Our company works with many foreign investors who for some reason have been lead to believe that cheaper property is better. That is not always the case. Our average sale price for investment property is right around $60,000 and the average rent is $850. For our example we are going to use our property compared to a $40,000 property with average rent of $550. We are going to look at the rate of return over a 5yr period so we can try to get a better idea of what actual numbers look like. These numbers below do not take into account taxes, insurance or management fees.
Property #1 $40,000 sale price / $550 monthly rent / $6,600 Gross Annual Cash Flow / $33,000 5yr Gross Profit
Average turnover will be about 4 times in the first 5yrs. Cost to refresh home every time about $1,500 – $2,000 per time. Yearly maintenance will run on average $1,200. Average time to re-rent the home will be about 45 days so your average.
$33,000 5yr gross profit
$28,875 income for 52.5 total months occupied
$6,000 $1,500 x 4 for having to make repairs during vacancies
$6,000 in total maintenance for 5yrs
5yr total cash flow of $16,875. Divide this number by 5yrs is $3,375 which gives you a 8.4% ROI
Property#2 $60,000 sale price / $850 monthly rent / $10,200 Gross Annual Cash Flow / $51,000 5yr Gross Profit
Average turnover will be about 2 times in the first 5yrs. Cost to refresh home every time about $1,500. Yearly maintenance will run on average $850. Average time to re-rent the home will be 30 days or less.
$51,000 5yr gross profit
$49,300 income for 58 total months occupied
$3,000 for having to make repairs during vacancies.
$4,250 in total maintenance for 5yrs
5yr total cash flow of $42,050. Divide this number by 5yrs is $8,410 which gives you a 14% ROI
With property #2 you will have minimized risk, better cash flow and less turnover when compared to property #1 which always will have high risk, high turnover. Though at times the cash flow and ROI could be presented to an investor in a way showing better numbers that what truly the real picture is. Single family homes usually follow the same principals as commercial real estate, you might pay a little more and the ROI will look lower initially but over time it will prove to be better return on investment then the cheaper investment.
If you’re an out of state investor and you want to minimize your risk you might want to consider better property in better areas. Think long term and not the first 12 months!! Cheap property will only work if you live here, purchase the property with no wholesale mark up, then you might have a chance. I have never had an investor come back to me and ask me to help them sell their $60,000 property for poor performance. If I had a dollar for every investor who came to me wanting help in selling their cheap home in a bad area for under performance I would be a rich man.