Real estate returns
A bit of background: I work in corporate finance, but have started getting into RE investing in my free time, so my knowledge of the space is pretty limited.
I recently finished renovating a duplex, and have secured rents in each unit with an average of $900. My fully loaded mortgage is under $800. My question is, what am I missing? Even after OPEX, I'm still planning on walking away with about $700 / month pretax, and this seems pretty high. Is all small time real estate this profitable? How do the margins do when you start scaling for more units?
Every REIT I've looked at has trash returns (no offense to anyone who does that for a living), so I'm just trying to understand the disconnect.
Thanks in advance...
Your expenses are way too low as said by others!
2-4 unit product is going to be self managed so expense weight (expense to EGI) should be around 28-35% vs around 33-38% range if you hire a third party manager. You can get a RESI loan at 75% LTV which should help...regular apartment deals are fooked today due to DSCR constrtaints.
If you are doing a simple back of the napkin analysis, you want to get close to a 6% cap on cost which is your stabilized NOI after renovation divided by your total costs (asset, fees, renovation budget, etc). 5.5% to 6% cap on cost is what I would want in most markets but might be different in a market like NYC. For your analysis, garbage in garbage out... if you have bullshit expenses then you might get a 9 or 10% cap on cost.
Also depends what risk profile investment you are buying. If you are buying a turnkey product, and someone is telling you that you can lift rents 10% in this market, then you might be in trouble.