.
There is an investment, obviously. If I have none of my capital in a deal, which provides passive monthly income and tax incentives to me year after year, I'll take that as many times as I can get it. One can't even dream to achieve this with paper.

If you could get $1000 yearly after giving up $1 once, you would. At least, any sane individual would.
If there is an investment, your returns can’t be infinite. I can make $1000 yearly with much less effort at my day job, honestly. Talking about crazy high rates of returns on a $1 investment isn’t interesting because I can’t compound it. There are many, many ways I can put down a dollar and get $10 back, but unless I can put down that $10 and earn $100 again and so on every time I do it, I don’t care. Unless, what you’re getting at is that the investment is considerably more than $1? We all know real estate can be a good investment, I own quite a lot of it. But it’s not a magical asset class.

InvestInLife
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Re: Direct Real Estate Returns

Post by InvestInLife » Tue Jul 17, 2018 8:24 am

knpstr wrote:
Thu Jul 12, 2018 5:52 pm

6000/18750= 32% ROI

You only "invested" your down payment
Using this model (total income after property tax, insurance, maintenance, vacancy, management, divided into initial cost invested), how does one factor in the added expenses of mortgage interest and increased principle paid?
Does the ROI change every month?
Does the total interest paid get subtracted from income, or added to amount invested?
Does the increased principle get added to the amount invested?

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knpstr
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Re: Direct Real Estate Returns

Post by knpstr » Wed Jul 18, 2018 7:47 am

InvestInLife wrote:
Tue Jul 17, 2018 8:24 am
knpstr wrote:
Thu Jul 12, 2018 5:52 pm

6000/18750= 32% ROI

You only "invested" your down payment
Using this model (total income after property tax, insurance, maintenance, vacancy, management, divided into initial cost invested), how does one factor in the added expenses of mortgage interest and increased principle paid?
Does the ROI change every month?
Does the total interest paid get subtracted from income, or added to amount invested?
Does the increased principle get added to the amount invested?
Those are all different metrics:
If you calculate your returns (all) on the price you paid for the house that is Return on Asset (ROA) or usually called Cap-rate
If you calculate the cash you receive against the cash you initially invested into the house that is Return on Investment (ROI) or usually called Cash-on-Cash return.
If you calculate your returns (all) on the equity you have in the house that is Return on Equity (ROE)

So certainly principal pay down raises your equity and your ROE changes (lowers) as more equity builds. Cash on Cash returns ignore those other sources of return (principal paydown, property appreciation, etc) it is just the net after all expenses cash you get out versus the net cash you put in (down payment, closing costs, etc).

Total interest paid is subtracted from income because it is expense, it is not added to the amount invested and it is not equity.

A way for one to keep returns as high as possible is to refinance every so often to get the equity out and invest it in something else. Depending on the property you bought you may be able to get more cash out than you ever put in - so you may have nothing left "in the deal" -- but still reap the benefits. Warren Buffett has a real estate investment like this.
Warren Buffett wrote: I joined a small group, including Larry and my friend Fred Rose, that purchased the parcel. Fred was an experienced, high-grade real estate investor who, with his family, would manage the property. And manage it they did. As old leases expired, earnings tripled. Annual distributions now exceed 35% of our original equity investment. Moreover, our original mortgage was refinanced in 1996 and again in 1999, moves that allowed several special distributions totaling more than 150% of what we had invested. I've yet to view the property.
(emphasis mine)

As you can see, Warren Buffett only look at returns from the money he actually invested. They were/are getting a 35% dividend and have "cashed" out of their entire investment... and then some.
Last edited by knpstr on Wed Jul 18, 2018 2:29 pm, edited 2 times in total.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

bigred77
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Re: Direct Real Estate Returns

Post by bigred77 » Wed Jul 18, 2018 8:56 am

This thread is hilarious.

Bad math. Assuming 3% - 5% real rates of appreciation for all RE investments. Just glazing over the difference between recourse and non-recourse financing like it's no big deal. Apparently negative cash flow time periods, vacancies, and capital repairs/improvements can be easily predicted and mitigated. It's all just a easy drivin highway to riches if one picks the "right" properties.

I believe real estate is a distinct asset class that falls between equities and fixed income on the risk/return spectrum. Directly held real estate is routinely thought of as more price stable than it really is because it's a major asset class that is not marked to market. The price exists in the owners head (usually 5%-10% overvalued and before accounting for transaction costs) until they have to actually sell the property.

Yes, one can leverage up their investments in real estate at favorable terms. But that's a financing decision and not an investment decision. If you just want the leverage than mortgage your primary residence to the hilt and never prepay the loan. You get the same favorable terms of leverage with no restriction on which asset class you have to actually invest the money in.

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Pajamas
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Re: Direct Real Estate Returns

Post by Pajamas » Wed Jul 18, 2018 9:03 am

bigred77 wrote:
Wed Jul 18, 2018 8:56 am
This thread is hilarious.
Part of the reason is that many of the strong proponents of being a landlord have only been in the business for a relatively short time and have not experienced a deep down cycle in the economy. Many of the lessons that should have been learned from the financial crisis a decade ago have already been forgotten by those who have. Everything is wonderful during a ten year bull market coming out of a recession. Makes it even funnier when some of those people are patting themselves on the back for being such astute and successful landlords. :beer

MindBogler
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Re: Direct Real Estate Returns

Post by MindBogler » Wed Jul 18, 2018 9:21 am

bigred77 wrote:
Wed Jul 18, 2018 8:56 am
This thread is hilarious.

Bad math. Assuming 3% - 5% real rates of appreciation for all RE investments. Just glazing over the difference between recourse and non-recourse financing like it's no big deal. Apparently negative cash flow time periods, vacancies, and capital repairs/improvements can be easily predicted and mitigated. It's all just a easy drivin highway to riches if one picks the "right" properties.
+1

A true exercise in self-delusion.

AerialWombat
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Re: Direct Real Estate Returns

Post by AerialWombat » Wed Jul 18, 2018 9:31 am

There seems to be a lot of confusion within this thread about the math, especially with how expenses are handled, among other things. Allow me to share a real world example: My first rental property, purchased in August 2015. This is a duplex in a middle-of-the-road military town, about an hour away from a thriving metropolis. I'd call it a "B" neighborhood. One side of the duplex is a 1-bedroom unit, other side is a 2-bedroom.

Purchase price: $145,000
Down payment: $0 --- yes, zero. 100% financing, VA loan, owner occupied. I lived in the 1-bedroom unit for over a year, as required when obtaining owner occupant financing.
Interest rate: 3.875%
PITI: $950/mo
Current total rents: $1850 per month (both sides combined)
Appreciation assumption: Case-Schiller says 0.2% per year above inflation. I use 3% appreciation in my math.
Rent increase assumption: Also 3% per year
Maintenance reserve: 12% (it's an older property)
Property manager: 10%
Vacancy assumption: 5%
Effective tax rate: 28% (for depreciation calculations)

In the 2nd year of ownership (first full year as a rental-only), the cash returns from appreciation, cash flow, debt paydown, and depreciation worked out to $18,527.

Since I'm 100% leveraged, my "investment" is really only the negative cash flow that I had while I was paying out of pocket during the first year I lived there, which was about $7,250. However, this $7,250 is really just my normal living expense. But I'll count it anyway. I also had about $4,500 in closing costs, so a total of $11,750 "invested".

So after I moved out, in year 2 of ownership, my return was 157%.

Ahh, but Wombat, you say, you can't spend appreciation and debt paydown today without selling. OK, if I leave those two out, and only take into account the cash flow from rent, minus expenses, plus the cash tax savings from the depreciation benefit...

Depreciation benefit: $1,252
Positive cash flow, including allowances for vacancy, maintenance, and property manager: $6,988

That's $8,240 per year in spendable cash. Annual cash-on-cash return = 70%.

Was my next house as good? Of course not. It wasn't a duplex, and it was bought at a higher price, total rent is lower, etc. But it's still darn good. I'm currently living in the third house, with the fourth under construction. When I eventually rent out the one I reside in now, I'll be closer to 18% annual cash on cash return. The projections on the house under construction are even worse -- pretty close to break even for the first rental year. But, it's a much nicer house in a much nicer area, and dangit, I wanna live somewhere nice for one year.

The buy, move in, rent it out, repeat strategy is not desirable to a lot of people. I get that. Bogleheads as a group don't appear to like moving very often. But I'm single, no kids, and it works for me. As somebody on this board likes to say, "there are many roads to Dublin."

Anyway, just thought I'd share an actual, real life example of an actual recent direct real estate deal.

AerialWombat
Posts: 144
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Re: Direct Real Estate Returns

Post by AerialWombat » Wed Jul 18, 2018 9:43 am

MindBogler wrote:
Wed Jul 18, 2018 9:21 am
bigred77 wrote:
Wed Jul 18, 2018 8:56 am
This thread is hilarious.

Bad math. Assuming 3% - 5% real rates of appreciation for all RE investments. Just glazing over the difference between recourse and non-recourse financing like it's no big deal. Apparently negative cash flow time periods, vacancies, and capital repairs/improvements can be easily predicted and mitigated. It's all just a easy drivin highway to riches if one picks the "right" properties.
+1

A true exercise in self-delusion.
The Case-Shiller study found that, over the last 120+ years, housing has appreciated 0.2% per year above inflation. So in my real estate calculations, I use a 3% nominal appreciation rate as my assumption.

gmaynardkrebs
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Re: Direct Real Estate Returns

Post by gmaynardkrebs » Wed Jul 18, 2018 9:55 am

I've been running a what I think is a valid test case on RE investing, that I would like to share, fwiw. At this point, I really have to question the rosy scenarios laid out by some of the RE boosters here. However, I'd really like to hear from those who can point out where my test case is wrong, because I'm actually quite inclined to do this, if I can make a decent return.

In my neighborhood in a desirable area of NW Washington DC, there are two virtually identical and well run semi-luxury apartment buildings right next to each other, except that one is a rental and the other a condo. Using rent vs buy calculators that take into account taxes, depreciation, price appreciation, inflation, opportunity costs, maintenance, condo fees etc., I've made comparisons on identical apartments in the studio, 1BR, and 2 BR/2BA floor plans. I assume that the rent I would get as an investor is the same as that charged for the identical apartment in the rental building. I also assume that all costs, rents, and property value will rise at the same level as inflation. What I've discovered is this. If you do 100% financing at today's mortgage rates (2.5% real, ie, CPI + 2.5%), you will be substantially cash-flow negative (even after taxes) until you sell. (Not sure if this matters, but my marginal rate including DC taxes is over 40%.) The only way you come out ahead is if the property appreciates faster than the rate of inflation. So, it's basically a bet that real estate will substantially outperform inflation. If it doesn't, you lose money. Just to put some numbers in: the 1300sq ft 2BR 2BA sells for $550K, with costs of about $1300 mo (condo fee,taxes, utilities, insurance, and maintenance.) The identical apartment rents for $3,400. As I note, these are real numbers.

As I say, I'd be happy to be shown the error of my ways, and I suspect I am missing at least something here. One thing that does stand out to me is that in other scenarios posted here, usually on cheaper units, rents are much higher as a percentage of the price of the units. Why that should be, I don't know.

AerialWombat
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Re: Direct Real Estate Returns

Post by AerialWombat » Wed Jul 18, 2018 10:45 am

gmaynardkrebs wrote:
Wed Jul 18, 2018 9:55 am
I've been running a what I think is a valid test case on RE investing, that I would like to share, fwiw. At this point, I really have to question the rosy scenarios laid out by some of the RE boosters here. However, I'd really like to hear from those who can point out where my test case is wrong, because I'm actually quite inclined to do this, if I can make a decent return.

In my neighborhood in a desirable area of NW Washington DC, there are two virtually identical and well run semi-luxury apartment buildings right next to each other, except that one is a rental and the other a condo. Using rent vs buy calculators that take into account taxes, depreciation, price appreciation, inflation, opportunity costs, maintenance, condo fees etc., I've made comparisons on identical apartments in the studio, 1BR, and 2 BR/2BA floor plans. I assume that the rent I would get as an investor is the same as that charged for the identical apartment in the rental building. I also assume that all costs, rents, and property value will rise at the same level as inflation. What I've discovered is this. If you do 100% financing at today's mortgage rates (2.5% real, ie, CPI + 2.5%), you will be substantially cash-flow negative (even after taxes) until you sell. (Not sure if this matters, but my marginal rate including DC taxes is over 40%.) The only way you come out ahead is if the property appreciates faster than the rate of inflation. So, it's basically a bet that real estate will substantially outperform inflation. If it doesn't, you lose money. Just to put some numbers in: the 1300sq ft 2BR 2BA sells for $550K, with costs of about $1300 mo (condo fee,taxes, utilities, insurance, and maintenance.) The identical apartment rents for $3,400. As I note, these are real numbers.

As I say, I'd be happy to be shown the error of my ways, and I suspect I am missing at least something here. One thing that does stand out to me is that in other scenarios posted here, usually on cheaper units, rents are much higher as a percentage of the price of the units. Why that should be, I don't know.
Using info you provided, plus I assumed 25% down payment, 4.5% interest rate, 3% closing costs, 3% appreciation, 3% rent appreciation rate, 3% inflation, 10% property management, and 10% maintenance reserve. First year total negative cash flow is $8,538. You don't hit breakeven for 20 years.

This is a "no buy", in my book.

It's generally really hard to make higher end properties like this in expensive areas work out mathematically. It's also difficult to make the numbers work for condos with their high HOA/condo fees.

That's why you usually see us real estate investors talk about investing in lower cost of living areas, where the numbers work. Where I'm at now, you can still buy a $250k house that will rent for $1900/mo. Those numbers work out very nicely.

renue74
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Re: Direct Real Estate Returns

Post by renue74 » Wed Jul 18, 2018 10:51 am

gmaynardkrebs wrote:
Wed Jul 18, 2018 9:55 am
I've been running a what I think is a valid test case on RE investing, that I would like to share, fwiw. At this point, I really have to question the rosy scenarios laid out by some of the RE boosters here. However, I'd really like to hear from those who can point out where my test case is wrong, because I'm actually quite inclined to do this, if I can make a decent return.

In my neighborhood in a desirable area of NW Washington DC, there are two virtually identical and well run semi-luxury apartment buildings right next to each other, except that one is a rental and the other a condo. Using rent vs buy calculators that take into account taxes, depreciation, price appreciation, inflation, opportunity costs, maintenance, condo fees etc., I've made comparisons on identical apartments in the studio, 1BR, and 2 BR/2BA floor plans. I assume that the rent I would get as an investor is the same as that charged for the identical apartment in the rental building. I also assume that all costs, rents, and property value will rise at the same level as inflation. What I've discovered is this. If you do 100% financing at today's mortgage rates (2.5% real, ie, CPI + 2.5%), you will be substantially cash-flow negative (even after taxes) until you sell. (Not sure if this matters, but my marginal rate including DC taxes is over 40%.) The only way you come out ahead is if the property appreciates faster than the rate of inflation. So, it's basically a bet that real estate will substantially outperform inflation. If it doesn't, you lose money. Just to put some numbers in: the 1300sq ft 2BR 2BA sells for $550K, with costs of about $1300 mo (condo fee,taxes, utilities, insurance, and maintenance.) The identical apartment rents for $3,400. As I note, these are real numbers.

As I say, I'd be happy to be shown the error of my ways, and I suspect I am missing at least something here. One thing that does stand out to me is that in other scenarios posted here, usually on cheaper units, rents are much higher as a percentage of the price of the units. Why that should be, I don't know.
Not all geo areas are best suited for landlording. Condos can be substantially difficult to get a high ROI because of condo fees. I used to own some fairly slummy duplexes in Class "C" neighborhoods. They grossed $1300/month and the cost me about $40K each. Yeah, the ROI was great....but tenant vetting was key to success. It's not investing...it's really not. It's a 2nd "gig." A job.

Use this worksheet: https://docs.google.com/spreadsheets/d/ ... sp=sharing

Edit any of the red numbers and that will give you ROI.

I find it difficult to believe that this rental question continues to show up on this forum weekly undermining or second guess rental returns. It's almost like the tax loss harvesting question that pops up everytime there's a sustained down market.

WanderingDoc
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Re: Direct Real Estate Returns

Post by WanderingDoc » Wed Jul 18, 2018 10:52 am

AerialWombat wrote:
Wed Jul 18, 2018 9:31 am
There seems to be a lot of confusion within this thread about the math, especially with how expenses are handled, among other things. Allow me to share a real world example: My first rental property, purchased in August 2015. This is a duplex in a middle-of-the-road military town, about an hour away from a thriving metropolis. I'd call it a "B" neighborhood. One side of the duplex is a 1-bedroom unit, other side is a 2-bedroom.

Purchase price: $145,000
Down payment: $0 --- yes, zero. 100% financing, VA loan, owner occupied. I lived in the 1-bedroom unit for over a year, as required when obtaining owner occupant financing.
Interest rate: 3.875%
PITI: $950/mo
Current total rents: $1850 per month (both sides combined)
Appreciation assumption: Case-Schiller says 0.2% per year above inflation. I use 3% appreciation in my math.
Rent increase assumption: Also 3% per year
Maintenance reserve: 12% (it's an older property)
Property manager: 10%
Vacancy assumption: 5%
Effective tax rate: 28% (for depreciation calculations)

In the 2nd year of ownership (first full year as a rental-only), the cash returns from appreciation, cash flow, debt paydown, and depreciation worked out to $18,527.

Since I'm 100% leveraged, my "investment" is really only the negative cash flow that I had while I was paying out of pocket during the first year I lived there, which was about $7,250. However, this $7,250 is really just my normal living expense. But I'll count it anyway. I also had about $4,500 in closing costs, so a total of $11,750 "invested".

So after I moved out, in year 2 of ownership, my return was 157%.

Ahh, but Wombat, you say, you can't spend appreciation and debt paydown today without selling. OK, if I leave those two out, and only take into account the cash flow from rent, minus expenses, plus the cash tax savings from the depreciation benefit...

Depreciation benefit: $1,252
Positive cash flow, including allowances for vacancy, maintenance, and property manager: $6,988

That's $8,240 per year in spendable cash. Annual cash-on-cash return = 70%.

Was my next house as good? Of course not. It wasn't a duplex, and it was bought at a higher price, total rent is lower, etc. But it's still darn good. I'm currently living in the third house, with the fourth under construction. When I eventually rent out the one I reside in now, I'll be closer to 18% annual cash on cash return. The projections on the house under construction are even worse -- pretty close to break even for the first rental year. But, it's a much nicer house in a much nicer area, and dangit, I wanna live somewhere nice for one year.

The buy, move in, rent it out, repeat strategy is not desirable to a lot of people. I get that. Bogleheads as a group don't appear to like moving very often. But I'm single, no kids, and it works for me. As somebody on this board likes to say, "there are many roads to Dublin."

Anyway, just thought I'd share an actual, real life example of an actual recent direct real estate deal.
The beauty is, your return was actually way more in this case than 157%, because living expenses are non-negotiable and you would have to spend them anyway :)

I have never done the house-hack but I did live in a place that I later turned into a rental. Bought the place with a $30K down payment (even though VA loan). The property produces $12K of rental income per year like clockwork, plus an additional $4K due to a 100% passive investment I arbitraged using a HELOC. Thats a >50% return in perpetuity.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

CantPassAgain
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Re: Direct Real Estate Returns

Post by CantPassAgain » Wed Jul 18, 2018 11:07 am

WanderingDoc wrote:
Wed Jul 18, 2018 10:52 am
I have never done the house-hack but I did live in a place that I later turned into a rental. Bought the place with a $30K down payment (even though VA loan). The property produces $12K of rental income per year like clockwork, plus an additional $4K due to a 100% passive investment I arbitraged using a HELOC. Thats a >50% return in perpetuity.
$30K down payment. What were the closing costs? When was the deal executed?

$12K rental income. What is the monthly mortgage payment, total with prop taxes and insurance? Do you use a property management company on this property? What is the monthly charge? Any income taxes paid? How much have you paid for maintenance? If you just took your actual, real life NET cash flows after all costs from the property and put them in a bank account, what would the balance be today?

What is the estimated FMV of the property today? What is the mortgage balance?

These are things that need to be factored in to calculate the actual return on your investment.

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Meg77
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Re: Direct Real Estate Returns

Post by Meg77 » Wed Jul 18, 2018 11:22 am

I've got 7 rental units and sold 3 last year. Some have done better than others (and it's impossible to predict exact returns due to unknowns like having to spend $30K on a property you paid $130K for to re-pipe the plumbing under the house). However in general I've calculated that if I buy a retail property - meaning I don't try to find a great deal by buying wholesale or a fixer-upper or a foreclosure or something - and I get zero cash flow off the thing, my total return on the total cash due at closing will be about 15% over the first three years.

This 15% "return" assumes 2% property appreciation, 20% down, 1.5% of the loan in closing costs, breakeven cash flow, and a 30 year loan amortization. To be fair since rates have risen this might need to be adjusted downward since the principal pay down will be slower. Two thirds of the return comes from the leveraged appreciation, and the other third is from normal amortization of the loan. This is clearly not ideal - you want cash flow, and you hope for above average capital appreciation by making improvements or buying strategically - but this is a baseline expectation if you end up with a dud that does neither, assuming you can qualify for prime financing terms.

One of my worst rentals (a condo) has averaged 35% on my initial $49,000 cash outlay over the 6 years I've owned it. I've had negative overall cash flow (due to some upgrades I chose to make as well as things like needing a new HVAC and other major repairs) which is why I consider it a bad rental. But it's appreciated at about 6% a year, plus the 4.125% 30 year mortgage helps with accelerated principal reduction. I manage that one myself though so I have spent afternoons cleaning the place, meeting tenants for various things, and negotiating with contractors. I put down $49K, it's increased $91K in value, and cash flow plus principal reduction has totaled $12k. So that's a $103K "return" on $49K divided by 6 years = 35% per year.

My other rentals (duplexes) have averaged 31% and 13% over the last 5 years. The one that's only 13% cash flows pretty well but has only appreciated 1.3% a year over a decade. Another I put 0% down on because I borrowed the cash to close from a family member. It has averaged $9490 in cash flow + principal reductions over the last 5 years, and it has also appreciated 6.4% a year over the last 8 years ($90k). Returns are undetermined since I put down nothing, but that's the best one I have by far. None of these figures include tax benefits. I am a very lazy landlord and pay for premium property management on all but one. I am generous with cosmetic and other upgrades and don't cut corners on repairs. I don't push up rents on tenants who stay. I have bought all but one (a short sale - the one I borrowed from a family member to buy) right off MLS listings at retail value.
Last edited by Meg77 on Thu Jul 19, 2018 3:19 pm, edited 1 time in total.
"An investment in knowledge pays the best interest." - Benjamin Franklin

WanderingDoc
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Re: Direct Real Estate Returns

Post by WanderingDoc » Wed Jul 18, 2018 11:53 am

CantPassAgain wrote:
Wed Jul 18, 2018 11:07 am
WanderingDoc wrote:
Wed Jul 18, 2018 10:52 am
I have never done the house-hack but I did live in a place that I later turned into a rental. Bought the place with a $30K down payment (even though VA loan). The property produces $12K of rental income per year like clockwork, plus an additional $4K due to a 100% passive investment I arbitraged using a HELOC. Thats a >50% return in perpetuity.
$30K down payment. What were the closing costs? When was the deal executed?

$12K rental income. What is the monthly mortgage payment, total with prop taxes and insurance? Do you use a property management company on this property? What is the monthly charge? Any income taxes paid? How much have you paid for maintenance? If you just took your actual, real life NET cash flows after all costs from the property and put them in a bank account, what would the balance be today?

What is the estimated FMV of the property today? What is the mortgage balance?

These are things that need to be factored in to calculate the actual return on your investment.
$30K was approximate "all-in" after closing. I believe I actually got a few bucks BACK per the VA loan/escrow calculation.

This isn't a BP newbie poster haha. I meticulously track all expenses since I do my own accounting and taxes. Of course I am factoring all expenses, and 8% property management. I am not even including principal pay down or capital appreciation in the > 50% annualized yield, athough a lot of both happened.

I closed on the property in '11 and it's been a rental since '15. $12K is the NET, post-tax cash flow in my bank account annually (I legally pay no taxes or take a small paper loss). To give you an idea, gross rents are $3100/mo.

FMV is ~$490K. Mortgage balance is $220K. If I do a cash out refi now, I would have $0 in the property and it would still cash flow handsomely. I haven't pulled the trigger though as I like the current 3.25% fixed rate :) Any other questions?
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

gmaynardkrebs
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Re: Direct Real Estate Returns

Post by gmaynardkrebs » Wed Jul 18, 2018 12:58 pm

WanderingDoc wrote:
Wed Jul 18, 2018 11:53 am
... $12K is the NET, post-tax cash flow in my bank account annually (I legally pay no taxes or take a small paper loss).... ..Any other questions?
Just so I can understand...I take you to mean that $12K is the amount you put in the piggy bank every year, having paid no federal income tax, which I guess is possible via depreciation. Do you then avoid recapture by doing 1033 like kind exchanges in perpetuity; you then avoid capital gains by dying (hopefully at a ripe old age :D) with heirs, who take at the stepped up basis? I assume, also that one doesn't need to recapture depreciation as ordinary/cap gains income on the decedent year tax return?

AerialWombat
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Re: Direct Real Estate Returns

Post by AerialWombat » Wed Jul 18, 2018 1:15 pm

WanderingDoc wrote:
Wed Jul 18, 2018 10:52 am
The beauty is, your return was actually way more in this case than 157%, because living expenses are non-negotiable and you would have to spend them anyway :)
You're talking to a guy that used to live in a van, and it wasn't that long ago. So, I consider living expenses to be highly negotiable. 8-)

WanderingDoc
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Re: Direct Real Estate Returns

Post by WanderingDoc » Wed Jul 18, 2018 2:25 pm

gmaynardkrebs wrote:
Wed Jul 18, 2018 12:58 pm
WanderingDoc wrote:
Wed Jul 18, 2018 11:53 am
... $12K is the NET, post-tax cash flow in my bank account annually (I legally pay no taxes or take a small paper loss).... ..Any other questions?
Just so I can understand...I take you to mean that $12K is the amount you put in the piggy bank every year, having paid no federal income tax, which I guess is possible via depreciation. Do you then avoid recapture by doing 1033 like kind exchanges in perpetuity; you then avoid capital gains by dying (hopefully at a ripe old age :D) with heirs, who take at the stepped up basis? I assume, also that one doesn't need to recapture depreciation as ordinary/cap gains income on the decedent year tax return?
My properties have done so well without much effort.. so I have no intention of ever selling. It would mathematically probably be better to do a 1031 exchange and by something bigger but I've been too lazy to 8-)

Correct. You never have to recapture unless you sell. Usually depreciation ends at 27.5 yrs and the loan ends at 30 yrs.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

StillLearning1977
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Re: Direct Real Estate Returns

Post by StillLearning1977 » Wed Jul 18, 2018 3:17 pm

WildBill wrote:
Thu Jul 12, 2018 7:40 pm
WanderingDoc wrote:
Thu Jul 12, 2018 6:51 pm
From a prior post, so I don't have to write it out again:

Buy a property at $100K, $20K down. Monthly rents of $900-$950. I personally buy in markets with 6-8% long term appreciation, but lets be very conservative and use the general longer-term real estate appreciation value across the entire U.S. - 4% annualized. Even though nobody buys every single house in the U.S.

Returns:
Appreciation of 4%: 5:1 Leveraged return of 20%.
Cash flow: 8%
Principal paydown by tenants: 4% (typically closer to 5%, but again I'll be worst case scenario)
Depreciation/net tax benefit: Depreciate $80K over 27.5 years = $3K per year, at a 25% tax rate this is $750, 3.75% return ($750 of $20K down payment is a 3.75% return annualized)
Inflation hedging/profiting: You pay the lender the same Principal and Interest over 30 years, in dollars that are worth less every single year, conservatively: 3% return

20% + 8% + 4% + 3.75% + 3% = 38.75% annualized return on your $20K down payment. The kicker here is that rental real estate returns very typically grow every year because if your expenses increase at the same level as rents, the way the math works, the difference becomes greater every year (kind of complex to explain here, so we can forget it and assume the 38% return).

Let me emphasize that this is a typical deal found all over the U.S. and accessible to everyone.

So yea, I would laugh at the idea of only a 18-20% return on a leveraged real estate deal. The above scenario very closely approximates my worst performing property which I bought "Turnkey" so I didn't go out and find a good deal, just a boring property with property management in place.


InvestInLife wrote:
Thu Jul 12, 2018 5:28 pm
There are members who boast about getting 18-20% annual ROI on their direct r/e holdings. I'm curious if that is just counting gross income against cost of purchase.
I always multiply rental income by 55% to account for maintenance, vacancy, management, taxes, and insurance, and then divide against purchase price to get my return calculation. My current house returns about 8%, rents at 900-925, purchased for 75k with a 25% downpayment, and that seems to be considered a solid return. 18-20% sounds too good to be true, unless you're talking gross numbers. In that case, mine would be 900*12/75k=14.4%. If we're talking cash invested, then 900*12/(75k/4)=57.6%. These are all very different calculations, so wanted to clarify which was being referenced. Also, by using leverage I incur a negative bond, toward which much of my 8% return goes, essentially breaking even for a long time.
Howdy

Interesting analysis with many very interesting assumptions.Worthy of Lewis Carroll.

Things that you might want to consider, that you haven’t, are included below and are normal and routine costs. Not included are bad ones, like getting a problem tenant you have to evict.

Operating expenses - Insurance, taxes, repairs, mortgage payments, maintenance. Most properties have those. Insurance and taxes are typically 6-7% of gross. Rentals and repairs and maintenance are 3-5% over time.

Another operating expense you seem to be ignoring is the mortgage. You include “principal paydown by tenant” as part of your return, but that is false. You pay the mortgage. The tenant pays you rent. You are double counting. In your scenario your mortgage is going to be about 30% of gross. That is a charge against operating income, not some magical component of total return.

An adjustment for vacancies and cost/time of finding new tenants. Typically a months rental every 2 years, or about a 4% charge.

Property manager? 10% of gross.

Your scenarios for appreciation and depreciation ignore the fact that you are reducing your basis to zero and both will be taxed as capital gains on the sale of the property. So you would have to adjust your assumed appreciation for those facts.

If you say you are getting 6-8 % appreciation a year on your properties and that you are planning on that continuing unabated, good on you.

Your quote of 4 % appreciation per year on US real estate is nominal, before inflation. So you are double counting when you also include a 3% inflation hedge return.

Your scenario of a $100,00 property renting for $950 a month is just barely plausible for a property bought cheaply in a sketchy part of Georgetown, Texas or Beaumont, but those properties are not going to appreciate like you project, nor will you have much fun getting reliable tenants.

I have owned and operated rental properties for over 40 years. Real estate can be a good business, but it requires a solid grasp of facts and details. Your analysis does not reflect reality and I am puzzled why you would post it?

Happy appreciation

WbB

W B
When using leverage, why isn't the ROI based on the down-payment only?

smitty1515
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Re: Direct Real Estate Returns

Post by smitty1515 » Wed Jul 18, 2018 9:19 pm

^^^
That would be cash on cash return
Be fearful when others are greedy and greedy when others are fearful. -Warren Buffett

CarpeDiem22
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Re: Direct Real Estate Returns

Post by CarpeDiem22 » Wed Jul 18, 2018 11:09 pm

Even if real estate provides higher return, is that a free lunch? Is there any way to measure risk-adjusted return? (Excuse me for adding more firewood to the burning fire here.).

boglerdude
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Re: Direct Real Estate Returns

Post by boglerdude » Thu Jul 19, 2018 3:06 am

Why are rents so high in LCOL areas?

> Is there any way to measure risk-adjusted return?

Landlording is more about your personality than math. ie not minding confrontation, and being a busybody (high energy and detail oriented).
Edit: heres an example from today:
"head over to the property to meet your “actual” tenant and let him/her know that you’re aware of the situation. Clearly remind her/him that no matter what, they are responsible for paying rent, damages, and the behavior of the others in the home. Then ask for IDs from the others living in the rental, collect a deposit for/from each and add them to the lease."
viewtopic.php?p=4025398#p4025398

ignition
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Re: Direct Real Estate Returns

Post by ignition » Thu Jul 19, 2018 3:25 am

Jealous of the returns here. I don't think that would work here in Belgium (finding 100K houses that rent out for 900 per month) + transaction costs here are notoriously high (15%+ of property value according to some real estate sites).

Also I've heard quite some horror stories from friends with tenants not paying their rent and trashing the place. Tenant rights are pretty strong here and it usually takes at least 6 months to evict a tenant.

Valuethinker
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Re: Direct Real Estate Returns

Post by Valuethinker » Thu Jul 19, 2018 3:49 am

CarpeDiem22 wrote:
Wed Jul 18, 2018 11:09 pm
Even if real estate provides higher return, is that a free lunch? Is there any way to measure risk-adjusted return? (Excuse me for adding more firewood to the burning fire here.).
A diversified housing REIT would be comparable to assets like a diversified index (equity) fund or bonds.

Individual housing units I think it would be very difficult.

It is the specific risks of RE (location, condition, tenants, etc.) that create the "opportunity". The market is pretty efficient in this. Some people have good experiences, some do not. Some get rich, some lose their shirts. Most probably do OK.

gmaynardkrebs
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Re: Direct Real Estate Returns

Post by gmaynardkrebs » Thu Jul 19, 2018 8:30 am

boglerdude wrote:
Thu Jul 19, 2018 3:06 am
Why are rents so high in LCOL areas?

> Is there any way to measure risk-adjusted return?

Landlording is more about your personality than math. ie not minding confrontation, and being a busybody (high energy and detail oriented).
Edit: heres an example from today:
"head over to the property to meet your “actual” tenant and let him/her know that you’re aware of the situation. Clearly remind her/him that no matter what, they are responsible for paying rent, damages, and the behavior of the others in the home. Then ask for IDs from the others living in the rental, collect a deposit for/from each and add them to the lease."
viewtopic.php?p=4025398#p4025398
Great questions, on which this thread is very thought-provoking for an would-be investor, like myself.
I can answer the LCOL question only by observing what I see in the HCOL where I live. When rents get too high here, most people have the financial ability to buy a place. In other words, landlords face competition from home sellers, not just other landlords. In fact, having looked and run the math on a number of HCOL properties, I would be cash negative for 20 years on just about everything. So, it becomes a major bet on home appreciation to come out ahead.

It would be very hard to separate the returns from higher risk from other premia, such as illiquidity and all the time you have to spend if you are DIY landlord. I suspect the latter is the biggest factor that is not accounted for when people brag about their returns.

Valuethinker
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Re: Direct Real Estate Returns

Post by Valuethinker » Thu Jul 19, 2018 9:05 am

boglerdude wrote:
Thu Jul 19, 2018 3:06 am
Why are rents so high in LCOL areas?
Probably better to frame it the other way. Why are rental cap rates so low in HCOL areas?

The answer is expectations of price appreciation. Also, if prices drop in a HCOL area, then there are lots of buyers, priced out of the market, who come in and buy. The owner occupiers dominate the market.

In the extreme valuation cases, like Toronto and Vancouver, you get cap rates below 3.0%, even below 2.0%. There's a lot of expectation built into that, because the actual rental income will not cover all costs (e.g. of structural renewal) in the long run.

In LCOL areas, rents are set by the availability of renters who cannot be buyers. That provides something of a floor to rents. And there's no price appreciation priced in. So landlords need to make a decent cap rate because they cannot bet on selling the property for (much) more than they paid for it.

Stormbringer
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Re: Direct Real Estate Returns

Post by Stormbringer » Thu Jul 19, 2018 9:24 am

WanderingDoc wrote:
Thu Jul 12, 2018 6:51 pm
20% + 8% + 4% + 3.75% + 3% = 38.75% annualized return on your $20K down payment. The kicker here is that rental real estate returns very typically grow every year because if your expenses increase at the same level as rents, the way the math works, the difference becomes greater every year (kind of complex to explain here, so we can forget it and assume the 38% return).

Let me emphasize that this is a typical deal found all over the U.S. and accessible to everyone.
I'm sorry, but this is just wrong.

It is absurd on it's face -- a bunch of amateur landlords routinely getting double Warren Buffett's annualized returns? It is also impossible, because if sustainable 38% returns were so widely available, there would be trillions of dollars pouring into real estate and bidding up property values to stratospheric levels until the returns came down to normal levels. A person who invested $20,000 at 38.75% for 30 years would have nearly $370 million by the time that house was paid off.

I have been investing in real estate for 23 years, own 15 buildings, and a management company that manages about 3,800 residential units. I have never seen sustained returns even approaching 38%, nor have any of the 100+ investors that we manage for. I have for brief periods of time, had returns like that in special situations (e.g. buying foreclosures for 50 cents on the dollar after the recession) but not sustainable, typical, or accessible to everyone.

The only time I've even seen numbers like that is when someone has come into our office all jazzed up after ordering some program off late night TV.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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knpstr
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Re: Direct Real Estate Returns

Post by knpstr » Thu Jul 19, 2018 10:09 am

Stormbringer wrote:
Thu Jul 19, 2018 9:24 am
WanderingDoc wrote:
Thu Jul 12, 2018 6:51 pm
20% + 8% + 4% + 3.75% + 3% = 38.75% annualized return on your $20K down payment. The kicker here is that rental real estate returns very typically grow every year because if your expenses increase at the same level as rents, the way the math works, the difference becomes greater every year (kind of complex to explain here, so we can forget it and assume the 38% return).

Let me emphasize that this is a typical deal found all over the U.S. and accessible to everyone.
I'm sorry, but this is just wrong.

It is absurd on it's face -- a bunch of amateur landlords routinely getting double Warren Buffett's annualized returns? It is also impossible, because if sustainable 38% returns were so widely available, there would be trillions of dollars pouring into real estate and bidding up property values to stratospheric levels until the returns came down to normal levels. A person who invested $20,000 at 38.75% for 30 years would have nearly $370 million by the time that house was paid off.

I have been investing in real estate for 23 years, own 15 buildings, and a management company that manages about 3,800 residential units. I have never seen sustained returns even approaching 38%, nor have any of the 100+ investors that we manage for. I have for brief periods of time, had returns like that in special situations (e.g. buying foreclosures for 50 cents on the dollar after the recession) but not sustainable, typical, or accessible to everyone.

The only time I've even seen numbers like that is when someone has come into our office all jazzed up after ordering some program off late night TV.
That would be return on year 1. Of course all of that return is not immediately re-investable necessarily. And some of it is speculative/estimated (the estimated for appreciaiton and inflation). For example, in his example 24% of that is equity/appreciation. It would not make sense to refinance to unlock that since the costs of doing so would wipe it out. So it isn't a 38% CAGR. However, that does not mean that the 38% return on year 1 is miscalculated.

Naturally returns can be VERY high at the start in real estate and gradually reduce to cap-rate if no equity is ever taken back out to invest in other areas. You already know this as you are a seasoned investor.

It'd be better to specifically rebut his estimates. Do you disagree with any of his assumptions on year 1?
Is 4% appreciation outrageous?
is 8% Cash flow outrageous?
Is 4% for principal pay down outrageous?
Is 3.75% for tax benefit/savings outrageous?
Is 3% inflation outrageous?

His estimate for year 1 total return is not far off in my opinion, but as I said, it isn't CAGR either which I think may be what people have a problem with, which is fair to point out.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

niceguy7376
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Re: Direct Real Estate Returns

Post by niceguy7376 » Thu Jul 19, 2018 10:46 am

I am an amateur landlord that bought and rent out a townhome. I dont know how/what of the returns but below is info.
Bought in Mid 2008 for 275K with 20%(55K) down.
Currently valued at 350K (county as well as surrounding sales).

Initially got 30 year loan at 4.125 but refinanced to 15 year loan(171K0 at 3.5 in Jan 2013. P+I is 1222.45 and Escrow is 355.13
HOA is 150 per month
Rents after $50 to mgmt is 2K.
Maintenance on avg since we bought came to 1K per year (new ac unit replaced last year and other repairs over the years).

WanderingDoc
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Re: Direct Real Estate Returns

Post by WanderingDoc » Thu Jul 19, 2018 12:39 pm

Stormbringer wrote:
Thu Jul 19, 2018 9:24 am
WanderingDoc wrote:
Thu Jul 12, 2018 6:51 pm
20% + 8% + 4% + 3.75% + 3% = 38.75% annualized return on your $20K down payment. The kicker here is that rental real estate returns very typically grow every year because if your expenses increase at the same level as rents, the way the math works, the difference becomes greater every year (kind of complex to explain here, so we can forget it and assume the 38% return).

Let me emphasize that this is a typical deal found all over the U.S. and accessible to everyone.
I'm sorry, but this is just wrong.

It is absurd on it's face -- a bunch of amateur landlords routinely getting double Warren Buffett's annualized returns? It is also impossible, because if sustainable 38% returns were so widely available, there would be trillions of dollars pouring into real estate and bidding up property values to stratospheric levels until the returns came down to normal levels. A person who invested $20,000 at 38.75% for 30 years would have nearly $370 million by the time that house was paid off.

I have been investing in real estate for 23 years, own 15 buildings, and a management company that manages about 3,800 residential units. I have never seen sustained returns even approaching 38%, nor have any of the 100+ investors that we manage for. I have for brief periods of time, had returns like that in special situations (e.g. buying foreclosures for 50 cents on the dollar after the recession) but not sustainable, typical, or accessible to everyone.

The only time I've even seen numbers like that is when someone has come into our office all jazzed up after ordering some program off late night TV.
You just said "its absurd". You didn't even attempt to disprove it but giving a mathematical or even logical reason why you believe what you do.

Those are the returns. The principal paydown, appreciation, and inflation hedging are actual returns but they aren't "realized" immediately. But they would be included on a balance sheet. They aren't imaginary, they are real. Those are the returns of the worst property in my portfolio, which I bought with a 20% down loan in a city I've never been to. Two other properties I have refi'd ALL of my initial capital, meaning I have $0 of my money in the deal and they still pay me in the 5 ways I've outlined.

Just because most of America invests in a vehicle they were told is "good" by the media, word of mouth, bankers, and politicians, it doesn't mean there aren't alternatives.

I have laid the math out in gory and specific detail. The burden of proof is now on YOU. "Warren Buffet" is not a rebuttal or reason or explanation. Neither is calling it absurd.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

Dottie57
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Re: Direct Real Estate Returns

Post by Dottie57 » Thu Jul 19, 2018 12:55 pm

WanderingDoc wrote:
Sat Jul 14, 2018 1:45 pm
Life is largely about self talk and the stories you tell yourself.

If you are convinced that all you can get / are entitled to 7% returns your whole life - that's exactly what you will get. That you should take money OUT of your paycheck for 40 years, because big banks and the government told you it was that best retirement plan - that is exactly what you will get.

There will always be naysayers and cynics. Real estate has risks, but there is an educational component that can greatly mitigate them. We also have a ton of control how you acquire, finance, manage, reposition, and exit the investment.

You can tell yourself the story that you will be alive, as energetic, as healthy, as mobile when you are 65 as when you were 35. (News flash - not happening) The reason I got into real estate was because I didn't want a life-deferral plan that involved taking money OUT of my paycheck for 40 years. For me it's the opposite, 20% of all the income flowing into my account is from real estate, is tax free, and I can spend now if I want. The other 80% is from my W-2 job.
jeffyscott wrote:
Sat Jul 14, 2018 10:15 am
WildBill wrote:
Sat Jul 14, 2018 3:33 am
michaelsieg wrote:
Sat Jul 14, 2018 12:11 am
It surprises me, that on this forum direct real estate is not looked at as another way to diversify one's portfolio and is being criticized so often.
I don’t think this forum is particularly anti real estate.
Yeah, I think it's maybe just anti claims of things like routine 38.75% returns via owning rental properties, that ignore many costs and risks. :)
Wow. Kind of nasty reply. Some are questioning your numbers. That is all. It is your life and money.

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Pajamas
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Re: Direct Real Estate Returns

Post by Pajamas » Thu Jul 19, 2018 1:04 pm

Dottie57 wrote:
Thu Jul 19, 2018 12:55 pm
Wow. Kind of nasty reply.
I thought it was humorous in a WAKE UP SHEEPLE!!! kind of way. 8-)

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gmaynardkrebs
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Re: Direct Real Estate Returns

Post by gmaynardkrebs » Thu Jul 19, 2018 1:07 pm

WanderingDoc wrote:
Thu Jul 19, 2018 12:39 pm
Stormbringer wrote:
Thu Jul 19, 2018 9:24 am
WanderingDoc wrote:
Thu Jul 12, 2018 6:51 pm
20% + 8% + 4% + 3.75% + 3% = 38.75% annualized return on your $20K down payment. The kicker here is that rental real estate returns very typically grow every year because if your expenses increase at the same level as rents, the way the math works, the difference becomes greater every year (kind of complex to explain here, so we can forget it and assume the 38% return).

Let me emphasize that this is a typical deal found all over the U.S. and accessible to everyone.
I'm sorry, but this is just wrong.

It is absurd on it's face -- a bunch of amateur landlords routinely getting double Warren Buffett's annualized returns? It is also impossible, because if sustainable 38% returns were so widely available, there would be trillions of dollars pouring into real estate and bidding up property values to stratospheric levels until the returns came down to normal levels. A person who invested $20,000 at 38.75% for 30 years would have nearly $370 million by the time that house was paid off.

I have been investing in real estate for 23 years, own 15 buildings, and a management company that manages about 3,800 residential units. I have never seen sustained returns even approaching 38%, nor have any of the 100+ investors that we manage for. I have for brief periods of time, had returns like that in special situations (e.g. buying foreclosures for 50 cents on the dollar after the recession) but not sustainable, typical, or accessible to everyone.

The only time I've even seen numbers like that is when someone has come into our office all jazzed up after ordering some program off late night TV.
You just said "its absurd". You didn't even attempt to disprove it but giving a mathematical or even logical reason why you believe what you do.

Those are the returns. The principal paydown, appreciation, and inflation hedging are actual returns but they aren't "realized" immediately. But they would be included on a balance sheet. They aren't imaginary, they are real. Those are the returns of the worst property in my portfolio, which I bought with a 20% down loan in a city I've never been to. Two other properties I have refi'd ALL of my initial capital, meaning I have $0 of my money in the deal and they still pay me in the 5 ways I've outlined.

Just because most of America invests in a vehicle they were told is "good" by the media, word of mouth, bankers, and politicians, it doesn't mean there aren't alternatives.

I have laid the math out in gory and specific detail. The burden of proof is now on YOU. "Warren Buffet" is not a rebuttal or reason or explanation. Neither is calling it absurd.
I'll admit, I'm confused. In your example, you have a 38% annualized return on your 20% down payment. Ok, I think I get that. But, as I am an admitted math idiot, let me ask: suppose you had put 10% down -- would the annualized return be 76%? What about 1% down? Would the annualized return on your down payment be 760%? I can't get around that, but as I say, whatever math skills I ever has are gone with wind, so to speak.

KyleAAA
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Re: Direct Real Estate Returns

Post by KyleAAA » Thu Jul 19, 2018 1:40 pm

WanderingDoc wrote:
Thu Jul 19, 2018 12:39 pm
Stormbringer wrote:
Thu Jul 19, 2018 9:24 am
WanderingDoc wrote:
Thu Jul 12, 2018 6:51 pm
20% + 8% + 4% + 3.75% + 3% = 38.75% annualized return on your $20K down payment. The kicker here is that rental real estate returns very typically grow every year because if your expenses increase at the same level as rents, the way the math works, the difference becomes greater every year (kind of complex to explain here, so we can forget it and assume the 38% return).

Let me emphasize that this is a typical deal found all over the U.S. and accessible to everyone.
I'm sorry, but this is just wrong.

It is absurd on it's face -- a bunch of amateur landlords routinely getting double Warren Buffett's annualized returns? It is also impossible, because if sustainable 38% returns were so widely available, there would be trillions of dollars pouring into real estate and bidding up property values to stratospheric levels until the returns came down to normal levels. A person who invested $20,000 at 38.75% for 30 years would have nearly $370 million by the time that house was paid off.

I have been investing in real estate for 23 years, own 15 buildings, and a management company that manages about 3,800 residential units. I have never seen sustained returns even approaching 38%, nor have any of the 100+ investors that we manage for. I have for brief periods of time, had returns like that in special situations (e.g. buying foreclosures for 50 cents on the dollar after the recession) but not sustainable, typical, or accessible to everyone.

The only time I've even seen numbers like that is when someone has come into our office all jazzed up after ordering some program off late night TV.
You just said "its absurd". You didn't even attempt to disprove it but giving a mathematical or even logical reason why you believe what you do.

Those are the returns. The principal paydown, appreciation, and inflation hedging are actual returns but they aren't "realized" immediately. But they would be included on a balance sheet. They aren't imaginary, they are real. Those are the returns of the worst property in my portfolio, which I bought with a 20% down loan in a city I've never been to. Two other properties I have refi'd ALL of my initial capital, meaning I have $0 of my money in the deal and they still pay me in the 5 ways I've outlined.

Just because most of America invests in a vehicle they were told is "good" by the media, word of mouth, bankers, and politicians, it doesn't mean there aren't alternatives.

I have laid the math out in gory and specific detail. The burden of proof is now on YOU. "Warren Buffet" is not a rebuttal or reason or explanation. Neither is calling it absurd.
We'll chat more when you've owned rentals through a major recession or real estate crash. It's been easy to get 30% returns in real estate over the last 7-8 years without any skill, and in fact I've done better, but when your local market is apprecating 8% and you're putting 20% down, it's almost impossible not to. Many of your "risk mitigation" techniques won't work when it comes down to it, you'll find. That said, make hay while the sun shines. Just don't expect 30%+ returns to last indefinitely without the risk showing up, because it will.

ignition
Posts: 154
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Re: Direct Real Estate Returns

Post by ignition » Thu Jul 19, 2018 1:50 pm

WanderingDoc wrote:
Thu Jul 12, 2018 6:51 pm
From a prior post, so I don't have to write it out again:

Buy a property at $100K, $20K down. Monthly rents of $900-$950. I personally buy in markets with 6-8% long term appreciation, but lets be very conservative and use the general longer-term real estate appreciation value across the entire U.S. - 4% annualized. Even though nobody buys every single house in the U.S.

Returns:
Appreciation of 4%: 5:1 Leveraged return of 20%.
Cash flow: 8%
Principal paydown by tenants: 4% (typically closer to 5%, but again I'll be worst case scenario)
Depreciation/net tax benefit: Depreciate $80K over 27.5 years = $3K per year, at a 25% tax rate this is $750, 3.75% return ($750 of $20K down payment is a 3.75% return annualized)
Inflation hedging/profiting: You pay the lender the same Principal and Interest over 30 years, in dollars that are worth less every single year, conservatively: 3% return

20% + 8% + 4% + 3.75% + 3% = 38.75% annualized return on your $20K down payment. The kicker here is that rental real estate returns very typically grow every year because if your expenses increase at the same level as rents, the way the math works, the difference becomes greater every year (kind of complex to explain here, so we can forget it and assume the 38% return).

Let me emphasize that this is a typical deal found all over the U.S. and accessible to everyone.

So yea, I would laugh at the idea of only a 18-20% return on a leveraged real estate deal. The above scenario very closely approximates my worst performing property which I bought "Turnkey" so I didn't go out and find a good deal, just a boring property with property management in place.
I plugged your numbers in this calculator: https://www.calculator.net/rental-prope ... lator.html

It sais the IRR is about 16.38% if you hold the property for 30 years (i took the same assumptions as the calculator but changed monthly rent to 900$ and appreciation to 4%). Not sure if IRR is the same as annualized return? If so, this is a lot less than 38.75% (but still a very nice profit of course). Or is the calculator wrong?

psteinx
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Re: Direct Real Estate Returns

Post by psteinx » Thu Jul 19, 2018 1:56 pm

OK, so here's my cut at Wandering Doc's numbers. Caveats below:

Code: Select all

 Price........................... 	 100,000 	
 Rent............................ 	 11,100 	
 Vacancy......................... 	 (666)	
 Taxes........................... 	 (1,000)	
 Insurance....................... 	 (600)	
 Property Mngmnt................. 	 (1,404)	 8% + 1 months rent every 24 months... 
 Maintenance..................... 	 (1,332)	
 ................................ 		
 Cash Flow (pre-tax)............. 	 6,098 	
 ................................ 		
 Appreciation.................... 	 1,000 	
 Tax Rate........................ 	30%	
 Depr tax savings................ 	 873 	
 Taxes on cash flow.............. 	 (1,829)	
 Total after tax cash flow....... 	 5,141 	
 A/T cash flow %................. 	5.1%	
 Total return $.................. 	 6,142 	
 Unlevered return, %............. 	6.1%	
 ................................ 		
 Effects of leverage:............ 		
 Interest Rate................... 	4%	
 LTV............................. 	80%	
 Down Pmt........................ 	 20,000 	
 Loan Term....................... 	 20 	
 Payment......................... 	 (485)	
 Year 1 Total.................... 	 (5,817)	
 Year 1 interest................. 	 (3,200)	
 Year 1 principal................ 	 (2,617)	
 ................................ 		
 Tax Impact of interest.......... 	 960 	
 After Tax Cash Flow, year 1..... 	 284 	
 A/T Cash on cash................ 	1.4%	
 Add appreciation................ 	 1,000 	
 Add principal paydown........... 	 2,617 	
 Total A/T return ($)............ 	 3,901 	
 Total A/T return on initial cash 	19.5%	
Caveats and notes:
1) I am not currently a direct real estate investor, and it's been many years since I've done it (and even then, my experience was relatively limited compared to many). But I have researched it now and again in more recent times, and I think much of what I've got above is relatively realistic.

2) WanderingDoc did not provide all the number necessary for an analysis, so I've made some guesses/assumptions. Some of these may vary significantly based on region. Appreciation rate is a BIG one (discussed further below), but property taxes is another significant one. I've not separated out utility charges and certain service fees and the like that may apply for some properties - consider them perhaps as part of "maintenance".

3) Why so low an assumption for appreciation? (I assume 1%, WanderingDoc talks of 4%.) Well, from my understanding, when you have properties that have relatively high rent to value numbers (or cap rates, or whatever), you're typically in geographic regions or neighborhoods that are not booming. Yes, appreciation is likely to be higher in many coastal/tech enclaves, but cap rates there will quite possibly be lower.

4) I think WanderingDoc's initial analysis confused rather than clarified by mixing up leverage impacts in the raw numbers (i.e. by multiplying a lot of stuff by 5x for the impacts of 80% borrowing). I've separated them here - first an unlevered analysis, then a levered analysis. The raw cash flow, pre-tax, in my unlevered analysis is $6098, on $100K invested, so ~6.1% cap rate. Perhaps that's a little conservative, but remember, the basic parameters we're dealing with here (per WD) are 900-950 rent (I used the average of this range) on a $100K property. In a perfect world - 100% occupancy, ZERO costs, that's 11,100/100,000 for 11.1% cap rate. Of course there WILL be costs and vacancy, so...

5) Depreciation saves some on the tax bill, but if the property cash flows (as it may, especially if bought unlevered), the cash profit is taxable. I've assumed 80% of the property value is depreciable (IIUC, the land value is not), on a 27.5 year schedule, and an overall tax rate of 30%.

6) Bottom line, for unlevered, I get cash on cash, pre-tax, of 6.1%, post-tax of 5.1%, and total post-tax return, WITHOUT making allowances for depreciation recapture or taxes on capital gains, of 6.1% (This makes the somewhat generous assumption that these get wiped out on death by step-up basis).

7) OK, now let's turn to the leverage side of things. Here I'm perhaps on shakier grounds. I'm not real current on typical loan terms these days, and I realize there's a lot of variation. In particular, things that may be possible on a small scale (say, buying a single property owner occupied, living there a while, then moving out and using it as a rental while keeping the loan in place), probably don't scale well. And, IIRC, even on a purely investment loan, you may get better terms, assuming you have a good salary and take a recourse loan, on your 2nd loan versus your 10th - again, scaling issues. Anyways, I assumed a 20 year fully amortizing 4% loan. I did not model closing costs.

OK, so if you apply a 4% loan to a property with a 6.1% cap rate, you DO boost your returns (assuming that things go roughly according to plan). But you don't necessarily boost your cash on cash returns (assuming we're truly talking cash in pocket, and not allowing for refinancings). That's because there's some principal paydown, which reduces cash flow to the investor.

Bottom line, I get a cash on cash return of 1.4%, and a total return of 19.5%, after tax (but again, before allowing for any depr. recapture or cap gains taxes).

So, the investor is magnifying total returns (assuming things go well), while reducing cash on cash returns. Yes, cashout refinancings may effectively boost cash on cash returns, but there are costs to these, and I think particularly with investment property, there may again be scale issues.

What if we vary some assumptions?
I won't try to replicate the table for these - just some highlights:
(In each of these, I'm varying only the indicating quantities from those shown above)
* If vacancy spikes to 20%, A/T Cash Flow %, unlevered, goes to 4.0%, levered goes to -4.5%. At 40% vacancy, these go to 2.3% and -12.8%
* If appreciation goes to 4% (from 1%), then total A/T return goes from 6.1% to 9.1%, unlevered, and (as % of initial cash) from 19.5% to 34.5%.
(So, if appreciation truly is 4% as WD speculates, then yes, with big leverage, you can get returns in the thirties, though not cash on cash, absent refinancing...)
* If (leveraged scenario) LTV goes from 80% to 75%, and interest rate goes from 4% to 4.5%, then A/T cash on cash goes from 1.4% to 1.8% (presumably because leverage is reduced), and total A/T return on initial cash goes from 19.5% to 15.1%.

8) Some further caveats - The payment math maybe slightly off - I may be fumbling raw interest rates and APRs there, but the differences shouldn't be too big at the rates I'm using.

My guess is that total costs of leverage for more ambitious RE investors (beyond one or two investments) will generally be higher, with points, closing costs and the like, that I haven't put in my number crunching.

There are probably other things I've forgotten.

One could certainly make both more and less generous assumptions.

There are plenty of potential risks and unexpected surprises, that would generally be more damaging to the highly leveraged investor with many properties versus the lightly leveraged investor and/or someone with only a property or two and substantial non-real estate income and financial reserves.

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