Let's say I am able to purchase a home in a very high demanded area for 150k. I put 10% down and the mortgage is 1k a month. I am able to rent it out at 1500 per month (these numbers are very conservative). After 2.5 years I make my down back, and am now making 6k a year in rental profit. This seems too easy. What am I missing here?

Assume that I know absolutely nothing about real estate and foreseeable problems that may occur.

There will be other expenses besides just the mortgage. Some planned for, some not.

1. Tenant doesn't pay and require eviction - which takes months. You never get the money back
2. Something major is wrong with the house when you buy it, and requires thousands to fix. Termites. Bad wiring. Bad plumbing.
3. The property market crashes and you're on the hook for $150K for something worth $90K
4. Interest rates go up from 0% to 5% and then 10%
5. Tenants damage your property and insurance doesn't cover it because you didn't mitigate or because of some clause
6. Property taxes go up due to state/municipality running out of money

If I had $150K I'd much rather buy a small business which can pay for itself fully in 1-2 years provided you don't mind managing it. 50%/year > 5% a year.

Where can you find rentals that "conservatively" yield 12%?

You are missing a ton of the expenses in your calculation.

property tax
landlord insurance
umbrella insurance
vacancy
repairs
supplies
property management fees
leasing fees
cleaning
landscaping
utilities (trash, sewer etc.)

those are the main ones, but there are some others.

i know bad neighbourhoods in mundane canadian cities, you used to be able to get unbelievably high gross yields... probably 30-40%. quite a bit lower now but still at nice levels...

obviously came with a ton of problems. seems like rent is pretty expensive for pretty crap set-up compared to owning.. i.e. renting is very expensive for poor people.

but anyway, amazing rental yields are/were out there... but you are generally renting to people that have no hope of owning a home, NOT young lawyers/accountants/etc. who don't make too much money but are very responsible and probably good to deal with.

OP is not factoring in a ton of expenses... someone i know who does alot of this is hoping to make small money on an on-going basis and then make capital appreciation later.

I have lived in this area the past 3 years, as a rentor, so I have a decent idea of the floors and ceilings for monthly rents. I would put 1500/month on the low end. The rest of the numbers I have just been plugging and chugging from Zillow.

I'm definitely a few years late to the party. It's crazy seeing the prices of these homes fluctuate from 08-now.

Right, basically leveraging the mortgage with rental payments.

Some of the stuff from Zillow is LOLOLOL inaccurate. Not saying what you're looking at is, but at least 50% of the places I own aren't even in the ball park when it comes to what zillow says (even something as simple as number of units is probably wrong on at least 25% of my places)

A good rule of thumb is to take your gross rent and multiply it by 50% and you'll have your net. Then take away your debt service.

Gross rent*.5 (taxes, insur, maint/repairs, vacancy, mgt) less debt service = profit.

1500*.5 = 750

Debt service on 135k 30 year note @ 5% = ~724$

750 net profit less $724 debt service = $24/mo profit

24*12mos = 288/15000 down = .02% annual roi

Keep in mind, most investor (non-owner occupant) financing terms require 20-25% down.

As this sounds like new/recent build and if you self manage, you may be able to only put 40% of your gross rent aside for expenses & repair/maintenance fund. Still real thin on profit, especially for taking on six digits worth of debt.

You generate $18,000 a year.

approximately $8,000 willl go to expenses.
approximately $12,000 will go to your mortgage.

you now lose $2,000 a year. every year. you spent $10,000 to get a part time job that nets -$2,000.

the average house I buy is $30,000 and rents for $700 a month. I have many of them. it is very time consuming and yields a horrible per hour rate compared to my present occupation. managing and purchasing real estate is a great thing to do when you are retired. I would not recommend it for anyone who is young or has no background in real estate related trade.

Where are these 30k homes?

try the projects in any city in the midwest. i suggest you carry a gun. here is a random email I got from a wholesaler today:

PROPERTIES:

439 Adrian 63137, (Occupied) - $25,000
-2/1, 1008 Sq. Ft.
-Rented for $640 for over 4 years. Lease is currently month to month, and has been for 3 years. A new year lease can be signed with tenant as they want to stay.
What it needs:
-Some water is coming in from front basement wall when it rains. This is from the driveway grading bringing water toward the house. Issue is a result of improper water drainage and a small hole in the basement wall
-Bad front porch: concrete porch has cracked and sunk in in one area. Can be poured over to even it out, or removed and replaced.


317 Northridge 63137 (Occupied) - $26,000
-3/1.5, 1337 Sq. Ft.
-Rented for $700 over 4 years. Lease is currently month to month. Tenant has indicated that they like the house and want to stay.
What it needs:
-Gutters Cleaned


253 Crown 63137 (Vacant) - $25,000
-4/1.5, 1736 Sq Ft
This vacant house is HUGE and has a lot of charm. It needs the most work of any of the houses. It will be a very nice house when it's fixed. Was previously rented for $900.
What it needs:
-Gutter repair
-A square shaped hole is in the basement wall from copper thief's. This hole is allowing water to come into the basement. It looks like that is the only place where water is coming in from. Should be a simple and cheap fix.
-Copper from water heater to PVC water lines was cut. Needs a small amount of copper.
-The basic flip fix ups: Floors, wall repair, paint, kitchen and bathroom touch ups.
-AC condenser and cage

1930 Chambers 63136 (Vacant)- $23,000
3/1, 1092 Sq. Ft
-House is currently rented for $750. Tenant has kept the property in decent condition. She wasn't a messy tenant, just a bad paying tenant.
-House is in pretty good shape
What it will need:
-During heavy rain, water comes in from the back basement door. Needs to be sealed with waterproofing
-Possible roof needed eventually, though no water damage to ceilings spotted
-Light gutter repair/clean

1948 Chambers 63136 (Occupied Sec 8) - $30,000
-4/1, 2257 Sq. Ft.
-Rented at $840 Sec 8. Has been rented over 3 years. Most recent lease expires in 8 months.
-HUGE house!
What it needs:
-Has a lot of bushes and trees in the front yard that make the house almost invisible from Chambers.
-Minor siding and gutter work
-Broken window. Window is boarded up and doesn't seem to be a complaint for the tenant.
-Clean/repair gutters
-Will need a new stack eventually

10150 Mayfair 63136 (Occupied) - $28,000
-3/2, 1232 Sq. Ft. Month to month
-Rented at $725, previously rented at $875 with sec 8. Tenant wants to remain but she sometimes has trouble paying because of her job at a temp agency. Would recommend getting another tenant and charging more for rent.
What it needs:
-washer drain unclogged
-Gutters Cleaned
-Sliding glass door handle
-leaky outside water faucet

9941 Valley Dr 63137, Riverview (Vacant) - $22,000
-4/1, 1118 Sq. Ft.
-Was rented for $640 for 2 years tenant is moving out this week. It can rent for at least $750.
-Needs rehab work.

Is this real life? For a similar price the only property I could buy near me is a single carspace and it would rent for $200/m

Edit: Melbourne, Australia

yes, real estate in the flyover and ghetto parts of the US is almost unimaginably cheap. Essentially neighborhoods with 3rd world levels of education, violence, drug use etc plopped down in major US cities.

Very lucrative if you can put up with it and are willing to deal with the dregs of society.

As others have said, your analysis is missing a LOT. In general, for every dollar you bring in from rent, about half will go away to various expenses. What's left is used for your mortgage payment (P&I) and your profit.

Here's a quick and dirty video tutorial:

http://www.123flip.com/wp-content/up...RuleFinal.html

A few years ago, you could have picked up plenty of great properties in great areas for next to nothing. When we started in 2008, we were finding more $30K houses in nice neighborhoods around Atlanta than we knew what to do with. They were renting for $900/month, and I wish we would have bought 1000 of them.

These days, the "secret" is out, and it's tough to find great rentals, as you're competing with everyone else who is jumping on the bandwagon and trying to get into real estate.

i mentioned that this was possible not too long ago in worst areas of mundane canadian cities... a woman i know bought a huge 7 story house for $70K. was only a couple of blocks from a very nice area. and i didn't think the area was that bad (it wasn't good, that's for sure). winnipeg, manitoba if you care.

but i bet that $70K house goes for $200K now (almost 10 years later... and it isn't the same time profile as the USA with the credit crisis).... and you used to be able to get houses in really bad areas for $30K, but i'd guess that's getting close to $70k-$80k now

the amazing opportunities are gone now... i'd say still good opportunities if it interests you and you think you can have the right skills/temperament.

Thanks for the responses.

What about something like a condo? They seem to be cheaper than a house, with considerably less capital and maintenance expenses, but are capable of renting out at similar rates?

In most cases condos are much worse. It depends on location obviously but local to myself the only stuff I see where an investor has a decent chance at making an ok return are 8-30 unit buildings. Multi-Units though tend to be too much of a capital outlay for people starting off. Student housing would be my second choice -- you have a lot of headaches but at least they are not usually in neighbourhoods where you need a gun.

i don't think condo's are good for this for a few reasons:

1) not to pick on you, but you didn't seem to be aware of so many of the costs of owing a house (which are substantial).... but with a condo you add in condo fees (much of which are not things you'd be paying for if there weren't condo fees) and possibly parking fees.. for example, say condo fees are $300 per month and parking is $70 per month. and let's just round things to $4000 per year. capitalized at 4% that's another $100K capital cost. and of course often you still have all kinds of other costs you'd have in a house.

2) condo's don't really have the potential for appreciation. some of the earliest ones appreciated but now in the places i'm aware of (toronto, vancouver) there is constantly huge supply coming on. there is basically very elastic medium-term supply... as opposed to a house 5 miles for a downtown centre. they won't be building any more houses in most cities.

3) shocked that you'd find that the rental yields are similar to that of owning a house. maybe comparable to a nice house in a nice neighbourhood where i'd say your yield is going to be negative. here in vancouver, say a house is $1MM. your mortgage interest payment will be at least $3K per month (maybe much higher) and i doubt you'd rent the house for that. in alot of full house rentals you are basically taking care of the house for offshore buyers. they want the security of the house and want good tenants so they'll rent to young professional families for much less than mortgage payment, thereby taking moderate negative yield (but the offshore owners have different motivation than you or i)

the whole idea is buying some large crappy house. dividing it cheaply into a bunch of units and charging 3 or 4 tenants $600 per month. you will potentially make great net yield, but have a tons of problems.

a friend of mine who is a restaurant manager (i.e. works in admin) did this and found it was too much hassle. he said though he would definitely invest in something like this if someone else took care of all the hassle......... "you are being paid for the hassle"

p.s. someone correct me if some of my numbers are right. pretty sure the ideas are right.

Thanks Aces.
I have followed your thread since you quit your job and started in real estate.
I always used the 50% rule and it works pretty well.

I just received 3 emails from my re Agent in Michigan with listings from
16-30k
the Vacancies/non payments/evictions are really high but the capital costs are so low that it still makes them worthwhile.

A "7" story House? What does that look like?

sorry 7 BR...

wonder if michigan cities/town could market themselves to online biz and individuals...

hadn't mentioned in other thread but cities running out of central land and gentrification coming to poorareas is the play.. obv detriot is very uniquely bad

Dan Gilbert is trying to do precisely that for Detroit. He's acquired 8 million square feet of commercial space in the downtown and is trying to attract any business but with a focus on tech. He is throwing a lot of money at it with private security and incentives. I'm not sure if it will work at all and if it does I imagine at least for a decade or two it will just create a well off core surrounded by a ring of destitution.