Cheat Sheet Q&A:
Topic: Real-Estate Investment
I’ve heard you speak before on rate of returns when purchasing rental property. What do you think is a decent return on investment each year percentage wise?
Bottom Line: The short answer to you question is that you should expect a 10% gross return on a rental investment. That means that for every $100k invested in real-estate you should expect to be able to rent it for aprox. $830-$850 per month. If you do that you generally should expect to net 5-6% per year plus potentially benefit from the long term appreciation of the property which historically has averaged 4.1% per year for a total return of 9-10% net. Now let me break down some of the critical variables…
- Property taxes
- Association dues (if applicable)
- Club dues (if applicable)
- Special assessments (if applicable)
- Property management fees (if applicable)
Property taxes need to be carefully studied because of the very local differences in tax rates. In Palm BeachCounty alone we have 38 different local property tax rates (37 municipalities and the non-incorporated areas). The variance can be significant on the same property value. Insurance cost is pretty self explanatory so let’s discuss vacancy. A mistake by many newer real-estate landlords is over-estimating occupancy levels. Many new investors will count on 12 months worth of occupancy. Here’s a key rule of thumb. Never count on more than 11 months worth of rent per year. If you’re being diligent factor in 10 and be pleasantly surprised when it averages out to be a little better. You will have periods of time without a tenant over the years. You will likely run into a month here in there in which the rent payment is late or isn’t paid at all and you have to take next steps. Now on to the special considerations…
When buying a rental property you really need to fully understand what you are getting yourself into with an association. What are the dues? What are their restrictions (many will have animal restrictions, restrictions on how frequently property can be rented out, guest restrictions, etc.)? What is the history of due increases? What is the history of special assessments? You need to have answers to all of those questions so you can quantify your hard costs and your risks. Next up the country club fees. Virtually all professional investors steer clear of mandatory club communities. You probably should too. If club dues are built in, in addition to HOA fees, unless you’re getting a steal of a deal & perhaps even then move on. Last but not least… Property management. Will you handle or will you hire? If you’re hiring a property manager you can factor a cost the will average out to be about 15% of your revenue. Whew… That’s a lot isn’t it? I don’t want to overwhelm you but you should be informed.
If you have a topic or question you’d like me to address email me: email@example.com
I hate computer ad-ons but this one is worth it when you book online:
Bottom Line: Wouldn’t it be nice if every time you bought something online you’d know if you were getting the cheapest price? By the same token wouldn’t be nice to have a coupon code or free shipping code automatically provided to us if it were available? That’s exactly what a new free browser add-on called Priceblink does.
With Priceblick, when you’re shopping online and select an item with any online retailer, it scans the internet for the exact item you’re preparing to purchase. If there is a better price it notifies you and will take you directly to it. If there are any active codes you could use it will notify and provide them to you. So why add-ons are annoying one that provides these benefits is likely worth it to you if you shop online frequently. Here is the direct link to their site to get started: http://www.priceblink.com/webcpns/browser-add-on/
What you need to know if you're an AT&T customer:
Bottom Line: Another day another data breach issue. But this one is different. Even if a company is as diligent as can be in thwarting hack attacks and security threats from outsiders… There is very little that can be done if insiders with access to customer information steal data and use it for illegal purposes. Such was recently the case at AT&T
AT&T has discovered that three employees with access to full customer information, including Social Security numbers, stole customer information and it may have already been used for identity theft related purposes. AT&T hasn’t disclosed how many customers had their information compromised but they are saying the incident occurred in April. AT&T has stated that they’ve taken action to prevent further issues related to this incident and they are now in the process of contacting those they’ve found to have been compromised. So if you’ve had recent odd activity with any of your accounts or outright identity theft issues and you’re an AT&T customer this may be the root cause.
This is one more reason I think that good identity protection is always a good idea. Unfortunately we only find out that these issues have occurred after the fact and generally months after the fact. Even if AT&T takes significant action to assist you at this point, a great deal of stress and damage involving your personal information may have already taken place.
Senior discounts usually aren't the best deals available:
Bottom Line: Kiplinger recently did some outstanding research on standard discounts offered through senior programs (most notably AARP) and the best discounting available by other discounting services. The results? They averaged bigger discounts using other online discount services (leading travel and discount related websites) services in all three categories they studied (Hotels, Cars, Attractions). In some cases the difference was a much as a discount advantage of greater than 30% over the senior discount. In other words… If you want to ensure you’re getting the best deal seniors generally should be scouting discounting services online like they used to. Rather than a senior discount you may actually be paying a premium all while thinking you’re getting a good deal.
How we're benefiting from our domestic energy boom:
Bottom Line: Like a myriad of times before we’ve seen an increase in the price of oil related to the negative news out of a Middle-East. Unlike times in the past the spike in the price of oil hasn’t been that big. It got me to thinking…
The increase in the cost of oil since the Iraq news broke last week is about 6%. I went back to the 1970’s and studied the oil price spikes around negative events involving OPEC nations. The results were interesting.
- The average historical oil price spike on negative news events out of an OPEC country has been 24%
The recent 6% increase is the smallest we’ve seen on a major geopolitical issue involving an OPEC country to date. In fact as US oil production has been rising in recent years the impact on these geopolitical events continues to diminish. The price of a barrel of oil is a world-wide commodity there is no inherent cost benefit to the oil being produced in the US than in another part of the world. The benefit of our production increase I believe is when we have these Geo-political events. We know that we aren’t reliant on oil from Iraq any longer. In fact the US no produces more oil daily than Iraq does. Therefore the fear trade with the commodity is mitigated. So even if the price of gas isn’t significantly lower on a day to day basis due to US oil production gains, it appears to be during these periods of geo-political turmoil.