Expected ROI from rental property?

[Christien]

I'm looking at possibly purchasing a house or condo for rental, but I'm just getting started. I'm looking at either a dwelling or a vacation rental, and return will probably be the deciding factor. I've read 5-15% of the home's value net for a vacation rental - is that similar in a leased residential home? My preference is a vacation rental, because it's something we could use in the off-season, plus it seems like a better class of people to deal with, and less issues. But maybe there's significantly more money in residential.

[uncle_scott]

There are certainly some deals to be had right now in real estate. Depending on how large of a mortgage you will be carrying on the rental property, you could be looking at breaking even, or cash-flowing the property from day one. I assume this will be your seond mortgage, which will require some sort of healthy down payment...at least 20% or so. If you can get rental income to cover the mortgage while you own the place, then taxes and upkeep will be your only real expenses. I imagine that residential will provide you with a more steady return, but I think it all depends how long you can stay in the game.

My plan is to buy two rental properties in the next year. I will be 20% down into each property, and the monthly rental payment should cover mortgage and taxes. If I keep the properties 10-20 years, then I should make a decent return on investment withen I sell. I don't plan on retiring for at least another 25 years, so this gives me plenty of time for the market to recover before I sell the homes in order to pad my retirement fund.

That is the plan anyway. Everyone is in a different place in their lives, and for me saving the 20% down has been a huge goal that I have been working on continuously. I see there is money to be made, and a chance to have a decent retirement if I play the cards right.

[Christien]

This is to transition out of the car business, so there would be little to no mortgage. Well, there would be mortgage at first, but as leases finish, it would be paid down very quickly, within 3-4 years I expect. Lease portfolio is about $6-700K, and most are 3-4 year terms, so as those wind down it would be transferred over to pay out the mortgage.

[jhynesrockmtn]

Not sure what to expect these days. I was active with residential years ago and still have a couple of rentals but have not bought anything in years. I would really do your due diligence on vacation rentals and not assume they are less hassle. Constant turnover means large bills for maintenance, housekeeping every time it turns over, furnishing the house with everything and very picky renters. I also would not touch a condo as, well, anything. HOA's are a pain, resale is much harder and the market can shift more dramatically. In Seattle the housing downturn has hit condos a lot harder than single family.

[Rusty Heap]

good book on in/outs of buying and running your own VRBO vacation rental by owner.

I read it and highlited many sections if we ever "take the plunge" for a condo in Hawaii.

Amazon.com: How to Rent Vacation Properties by Owner Second Edition (9780974824994): Christine Hrib-Karpinski, Christine Karpinski: Books

[Christien]

Thanks guys. I'm surprised to hear that condos are a harder resell in Seattle. In toronto, condos are hot property. Rusty, what made you decide not to buy?

Do you guys think 15% net (not including mortgage) is unrealistic?

[Rusty Heap]

A good way to judge your potential "income" and rental rates is to research your existing competition and other people currently listing on Craigslist or other listing site.

In Hawaii, it's brutal as very nice condos are presently renting for $89-125-200 a night. Condos there have insane HOA maintenance dues of $500-700 A MONTH.

a GLUT of condo's on the market for sale or rent makes it upside down for a potential buyer/investor, even when today you can buy a for sale $200-300K condo that was listed 3-4 years ago at $500K.

I simply don't get the super high maintenance fees.

but a couple links for you.

Hawaii Kona Real Estate KonaListings.com - Kona Hawaii Real Estate for Sale

big island vacation rentals classifieds - craigslist

[biosurfer1]

Hawaiian maintenance fees get worse than that. My family stayed at a part hotel/part private owner place in Kauai about 2 years ago. We rented from one of the owners and paid $150/night for a very nice 2 master suite, kitchen, etc... we were interested in how much they were going for and looked it up online and their "maintenance" fees were $1800 PER MONTH!!!

Not exactly the same as a condo but close, and I will say the grounds at this place were amazing with a couple nice pools, water slide, etc but damn, that is just crazy.

[Dottore]

Originally Posted by Christien

Do you guys think 15% net (not including mortgage) is unrealistic?

How long is a piece of string? Depends on the condo, the market, your cost factors, the bookings you get, the weather...endless imponderables.

It's very rare IMO that all these factors will align to give you a good return. Ask me how I know.

Best real estate investment? IMO a small medical/dental commercial building in a top location.

[fred cook]

Have you considered commercial rental property? There are a couple of advantages there. One is that since it will be the renters place of business, they tend to keep it looking nice. Also, as a commercial rental, it is easier to evict a tenant from commercial than from residential property (at least in Georgia). As in all property, the three most important things to shop for are location, location and location. A commercial property in a good location tends to keep tenants for years at a time. By researching the other rental properties in the same area and keeping your rents slightly lower than the others you will have no problems keeping the space filled. If possible, a multi suite unit is better because the loss of one tenant out of 4 or 5 will hurt the old cash flow less. You should be able to get sufficient rents to cover the cost of the building and expenses in 10 years or less. Hope this helps with your decision/plan.

[svandamme]

personally i think Rent should cover the mortage payments on the property + maintenance overhead.

It really should not yield an income on top of that, because basically you are getting a free house (payed by somebody else) when you retire..
why charge extra for it? It just seems greedy to me.

My sister's landlord is one of those... He buys an ok3 story row house, converts it to 3 crappy appartments and charges 400 euro rent per month.
Basically he get's 1200 euro out of a low quality house on which he pays at most 800 euro mortage and upkeep for..If at all he bothers to do any upkeep.
And when he upgrades the single pane glass to double(to get the tax breaks), he even tries to raise the rent so the upgrade (which he pays with tax returns he would not have gotten)is payed off by the renters in 2 years.
Now my sister works in a protected workplace, for a reason...If i hadn't stepped in, he would have illegally gotten a double profit out of that window scheme..When he could have done the upgrade without charging her a cent more, and still make a profit.. that's greed.
That's how landlords get a bad rep.

[jhynesrockmtn]

I'm surprised to hear that condos are a harder resell in Seattle.

They are selling but took a bigger hit on value than single family homes did. A lot of owners are upside down right now, many buildings have a high percentage of rental properties, many of those rentals are illegal per the HOA agreement meaning the building limits them but owners get desperate and rent anyway because they won't sell and lose $100k. The high number of rentals impacts market value. It's a nasty cycle. I just would never buy a condo having seen these issues through friends happen over and over. Too much is outside of your control.

[BK911]

I approached rental properties a little different. I bought a fixer-upper, moved in and fixed it up. Then bought another one, moved in and rented the first one out. Repeat until I got married and couldn't live in ~dumps anymore and move every 2 years.

The rental income pays for the houses plus there's almost enough left over each month to cover the mortgage in my current house. If I could have done one more house before I got married, I would be living for free right now.

[MRM]

Buying a single unit or home for a rental, particularly a vacation rental, is not a good investment. To answer your actual question, you need to return at least 20% to justify the risk of renting. There is almost no way to break even, let alone turn any profit renting a vacation house or condo. There is no way you can reach a reasonable rate of return renting a single vacation unit, almost no way you can do it by renting out a single family home, and very little way you can do it renting a single condo or townhouse.

As mentioned above, you can make a reasonable rate of return on a single family home or single condo unit if you buy it distressed, fix it up, and rent it out with little sunk costs. Otherwise, you need many units to make a decent income. Renting is a risky and expensive business. It is time consuming and if you aren't there every day to deal with every issue, you're paying someone to do it.

The best way to get a decent return on rental property is to buy into a distressed condo or townhouse development that is fully rented and has on site professional property management. Many condo or townhouse developments were built to sell the individual units, but couldn't when the market tanked so they became rental developments. Find one of these developments and leverage your money to buy a dozen units at a price where the rent minus the mortgage, interest, fees, taxes and expenses gives you a positive cash flow plus 20%. If your return is less than that, keep looking.

[recycled sixtie]

I have not had any experience with vacation condo rentals but my wife and I bought a condo which we rented out and it is located close to us in the city. We have had a steady income for almost 5 years but we bought at a high period and it reduced in value by about 30% but with the rent income we are close to breaking even. Our rate of return is only 2.2% as the condo fees have steadily climbed up. A test I use for myself is "would I want to live there" and the answer is no. Too much politics(it is an over 50 year old to reside there). I agree with the above poster that single family dwellings are easier to sell. Also nicer to live in .Hope this helps

[johnsjmc]

Canadian mortgage rules now require at least a 20% downpayment on a second or investment home. You also want a mortgage to allow you to deduct the interest to offset the income.
Pay off any non deductable debt first. Invest any surplus elsewhere to remain diversified in case the real estate bursts like the US did.
If you use the rental house for personal use part of the year that needs to be factored or prorated as you can,t deduct expenses for a personal use property.
That all considered a nice piece of real estate you would live in ,not a slum ,would be my choice. It may not cash flow as well but will likely realize a larger capital gain down the road. It also attracts a better tenant (often with high expectations of service from the landlord)BUT they are less likely to disappear in the night when the rent is due.
I had about 15 units in London at one time but looking back it would have been just as profitable to have concentrated on a fewer good places.
I just sold a 4 plex I bought in 1986 .I had about $150K in it and sold for $480 .It was making money or at least breaking even most years on paper but I got tired of dealing with the same stuff over and over.

[Christien]

Here's an example scenario of #s I've been looking at for a vacation rental:

$300K purchase price, $100K down, $200k @ 5% paid out over 2-3 years
$1500/week high season, $1100/week mid season, $800/week low season.

The real question mark is how many weeks of the year can it be rented out? Is 40 weeks unreasonable? From what I've read, there are 12 high season weeks that are easy to rent, so $1500 x 12 = $18000. Maybe another 12 mid season weeks @ $1100 = $13200. So that leaves 28 weeks, less 2 weeks for maintenance @ $800 = $20800. That totals $52000 gross, which would represent about 17.5%, and that's where I'd need to be. That's best case scenario. What I'll need to figure out is what a realistic scenario is.

[Deschodt]

I've researched this several time of late in my area, for a city dwelling... Based on $x per sqfot rental rates, I can't see getting more than 3% profit. Dunno about vacation rentals, that's another story. By the time you pay the insurance, property tax, repairs, let alone a management company if you don't want to be bothered, there really is not much left.

I will do it shortly anyway, because it's possible long term to make some $$ on the property itself.

Example in my area: I was looking at a $140K small home, rentable for $900 max per month.
That's 10800 a year IF they pay. Figure $1000 of repairs and piddly crap. $1000 insurance (flood, hurricane, fire) and that is conservative here. Prop tax is $3K. You got $5800 rental money, If there is no mgt company... I suppose you pay tax on that... imagine you get a bad tenant now and then and get stiffed a few months rent, even one time a year.... and compare the result with safer investments... nothing to write home about... Of course that's my area, your costs my vary and influence bottom line. I think the key is to work up to multiple units and be a ruthless landlord and know the law really well regarding evictions and your rights... I can't be bothered. I'm gonna be doing it simply in the hope the property will go up eventually, it's a lot I could build on for myself.

[jhynesrockmtn]

The real question mark is how many weeks of the year can it be rented out? Is 40 weeks unreasonable? From what I've read, there are 12 high season weeks that are easy to rent, so $1500 x 12 = $18000. Maybe another 12 mid season weeks @ $1100 = $13200. So that leaves 28 weeks, less 2 weeks for maintenance @ $800 = $20800. That totals $52000 gross, which would represent about 17.5%, and that's where I'd need to be. That's best case scenario. What I'll need to figure out is what a realistic scenario is.

The other real question is how much of that do you get to keep. I assume you would put this in to a rental pool that is professionally managed? If so, from what I researched years ago, expect to keep 50% of the gross after deducting management fees and housekeeping. If you are expecting to manage this yourself have you figured out how to attract tenants, transact with credit cards, maintain a website or presence on VRBO, hire housekeeping, keep it stocked with furniture, linens, kitchen stuff, handle emergency and preventative maintenance, etc. Deal with renters who are nice and want a lot of hand holding, deal with renters who are a demanding pain in the arse. It's a lot of work.

[Christien]

I assume you would put this in to a rental pool that is professionally managed?

No, this would be my full-time job, or part of it.

management fees and housekeeping.

No management fees, but yes, housekeeping costs.

figured out how to attract tenants, transact with credit cards, maintain a website or presence on VRBO, hire housekeeping, keep it stocked with furniture, linens, kitchen stuff, handle emergency and preventative maintenance, etc.

I've considered all these things - haven't answered them yet, but definitely understand they're on the list.

Deal with renters who are nice and want a lot of hand holding, deal with renters who are a demanding pain in the arse. It's a lot of work.

I've been dealing with sub-prime car leasing for a decade now. Can't be worse than that. I had a woman text me 6 times a day last week, even after I told her repeatedly I was on vacation and would deal with her issue when I returned.

I don't expect it to manage itself and be a walk in the park - it would be my main source of income, and as such I would approach it as I would by current job.

It all comes down to whether I can make sufficient money at it to make it worth my time. The leasing business used to be an easy "yes" but that's changed drastically in the last few years. It's still worth my time, but the writing's on the wall - I can only do it for so long.