Dallas-Fort Worth Expert Advisors
How would you like an investment that could provide returns of 6.5% to 7.3% per year, not counting capital appreciation?
If I told you that this can be done in real estate, I’m sure visions of the infomercials and folks selling seminars, training programs, and books come to mind, sending a shiver up and down your spine!
Let me lay it out for you as simply as possible with some hypothetical, and hopefully fairly conservative, numbers (actual numbers will vary depending on the home, the location, taxes, HOA fees, your insurance, and maintenance costs).
Let’s say you purchase a home for $150,000 cash, and the home needs an additional $500 to make it ready for a tenant. Let’s also say that the home is in an area that would support a monthly rent of $1,500.
At this point, I can feel the imaginary fences, shields, and barriers going up around you! You don’t want to have to deal with the tenants - the bother of having to collect the rent every month, the bother of having them call you at all hours with every little question or maintenance request, the bother of you actually having to go out and fix any issues or coordinate with a handyman or other professional to do any needed repairs. So, let’s lower those imaginary fences and include having someone else professional manage the property for you. We’ll use 10% of the rent as the amount the property manager would get paid.
For your annual expenses, plan on an amount for repairs. In this example, I’ll use $500 for the year, but it could be more or less (or zero) depending on the property and tenants. You will also have property taxes (let’s say $3,735 based on $150,000) and property insurance (let’s say $1,000). And, you should plan on paying a commission to your real estate expert advisor of 75% of one month’s rent, or ($1,125 in this case) to obtain a tenant.
Wow - is your head spinning yet with all these numbers? Let me summarize:
You have put in a total of $150,500 cash to purchase and “make ready” the home. For the year, gross rents received are $18,000 ($1,500 times 12 months). The property management cost is $1,800. The leasing cost (commission) is $1,125, property taxes are $3,735, property insurance is $1,000, and annual repair costs is $500. That results in a net return of $9,840 that first year, or 6.5% ($9,840 divided by $150,500).
Total Cash In: $150,500 (purchase and make ready)
Annual Rent: $18,000
Less Property Management: $1,800
Less Leasing Commission: $1,125
Less Property Taxes: $3,735
Less Property Insurance: $1,000
Less Annual Repairs: $500
Resulting Net: $9,840 (18,000 - 1,800 - 1,125 - 3,735 - 1,000 - 500 = 9,840)
$9,840 divided by $150,500 = 0.06538 ... 0.06538 * 100 = 6.5%
After the first year, ideally your tenant decides to renew their lease for another year, because then you won’t have another leasing commission to pay, saving you $1,125 that year. Adding that to the resulting net above gives you a net of $10,965 for the year, which translates to a 7.3% return on your investment.
Again, these returns do not even take into account any increase in value (your equity) in the property. They also don’t consider the income tax benefits (deductions you can take) and income tax liabilities (tax you may owe on the additional income).
One of the keys is finding the right home in the right neighborhood at the right price. And, knowing that the marketplace within that neighborhood would support the rental amount you expect. For this, you will want to utilize the services of a real estate agent that is a Certified Expert Advisor™, such as us on the Munguia Group Properties team at Keller Williams Realty Dallas Metro North. Please contact us, and we’d be glad to assist and advise you!
*NOTE: All figures used are hypothetical and can change based on many factors. Please review your situation and each specific property with your Expert Advisor™.
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