Is Now A Good Time To Buy Single Family Rental Units? - Return On Investment (ROI)
Is now a good time to invest in single family rental units? It depends on a lot of factors. Let's go over the details based on today's marketplace and see what we come up with.
I will use real life numbers and opportunities based on one of my local marketplaces. The example property I will use is a real home listed for sale in Gresham, Oregon.
The home is a bank owned 3 bedroom, 2 bathroom ranch style home listed for $147,900. It has been on the market for 3 months and I think it would be safe to say they would take $140k for it, but that is just my opinion.
Let's crunch the numbers:
With a $140,000 purchase price you're looking at a $28,000 down payment which is 20% down. You still have to come up with more money to close and I will estimate general ballpark numbers for you. These numbers will vary depending on lender, type of loan, rate and the time of year (taxes). The numbers are used for illustration purposes only and are not a guarantee of costs. You could pay more or less.
$28,000. - Down payment
$ 600. - Appraisal
$ 375. - Home inspection
$ 3,000. - Various loan fees including points
$ 275. - Escrow
$ 500. - Title Insurance
$ 1,250. - Misc. including tax pro-rates, insurance, etc.
$34,000. Total initial investment.
OK, let's estimate your monthly carrying costs:
$601.24 - Loan payment for a $112,000 loan with a 30 year fixed rate at 5% interest.
$206.52 - Property Taxes $2,478.14 current tax bill.
$ 41.67 - Insurance estimated at $500 per year
$ 25.57 - Misc. hidden costs and buffer
$875. Total monthly carrying costs.
Then we need to come up with market rents for the area. After a brief analysis of homes listed for rent on Craigslist, it appears that a decent 3 bedroom, 2 bathroom, 2 car garage home would rent for $1,200 and up.
$1,200. Conservative fair market rent.
Now we can calculate our monthly cash flow and return on investment (ROI). We take our monthly rent of $1,200 and subtract from it our monthly carrying cost of $875 to come up with a positive cash flow of $325 per month. We then take the $325 per month times 12 months which equals $3,900 as our yearly return. $3,900 is approximately 11.5% of $34,000.
So your (ROI) Return On Investment is approximately 11.5% per year.
This does not include the additional tax benefits of writing off the depreciation, interest and property taxes every year against your income on your tax returns!
Final answer:
Yes, it appears it is a good time to buy single family rental units.
As a matter of fact, I am taking my own advice. I am in the process of arranging my finances to take advantage of the low real estate prices and low interest rates to pick up another rental unit for myself. But don't worry there are plenty of properties out there and I am available to help you achieve your goals.
Donn
I will use real life numbers and opportunities based on one of my local marketplaces. The example property I will use is a real home listed for sale in Gresham, Oregon.
The home is a bank owned 3 bedroom, 2 bathroom ranch style home listed for $147,900. It has been on the market for 3 months and I think it would be safe to say they would take $140k for it, but that is just my opinion.
Let's crunch the numbers:
With a $140,000 purchase price you're looking at a $28,000 down payment which is 20% down. You still have to come up with more money to close and I will estimate general ballpark numbers for you. These numbers will vary depending on lender, type of loan, rate and the time of year (taxes). The numbers are used for illustration purposes only and are not a guarantee of costs. You could pay more or less.
$28,000. - Down payment
$ 600. - Appraisal
$ 375. - Home inspection
$ 3,000. - Various loan fees including points
$ 275. - Escrow
$ 500. - Title Insurance
$ 1,250. - Misc. including tax pro-rates, insurance, etc.
$34,000. Total initial investment.
OK, let's estimate your monthly carrying costs:
$601.24 - Loan payment for a $112,000 loan with a 30 year fixed rate at 5% interest.
$206.52 - Property Taxes $2,478.14 current tax bill.
$ 41.67 - Insurance estimated at $500 per year
$ 25.57 - Misc. hidden costs and buffer
$875. Total monthly carrying costs.
Then we need to come up with market rents for the area. After a brief analysis of homes listed for rent on Craigslist, it appears that a decent 3 bedroom, 2 bathroom, 2 car garage home would rent for $1,200 and up.
$1,200. Conservative fair market rent.
Now we can calculate our monthly cash flow and return on investment (ROI). We take our monthly rent of $1,200 and subtract from it our monthly carrying cost of $875 to come up with a positive cash flow of $325 per month. We then take the $325 per month times 12 months which equals $3,900 as our yearly return. $3,900 is approximately 11.5% of $34,000.
So your (ROI) Return On Investment is approximately 11.5% per year.
This does not include the additional tax benefits of writing off the depreciation, interest and property taxes every year against your income on your tax returns!
Final answer:
Yes, it appears it is a good time to buy single family rental units.
As a matter of fact, I am taking my own advice. I am in the process of arranging my finances to take advantage of the low real estate prices and low interest rates to pick up another rental unit for myself. But don't worry there are plenty of properties out there and I am available to help you achieve your goals.
Donn
Posted by Donn's Blog at 5/11/2011 2:54 PM 
Categories: Real Estate Investing
Tags: Rental Units Investment Real Estate
Categories: Real Estate Investing
Tags: Rental Units Investment Real Estate
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