## Direct Real Estate Returns

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
InvestInLife
Posts: 82
Joined: Mon Aug 22, 2016 2:36 pm

### Direct Real Estate Returns

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.

Sandtrap
Posts: 5320
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

### Re: Direct Real Estate Returns

Average 6% Net Cap across my rentals, over many many decades.
j
Last edited by Sandtrap on Sat Jul 14, 2018 2:01 pm, edited 1 time in total.

knpstr
Posts: 2154
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

### Re: Direct Real Estate Returns

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.
Purchased for \$75K with 25% down is \$18,750 invested. You "say" you make 8% but you are going against \$75K so you clear \$6K?

6000/18750= 32% ROI

You only "invested" your down payment. You were calculating ROA Return on Asset (or also referred to "cap rate" in REI)
Last edited by knpstr on Thu Jul 12, 2018 5:53 pm, edited 1 time in total.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

whodidntante
Posts: 4032
Joined: Thu Jan 21, 2016 11:11 pm

### Re: Direct Real Estate Returns

People say all kinds of things to defend their darlings. But if I could RELIABLY get 18% net a year on the total investment exposure where I live now with acceptable risk that does not involve being an on call maintenance guy and renter qualifier guy, and eviction expert who is unable to go on vacations to fancy Europe, you will never see another post from me here. Oh, and it cannot involve the mafia, drugs, buying bad debts, or hiring muscle.

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

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.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

WildBill
Posts: 391
Joined: Wed Jun 29, 2016 10:47 pm
Location: San Antonio, Texas

### Re: Direct Real Estate Returns

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
Last edited by WildBill on Thu Jul 12, 2018 7:49 pm, edited 1 time in total.
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

visualguy
Posts: 729
Joined: Thu Jan 30, 2014 1:32 am

### Re: Direct Real Estate Returns

Beyond the returns, there's another aspect that makes direct real estate attractive. It typically holds up relatively well at times of high inflation. Real assets are where you want to be invested at those times. Real estate is an investment that has a good combination of attributes.

However, it does require a bit of work, and it's a bit challenging in cases where your local market isn't attractive for whatever reasons, and you have to invest remotely. All very doable and commonly done, but obviously not for someone who doesn't want to spend any time or effort on it whatsoever.

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

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
I have used conservative assumptions. Everything that you've listed are called "expenses". If you don't underwrite for expenses, you aren't an investor - rather an accidental landlord.

That property example is found all over the U.S., even in today's seller's market. Birmingham, Memphis, Jacksonville, Little Rock, parts of NC and SC, many more markets.

I just gave an example because folks who invest in stocks and bonds often aren't aware of the number of different ways real estate pays you. I don't invest in SFHs as much because I've discovered other niches and strategies that work better for me.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

knpstr
Posts: 2154
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

### Re: Direct Real Estate Returns

WanderingDoc wrote:
Thu Jul 12, 2018 8:24 pm

That property example is found all over the U.S., even in today's seller's market. Birmingham, Memphis, Jacksonville, Little Rock, parts of NC and SC, many more markets.
A bit off topic, but do you invest using turn-key providers?
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

knpstr wrote:
Fri Jul 13, 2018 11:37 am
WanderingDoc wrote:
Thu Jul 12, 2018 8:24 pm

That property example is found all over the U.S., even in today's seller's market. Birmingham, Memphis, Jacksonville, Little Rock, parts of NC and SC, many more markets.
A bit off topic, but do you invest using turn-key providers?
Not really. I just own one property through a turnkey provider. Decent tax shelter, only so-so returns. The best returns by far have been deals where I control it the entire time. Not counting agricultural land since that is also turnkey in a sense.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

knpstr
Posts: 2154
Joined: Thu Nov 20, 2014 8:57 pm
Location: Michigan

### Re: Direct Real Estate Returns

WanderingDoc wrote:
Fri Jul 13, 2018 12:02 pm
knpstr wrote:
Fri Jul 13, 2018 11:37 am
A bit off topic, but do you invest using turn-key providers?
Not really. I just own one property through a turnkey provider. Decent tax shelter, only so-so returns. The best returns by far have been deals where I control it the entire time. Not counting agricultural land since that is also turnkey in a sense.
I only asked because you listed off cities/areas that some turnkey providers really target. I have never used their services so I was just wondering if you had done it, thanks for the reply.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

gmaynardkrebs
Posts: 886
Joined: Sun Feb 10, 2008 11:48 am

### Re: Direct Real Estate Returns

The people I know who make money are "cosmetic" renovators. They buy a house for let's say \$500K, put \$30K into places that show the most, and sell it for \$100K three months later. I guess some buyers just can't resist the smell of new paint, fresh carpeting, and a cleaned up garden.

renue74
Posts: 1166
Joined: Tue Apr 07, 2015 7:24 pm

### Re: Direct Real Estate Returns

My rental testing sheet:

In the South, we can buy houses for \$38K. I just bought one in March. (Though, they are getting less and less frequent these days)

I have 3 rentals and the average about 14%.

I had some duplexes a couple years ago. That's where the ROI is. I had \$40K duplexes and was grossing \$1300/month on them. I can't recall the net but I think the Cash on cash ROI we were getting was close to 30%. It was a Class "C" neighborhood, which meant high turnover, rough tenants.

We sold those duplexes in summer of 2017 for about \$84K each. Bought 4 years ago at \$40K. Walking out the closing attorney's office, I fell like Andy Dufrane in Shawshank Redemption....where he inched his way out of the prison sewer system to triumphantly emerge into the clean rain of the creek near the prison.

randomguy
Posts: 6284
Joined: Wed Sep 17, 2014 9:00 am

### Re: Direct Real Estate Returns

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.

Simple question. How long til your a billionaire? With 38% annual returns it doesn't take long:).

kosomoto
Posts: 424
Joined: Tue Nov 24, 2015 8:51 pm

### Re: Direct Real Estate Returns

I recently bought my first investment property off Roofstock for 137k and it rents for 1250. Going to be many years before I can tell you the returns. It should at least have positive cash flow most years. Honestly I just wanted some long term debt as an inflation hedge.

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

gmaynardkrebs wrote:
Fri Jul 13, 2018 12:38 pm
The people I know who make money are "cosmetic" renovators. They buy a house for let's say \$500K, put \$30K into places that show the most, and sell it for \$100K three months later. I guess some buyers just can't resist the smell of new paint, fresh carpeting, and a cleaned up garden.
Sell a \$500K house for \$100K .. excellent profit!
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

You have to assume you capitalize and reinvest 100% of those returns. Which I don't. I have a day job and invest on a side. I like my regular job, and I value my free time (a lot) more than making money, sorry.

I'm at the stage in my early 30s where cash flow from real estate more than covers my living expenses. For a physician, I am not the most ambitious one you'll ever meet. If you asked me to sit down and do real estate like a real business so I could have 10X the net worth I do now, I would politely decline and would go the gym, read books, fishing, or memorizing Japanese Kanji. Every single time.

randomguy wrote:
Fri Jul 13, 2018 1:42 pm
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.

Simple question. How long til your a billionaire? With 38% annual returns it doesn't take long:).
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

michaelsieg
Posts: 549
Joined: Mon Jan 07, 2013 11:02 am

### Re: Direct Real Estate Returns

Wildbill wrote;
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.
Wildbill, I agree that the mortgage is negative cashflow, but if you look at total return, I really think that you have to count the increase of your principal (or decrease of your mortgage debt) as part of your total return.

I do direct real estate using a management company, which costs me 10% of the rental income, and this assures to me that these are investments and not a side job/work.
I found similar deals that WanderingDoc found. I don't like to leverage much, (but I have some), therefore my returns are lower, they are in the 8-12% range before taxes, but this this is purely looking at cash flow, not increase in value.
I look at these higher returns compared to other fixed income investments as an "illiquidity premium".
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.

emlowe
Posts: 90
Joined: Fri Jun 01, 2018 2:57 pm

### Re: Direct Real Estate Returns

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.
As a diversifier is it any different from holding REITs ? (say FSRVX or VGSIX)

WildBill
Posts: 391
Joined: Wed Jun 29, 2016 10:47 pm
Location: San Antonio, Texas

### Re: Direct Real Estate Returns

michaelsieg wrote:
Sat Jul 14, 2018 12:11 am
Wildbill wrote;
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.
Wildbill, I agree that the mortgage is negative cashflow, but if you look at total return, I really think that you have to count the increase of your principal (or decrease of your mortgage debt) as part of your total return.

I do direct real estate using a management company, which costs me 10% of the rental income, and this assures to me that these are investments and not a side job/work.
I found similar deals that WanderingDoc found. I don't like to leverage much, (but I have some), therefore my returns are lower, they are in the 8-12% range before taxes, but this this is purely looking at cash flow, not increase in value.
I look at these higher returns compared to other fixed income investments as an "illiquidity premium".
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.
Howdy Michael

Real estate is unique in that it is one of the few businesses where you can use leverage to invest in a potentially appreciating asset. This leads people to sort of conflate paying down a debt liability with the prospect of building equity in a (potentially) appreciating asset. They are two separate things. Asset appreciation is contingent; debt is forever. Ask the guys who overleveraged and bankrupted in 2008, and 1989 and.....

Your take on real estate and the presence of an illiquidity premium is pretty solid, I think. I tend to view it slightly differently. I look at real estate as an illiquid medium to high coupon inflation indexed bond, with some favorable tax advantages. It is also a business and it requires the intelligence, time and discipline any other business does.

I have made good money in real estate over 40 years. My big scores were in raw land. Rentals and commercial property are good businesses, if you buy at reasonable prices, but to make a big score you need unusual asset appreciation or lots of leverage.

I don’t think this forum is particularly anti real estate. Real,estate is certainly a useful and valuable diversifier, but it is not a hands off activity and the time and attention necessary to manage it can take time from building and succeeding in your principal career. Lots of folks have no interest in devoting the time necessary.

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

gmaynardkrebs
Posts: 886
Joined: Sun Feb 10, 2008 11:48 am

### Re: Direct Real Estate Returns

WanderingDoc wrote:
Fri Jul 13, 2018 2:50 pm
gmaynardkrebs wrote:
Fri Jul 13, 2018 12:38 pm
The people I know who make money are "cosmetic" renovators. They buy a house for let's say \$500K, put \$30K into places that show the most, and sell it for \$100K three months later. I guess some buyers just can't resist the smell of new paint, fresh carpeting, and a cleaned up garden.
Sell a \$500K house for \$100K .. excellent profit!
Ooops -- I meant a \$100K profit.

FoolMeOnce
Posts: 282
Joined: Mon Apr 24, 2017 11:16 am

### Re: Direct Real Estate Returns

WanderingDoc wrote:
Thu Jul 12, 2018 8:24 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.
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
I have used conservative assumptions. Everything that you've listed are called "expenses".
I don't know anything about real estate investing and am trying to understand this. Where have you accounted for expenses in your calculation? Is that part of the cash flow calculation? If you didn't count it, why not?

Is cash flow just the incoming rent? If so, why also count principal paydown by tenants, which comes out of the rental payments?

Thanks.

gmaynardkrebs
Posts: 886
Joined: Sun Feb 10, 2008 11:48 am

### Re: Direct Real Estate Returns

One thing that might be helpful to the OP and others with similar questions. Can anyone recommend a user friendly online real estate investment calculator? The ones I've tried via google either don't take into account enough factors (like inflation rates, opportunity costs, tax brackets etc), or they use all this technical jargon that doesn't explain what the boxes mean, leaving me scratching my head about what I'm supposed to fill in the box.

not4me
Posts: 414
Joined: Thu May 25, 2017 3:08 pm

### Re: Direct Real Estate Returns

WildBill wrote:
Sat Jul 14, 2018 3:33 am

Real estate is unique in that it is one of the few businesses where you can use leverage to invest in a potentially appreciating asset.
Wildbill, I've appreciated your posts & insight. Would you clarify the above statement? Seems to me that someone could use leverage to invest in stocks also. However, that is viewed differently for various reasons & lots of folks tend to think in terms they are used to...thus the confusion between worlds

By the way, I'm am NOT advocating the use of leverage .... just saying...

Valuethinker
Posts: 35949
Joined: Fri May 11, 2007 11:07 am

### Re: Direct Real Estate Returns

not4me wrote:
Sat Jul 14, 2018 9:08 am
WildBill wrote:
Sat Jul 14, 2018 3:33 am

Real estate is unique in that it is one of the few businesses where you can use leverage to invest in a potentially appreciating asset.
Wildbill, I've appreciated your posts & insight. Would you clarify the above statement? Seems to me that someone could use leverage to invest in stocks also. However, that is viewed differently for various reasons & lots of folks tend to think in terms they are used to...thus the confusion between worlds

By the way, I'm am NOT advocating the use of leverage .... just saying...
There's another thread on this going on at this very moment.

You can be margin called in stocks. A dropinvalue of your portfolio leads to the bank or broker pulling your loan.

Excessive margin was a major cause of the crash of 1929. Tens of thousands of investors got wiped out. It was also a key cause of the Lehman Brothers bankruptcy.

A residential home mortgage as long as you keep your job and make the payments, or your tenant s rent covers the mortgage, you are ok. Bank cannot pull the loan ie demand immediate repayment or seize and sell the asset if you cannot.

jeffyscott
Posts: 7208
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

### Re: Direct Real Estate Returns

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
WB's figures add up to about 55%, matching the OP's figure. So it seems reality is that in WanderingDoc's scenario \$900-950 gross rent, becomes something like 45% of that or about \$415 net. That is \$5000 per year, which is a 25% return on the \$20,000 down payment and about a 5% return on the \$100,000 invested.

I would think the most logical way to look at the return is what it would it be without the leverage? In that case, the 30% mortgage cost would go away and the net would be 75%, or about \$8300 per year or 8.3%.

Beyond that my understanding is that you can hope for price appreciation and convert ordinary income into cap gains via depreciation.
press on, regardless - John C. Bogle

jeffyscott
Posts: 7208
Joined: Tue Feb 27, 2007 9:12 am
Location: Wisconsin

### Re: Direct Real Estate Returns

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.
press on, regardless - John C. Bogle

randomguy
Posts: 6284
Joined: Wed Sep 17, 2014 9:00 am

### Re: Direct Real Estate Returns

WanderingDoc wrote:
Fri Jul 13, 2018 2:52 pm
You have to assume you capitalize and reinvest 100% of those returns. Which I don't. I have a day job and invest on a side. I like my regular job, and I value my free time (a lot) more than making money, sorry.

I'm at the stage in my early 30s where cash flow from real estate more than covers my living expenses. For a physician, I am not the most ambitious one you'll ever meet. If you asked me to sit down and do real estate like a real business so I could have 10X the net worth I do now, I would politely decline and would go the gym, read books, fishing, or memorizing Japanese Kanji. Every single time.

randomguy wrote:
Fri Jul 13, 2018 1:42 pm
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.

Simple question. How long til your a billionaire? With 38% annual returns it doesn't take long:).
Why do you have a day job when you could work full time and be a billionaire? If you are making 38%/year you will have a line of people out your door offering you 2/20 to take their money if you don't have enough capital to get started:)

dharrythomas
Posts: 884
Joined: Tue Jun 19, 2007 4:46 pm

### Re: Direct Real Estate Returns

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.
+1

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

You have a lot to learn, grasshopper.

In that example, I assumed an 8% cash flow, after ALL expenses. That is very conservative in the sense that no creativity or good deal is needed to get it. Most (correction, all) of my deals cash flow significantly more than 8%.

Principal paydown is totally separate from cash flow/income. Let me give you a simple illustration. You collect \$1300 rent per month. Your PITI (which includes principal, interest, taxes, and insurance) is \$700, well part of that is your principal/equity which the tenant payed. That's a return since it directly increased equity in the property. Next \$300 for repairs/Cap Ex reserves, your tenant also payed that for you.

Now we are left with \$300 per month. That is called your cash flow/income. Totally separate from principal paydown. \$300/mo. \$3600 per year. On a \$30,000 down payment, that is over a 10% cash flow.

FoolMeOnce wrote:
Sat Jul 14, 2018 8:03 am
WanderingDoc wrote:
Thu Jul 12, 2018 8:24 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.
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
I have used conservative assumptions. Everything that you've listed are called "expenses".
I don't know anything about real estate investing and am trying to understand this. Where have you accounted for expenses in your calculation? Is that part of the cash flow calculation? If you didn't count it, why not?

Is cash flow just the incoming rent? If so, why also count principal paydown by tenants, which comes out of the rental payments?

Thanks.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

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.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

Sandtrap
Posts: 5320
Joined: Sat Nov 26, 2016 6:32 pm
Location: Hawaii😀 Northern AZ.😳 Retired.

### Re: Direct Real Estate Returns

whodidntante wrote:
Thu Jul 12, 2018 5:53 pm
People say all kinds of things to defend their darlings. But if I could RELIABLY get 18% net a year on the total investment exposure where I live now with acceptable risk that does not involve being an on call maintenance guy and renter qualifier guy, and eviction expert who is unable to go on vacations to fancy Europe, you will never see another post from me here. Oh, and it cannot involve the mafia, drugs, buying bad debts, or hiring muscle.
Good one.
Have been those things, and more. And, yes, no vacations, on call 24/7, and not many days off, and certainly no trip to Europe. No fun.
IMHO R/E is slow, steady, and more sure the slower and steadier it is. Any mention of speeding up the process sans volatility is . . . But, I'm no expert.

Hiring Muscle. . . that's a good one. LOLOL.
j

jminv
Posts: 537
Joined: Tue Jan 02, 2018 10:58 pm

### Re: Direct Real Estate Returns

People commonly present the return that makes the investment look best to others.

Surprised no one has pointed out the obvious infinite return flaw in the calculation presented for 38% returns, due to the way it was 'calculated'. 100:1 leverage, ie, 1% down would yield 4% annual real appreciation *100 times leverage=400% plus the other percentages pointed out. 1000:1 ie 0.1% down would yield 4000% returns. 10000:1 ie 0.01% down would yield 40,000% returns and so on. This is why it is important to use a valid method of calculating returns otherwise it's just lying to yourself and misleading others. This thinking should lead you to always take all of the equity out of the house through regular refinancings to maintain infinite returns and purchase more infinite return houses. I don't understand why one would put any equity into the house if they believed this is how you calculate returns. If they could only get a standard loan for 80% they should then seek out alternative/hard money lenders for the other 20%.

It turns out that the return with 80% down is around 21% using the inputs given and normal expenses and not including property management fees. 0% down would lead to a return of around 72% but this is all assuming a regular 30 year mortgage when in fact the rate will be higher. It sounds like a property management company is not used but that's also difficult to understand given the stated profession. I would hire someone to do that since my time doing anything with a 100k house would not make it worthwhile at all as a physician. I would buy an apartment complex and hire an agent to have scale while having someone else do the low value added work. This would also let me spread my vacancy risk.

The housing market is inefficient so there are certainly high rental yield properties in highly appreciating areas but normally there is an inverse correlation. There's also a tendency to believe that we've found this inefficiently priced asset and there clearly were many of them at and after the lows of the last recession but normally high appreciation = low rental yields whereas low appreciation = high rental yields. There's also clearly high rental yields in bad areas to compensate the landlord for the time spent and risk undertaken (landlording in detroit, for example) that might otherwise be undergoing appreciation.
Last edited by jminv on Sat Jul 14, 2018 2:33 pm, edited 1 time in total.

gmaynardkrebs
Posts: 886
Joined: Sun Feb 10, 2008 11:48 am

### Re: Direct Real Estate Returns

When we bought our present home 33 years ago, we sold our rather nice 2BR/2B condo. I've often thought that we should have held onto it. I'm pretty sure we could have about broken even as far as the rent covering the all the costs/PITI. We sold it for \$140K, and today it is worth about \$525K (\$330k in 1985 dollars). Now, I'm not so sure. That doesn't seem like an incredible return. And, this is Washington DC, which has been a relatively hot RE market over the years.

randomguy
Posts: 6284
Joined: Wed Sep 17, 2014 9:00 am

### Re: Direct Real Estate Returns

gmaynardkrebs wrote:
Sat Jul 14, 2018 2:30 pm
When we bought our present home 33 years ago, we sold our rather nice 2BR/2B condo. I've often thought that we should have held onto it. I'm pretty sure we could have about broken even as far as the rent covering the all the costs/PITI. We sold it for \$140K, and today it is worth about \$525K (\$330k in 1985 dollars). Now, I'm not so sure. That doesn't seem like an incredible return. And, this is Washington DC, which has been a relatively hot RE market over the years.
Turning 28k (20% down) into 525k over 30 years is around 9%. Thats pretty good. And of course we haven't talked about rents. You might have been say break even at the start but after 10 or so your years, you have doubled the rent while your expenses have only gone up say 20%. That is a lot of cash flow.

Realistic numbers are that making 12-15% in real estate consistently isn't crazy. But you are talking about lots of hands on work and you being good at picking properties and controlling costs. One bad renter (i.e. the person that takes 6 months to evict and causes 50k of damage) can mess up your returns for a decade. Or bad timing if you local economy collapses. Those bad returns happen enough to lower the overall return of real estate investing down to stock market level returns. If you could make 38% easily, there would be hoards of VC funds set up to do exactly that.

gmaynardkrebs
Posts: 886
Joined: Sun Feb 10, 2008 11:48 am

### Re: Direct Real Estate Returns

randomguy wrote:
Sat Jul 14, 2018 2:50 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 2:30 pm
When we bought our present home 33 years ago, we sold our rather nice 2BR/2B condo. I've often thought that we should have held onto it. I'm pretty sure we could have about broken even as far as the rent covering the all the costs/PITI. We sold it for \$140K, and today it is worth about \$525K (\$330k in 1985 dollars). Now, I'm not so sure. That doesn't seem like an incredible return. And, this is Washington DC, which has been a relatively hot RE market over the years.
Turning 28k (20% down) into 525k over 30 years is around 9%. Thats pretty good. And of course we haven't talked about rents. You might have been say break even at the start but after 10 or so your years, you have doubled the rent while your expenses have only gone up say 20%. That is a lot of cash flow...
.
This where I get confused. Even though I'm only putting in down 20% (\$28), don't I have to figure return on the entire \$140K, since I'd be paying interest on the remaining 80%?

WildBill
Posts: 391
Joined: Wed Jun 29, 2016 10:47 pm
Location: San Antonio, Texas

### Re: Direct Real Estate Returns

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.
Howdy

You nailed it

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

WildBill
Posts: 391
Joined: Wed Jun 29, 2016 10:47 pm
Location: San Antonio, Texas

### Re: Direct Real Estate Returns

not4me wrote:
Sat Jul 14, 2018 9:08 am
WildBill wrote:
Sat Jul 14, 2018 3:33 am

Real estate is unique in that it is one of the few businesses where you can use leverage to invest in a potentially appreciating asset.
Wildbill, I've appreciated your posts & insight. Would you clarify the above statement? Seems to me that someone could use leverage to invest in stocks also. However, that is viewed differently for various reasons & lots of folks tend to think in terms they are used to...thus the confusion between worlds

By the way, I'm am NOT advocating the use of leverage .... just saying...
Howdy

Given the history of equity markets using leverage to hold equities is actually a reasonable idea, although riskier than real estate. The problem with margin loans is that your equity assets are marked to market daily and if you get a down spike in the market you can get sold out and that is that.

Back in 2009 I considered mortgaging my home and several of my rental properties and investing in equities. I walked past the credit union at work every day and they were pushing something like 3.5 % 5 year arms. I was at about a 95% asset allocation to equities in my investment accounts at that time and would have been happy to put more into equities.

Upon due consideration I decided that leveraging up my home and other real estate to shove into equities was not suitable behavior for a father with a dependent family.

In hindsight it would have worked great, but it was still a dumb idea. The only way to go broke is to borrow money you cannot pay back.

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

gmaynardkrebs wrote:
Sat Jul 14, 2018 2:59 pm
randomguy wrote:
Sat Jul 14, 2018 2:50 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 2:30 pm
When we bought our present home 33 years ago, we sold our rather nice 2BR/2B condo. I've often thought that we should have held onto it. I'm pretty sure we could have about broken even as far as the rent covering the all the costs/PITI. We sold it for \$140K, and today it is worth about \$525K (\$330k in 1985 dollars). Now, I'm not so sure. That doesn't seem like an incredible return. And, this is Washington DC, which has been a relatively hot RE market over the years.
Turning 28k (20% down) into 525k over 30 years is around 9%. Thats pretty good. And of course we haven't talked about rents. You might have been say break even at the start but after 10 or so your years, you have doubled the rent while your expenses have only gone up say 20%. That is a lot of cash flow...
.
This where I get confused. Even though I'm only putting in down 20% (\$28), don't I have to figure return on the entire \$140K, since I'd be paying interest on the remaining 80%?
No, your tenants are paying your principal and interest. Not you. Your cash flow is what is left after all expenses. If you put down \$20K on a property and you earn \$5000 that year after expenses, your return on the capital you put in (\$25K) is 20%. That's only 1 profit center of real estate.

Terminology is difficult when you have an asset which pays you in at least 5 ways. Indexing pays you one way only (capital appreciation), perhaps one and a half ways if you count a 1.8% dividend as anything

I do not fancy to compete with the echo chamber of naysayers high-fiving each other the last few posts. I'd rather know the truth and take the less common road than to do have everyone agree with me and pat me on the back It's worked very well so far.
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
Posts: 886
Joined: Sun Feb 10, 2008 11:48 am

### Re: Direct Real Estate Returns

WanderingDoc wrote:
Sat Jul 14, 2018 3:22 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 2:59 pm
randomguy wrote:
Sat Jul 14, 2018 2:50 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 2:30 pm
When we bought our present home 33 years ago, we sold our rather nice 2BR/2B condo. I've often thought that we should have held onto it. I'm pretty sure we could have about broken even as far as the rent covering the all the costs/PITI. We sold it for \$140K, and today it is worth about \$525K (\$330k in 1985 dollars). Now, I'm not so sure. That doesn't seem like an incredible return. And, this is Washington DC, which has been a relatively hot RE market over the years.
Turning 28k (20% down) into 525k over 30 years is around 9%. Thats pretty good. And of course we haven't talked about rents. You might have been say break even at the start but after 10 or so your years, you have doubled the rent while your expenses have only gone up say 20%. That is a lot of cash flow...
.
This where I get confused. Even though I'm only putting in down 20% (\$28), don't I have to figure return on the entire \$140K, since I'd be paying interest on the remaining 80%?
No, your tenants are paying your principal and interest. Not you. Your cash flow is what is left after all expenses. If you put down \$20K on a property and you earn \$5000 that year after expenses, your return on the capital you put in (\$25K) is 20%. That's only 1 profit center of real estate.

Terminology is difficult when you have an asset which pays you in at least 5 ways. Indexing pays you one way only (capital appreciation), perhaps one and a half ways if you count a 1.8% dividend as anything

I do not fancy to compete with the echo chamber of naysayers high-fiving each other the last few posts. I'd rather know the truth and take the less common road than to do have everyone agree with me and pat me on the back It's worked very well so far.
Ok, so now I think I'm getting this. So, let's say I have \$140K to invest. I'll make a lot more money if I buy 5 properties with 20% down, instead one property for \$140K. So, now I don't get why some people seem to be saying the return isn't better with leverage.

KyleAAA
Posts: 6719
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

### Re: Direct Real Estate Returns

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. There is no magic secret: the key ingredient is leverage, which is generally easier to get on favorable terms with real estate vs other assets. Leverage increases risk along with potential returns.

gmaynardkrebs
Posts: 886
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### Re: Direct Real Estate Returns

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?

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

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.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

randomguy
Posts: 6284
Joined: Wed Sep 17, 2014 9:00 am

### Re: Direct Real Estate Returns

gmaynardkrebs wrote:
Sat Jul 14, 2018 3:52 pm
WanderingDoc wrote:
Sat Jul 14, 2018 3:22 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 2:59 pm
randomguy wrote:
Sat Jul 14, 2018 2:50 pm
gmaynardkrebs wrote:
Sat Jul 14, 2018 2:30 pm
When we bought our present home 33 years ago, we sold our rather nice 2BR/2B condo. I've often thought that we should have held onto it. I'm pretty sure we could have about broken even as far as the rent covering the all the costs/PITI. We sold it for \$140K, and today it is worth about \$525K (\$330k in 1985 dollars). Now, I'm not so sure. That doesn't seem like an incredible return. And, this is Washington DC, which has been a relatively hot RE market over the years.
Turning 28k (20% down) into 525k over 30 years is around 9%. Thats pretty good. And of course we haven't talked about rents. You might have been say break even at the start but after 10 or so your years, you have doubled the rent while your expenses have only gone up say 20%. That is a lot of cash flow...
.
This where I get confused. Even though I'm only putting in down 20% (\$28), don't I have to figure return on the entire \$140K, since I'd be paying interest on the remaining 80%?
No, your tenants are paying your principal and interest. Not you. Your cash flow is what is left after all expenses. If you put down \$20K on a property and you earn \$5000 that year after expenses, your return on the capital you put in (\$25K) is 20%. That's only 1 profit center of real estate.

Terminology is difficult when you have an asset which pays you in at least 5 ways. Indexing pays you one way only (capital appreciation), perhaps one and a half ways if you count a 1.8% dividend as anything

I do not fancy to compete with the echo chamber of naysayers high-fiving each other the last few posts. I'd rather know the truth and take the less common road than to do have everyone agree with me and pat me on the back It's worked very well so far.
Ok, so now I think I'm getting this. So, let's say I have \$140K to invest. I'll make a lot more money if I buy 5 properties with 20% down, instead one property for \$140K. So, now I don't get why some people seem to be saying the return isn't better with leverage.
Last I check, you are the one writing the check the bank. The tenants are giving you cash which enables you to write that check.

People don't like leverage because it hurts really bad when it turns against you. You buy 1 140k house and it drops 20%, you lost 28k. Buy 5 of them and now you just lost 140k. In the first case you have lost 20% of your money. In the second you have lost 100%. There are numerous stories from 2007-9 of would be real estate tycoons that went bust when they could no longer get enough income from their properties to service their debt. The real estate pushers say those guys made bad investments that were clearly bad from the start. Other people go, that is using hindsight. Reality is a mixture of both. Most nonBoglehead real estate investors suggest using leverage in most case. Some are even very aggressive by doing things like refinancing to get equity out of properties. You need to figure out what works for you. And it really isn't binary. There is a difference between a little leverage (say 2 houses) and a lot of leverage (20 house:)). You need to find what works for you in terms of being able to handle the risk.

randomguy
Posts: 6284
Joined: Wed Sep 17, 2014 9:00 am

### Re: Direct Real Estate Returns

WanderingDoc wrote:
Sat Jul 14, 2018 4:44 pm
Also, if you buy cash-flowing real estate, you can mitigate risk greatly no matter what property values do - you still get paid.
Only if you tenant writes you a check:) Anyone thinking about real estate should watch : https://www.netflix.com/title/80224279 or https://www.imdb.com/title/tt2223758/ . Now I am not saying those type of events are common by any stretch but they are in the realm of expected results.

MIretired
Posts: 752
Joined: Fri Sep 06, 2013 12:35 pm

### Re: Direct Real Estate Returns

WanderingDoc

Enticing idea about the use of leverage for RE, with little risk of defaulting. That might have been debatable back in 2009 & 10. And seems ,since you're early 30s and a doc, you were not doing this then.

But, a question, if you would answer:
Seems you mentioned one possible property as such:
cost : \$125000.
down \$25000.
PITI \$700/mo
rent \$1300/mo

\$700/mo is about 0.7% of loan - I guess this might be in ball park at these int rates.
\$1300/mo is about 1% of prop. value. - that was a saying to shoot to be at or beat--so OK.
So this doesn't really look like a distressed property. But it does look like probably not a very common rent/value that you'd find just looking at asking prices.

So a little ? How do you do the accounting for the \$25000 down payment? How do you recover this through accounting math. Or is this an upfront investment cost that you recoup latter from cap. gains of prop. sales.? It's like a business sheet deduction from your total equities. You start out in-the-hole for the down payment + any upfront repair costs + loan closing costs, title, appraisal,surveys,inspections. Not trying to be annoying, just wanted to put more things on the table.
Thanks.

Edit: Nevermind. This is your investment cost of which your cashflow/investment is figured.
Edit: I had reversed rent and PITI above
Last edited by MIretired on Sat Jul 14, 2018 6:55 pm, edited 1 time in total.

Posts: 555
Joined: Fri Jun 01, 2018 4:00 pm

### Re: Direct Real Estate Returns

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.
I don't understand your last calculations (or many of the calculations in this thread), I only care about money in my accounts. If I put in \$1 worth of cash into rental real estate, I expect at least \$0.12 return to come back into my accounts every year. So this is after all expenses (and vacancy assumptions) and does not include any appreciation, but technically it is before income taxes. These numbers were achievable in the past 10 years in the regions I invest in, but I admit it is now becoming more difficult (but not impossible). The only time I care about cap rate is when it gets way out of whack (usually well into the future) and I need to consider selling or exchanging the property into something else.

If I do not feel I am adequately compensated for my risk (and I view single property real estate as risky), than I will invest in another asset class other than real estate. Years ago before 2008, I actually rented a house for a time while owning other houses because real estate prices were sky high and the owner of the home I rented from was apparently ok with what I estimated to be something like a low single digit cash on cash return each month. At that time, I preferred equities (which also lost big in crash). I find that many owners are ok with low returns (or don't consider risks/expenses), I am not.

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

randomguy wrote:
Sat Jul 14, 2018 4:58 pm
WanderingDoc wrote:
Sat Jul 14, 2018 4:44 pm
Also, if you buy cash-flowing real estate, you can mitigate risk greatly no matter what property values do - you still get paid.
Only if you tenant writes you a check:) Anyone thinking about real estate should watch : https://www.netflix.com/title/80224279 or https://www.imdb.com/title/tt2223758/ . Now I am not saying those type of events are common by any stretch but they are in the realm of expected results.
A 91% stock market crash is also within the realm of possibility. I'd rather risk the outside chance of 50% decline in property values (while still cash flowing 10-12%) than a stock market crash where a 1.8% dividend won't offset a -60% return
My colleagues saw DECREASED vacancies during 2006-2008. I am actually praying for a big real estate correction. Housing is a basic need, and if the tenants won't pay me, the government will often foot the bill. A real estate investor who purchased cash-flowing real estate is fine in all phases of the market cycle. Not so much a stock or index investor.
Don't get me wrong, I still invest 10-15% of my investible dollars into indexing. But I would be lying to myself if I thought you could achieve anywhere the returns or tax benefits as real estate. I do it purely because I have extra cash and to diversify across asset classes.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

WanderingDoc
Posts: 1090
Joined: Sat Aug 05, 2017 8:21 pm

### Re: Direct Real Estate Returns

Sat Jul 14, 2018 5:38 pm
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.
I don't understand your last calculations (or many of the calculations in this thread), I only care about money in my accounts. If I put in \$1 worth of cash into rental real estate, I expect at least \$0.12 return to come back into my accounts every year. So this is after all expenses (and vacancy assumptions) and does not include any appreciation, but technically it is before income taxes. These numbers were achievable in the past 10 years in the regions I invest in, but I admit it is now becoming more difficult (but not impossible). The only time I care about cap rate is when it gets way out of whack (usually well into the future) and I need to consider selling or exchanging the property into something else.

If I do not feel I am adequately compensated for my risk (and I view single property real estate as risky), than I will invest in another asset class other than real estate. Years ago before 2008, I actually rented a house for a time while owning other houses because real estate prices were sky high and the owner of the home I rented from was apparently ok with what I estimated to be something like a low single digit cash on cash return each month. At that time, I preferred equities (which also lost big in crash). I find that many owners are ok with low returns (or don't consider risks/expenses), I am not.
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.
Don't wait to buy real estate. Buy real estate, and wait. | Rent where you live, buy where others pay your mortgage for you.

randomguy
Posts: 6284
Joined: Wed Sep 17, 2014 9:00 am

### Re: Direct Real Estate Returns

WanderingDoc wrote:
Sat Jul 14, 2018 6:23 pm
randomguy wrote:
Sat Jul 14, 2018 4:58 pm
WanderingDoc wrote:
Sat Jul 14, 2018 4:44 pm
Also, if you buy cash-flowing real estate, you can mitigate risk greatly no matter what property values do - you still get paid.
Only if you tenant writes you a check:) Anyone thinking about real estate should watch : https://www.netflix.com/title/80224279 or https://www.imdb.com/title/tt2223758/ . Now I am not saying those type of events are common by any stretch but they are in the realm of expected results.
A 91% stock market crash is also within the realm of possibility. I'd rather risk the outside chance of 50% decline in property values (while still cash flowing 10-12%) than a stock market crash where a 1.8% dividend won't offset a -60% return
My colleagues saw DECREASED vacancies during 2006-2008. I am actually praying for a big real estate correction. Housing is a basic need, and if the tenants won't pay me, the government will often foot the bill. A real estate investor who purchased cash-flowing real estate is fine in all phases of the market cycle. Not so much a stock or index investor.
Don't get me wrong, I still invest 10-15% of my investible dollars into indexing. But I would be lying to myself if I thought you could achieve anywhere the returns or tax benefits as real estate. I do it purely because I have extra cash and to diversify across asset classes.
How are you getting any cash flow on a vacant property?:) You are making the assumption that you will be able to rent it out at a rate that makes you money. But think about how you are going to compete against all the people that bought houses for 50% off what you paid and can rent it out profitably at a fraction of what you can. And while housing is a basic need, the demand for it does change with price. People have various options from buying (i.e. the rent versus buy changes a lot if rent stays constant while housing prices drop 50%) to things like living with parents/friends. How exactly it plays out depends on a ton of factors. A town that goes from 5% unemployment to 25% is going to be a lot different than the one that went from 5 to 10%.

You can definitely make a killing in the real estate game. You can also lose one. 2005-2010 gave us tons of stories of both sides of the game.