Here's an article from CNN Money that hits a few buttons for me.
- First, it's about real estate investing.
- Second, it lists the "best" markets to become a landlord. I thought I'd compare my results with the best.
- Third, it highlights (again) how little the mainstream media understands financial terms, what they mean, how to use them, and so forth.
Let's begin with the financial terms.
The article talks about "profits" and "average returns" in real estate investing. Both of these terms are "net" amounts -- what you have left over after expenses. For instance, a profit is generated when you earn revenue and then subtract expenses. What's left over is "profit". The same goes for investment returns. You take your net gain (income less expenses) and divide it by the amount invested to get your return percentage.
But in this article the author does not take into account investing costs. He simply takes revenue, divides it by the selling price of a unit (amount invested), and calls that "profit" and calculates "average return."
In the real world, profit and average return are calculated after expenses. Yes, some mutual funds publish their "returns" before expenses (or at least they used to), but we all know those aren't real returns until costs are deducted. The case is the same here. I'm not sure if the author doesn't know the difference or is simply ignoring it. Whatever the case, it makes him look like he doesn't know what he's talking about (at least to an informed reader.)
That said, the chart gets one term correct in calling it "gross rental yield" (GRY). And I admit that there is some value in calculating GRY. But it's certainly not "profit" or "average return." Not even close. You MUST deduct expenses to get those numbers. Believe me, I wish GRY was the same as profit and that's what we all took home to the bank! :)
Ok, with that rant out of the way, let's look at their top markets. The list of cities, gross rental yield, average monthly rent, and average unit selling price are as follows:
- Anderson, S.C. -- 15.3% -- $893 -- $69,900
- Greenville, S.C. -- 13% -- $975 -- $90,000
- Sioux City, Iowa -- 13% -- $914 -- $84,250
- Gainesville, Fla. -- 12% -- $1,161 -- $115,950
- Washington, D.C./Arlington, Va. -- 11.9% -- $1,966 -- $199,000
- Columbia, S.C. -- 11.3% -- $1,046 -- $111,500
- Pittsburgh, Pa. -- 11.3% -- $991 -- $105,700
- Charleston, S.C. -- 10% -- $1,160 -- $139,900
- Columbus, Ohio -- 10% -- $1,039 -- $125,000
- Omaha, Neb. -- 9.9% -- $1,059 -- $128,000
Just so we're all on the same page, here’s how you read the numbers using Anderson, S.C. as an example:
- Anderson's average rental unit sells for $69,900
- The average unit there generates $893 per month in rent (gross, no expenses deducted)
- This means the average rental unit generates $10,716 each year in gross rents ($893 * 12 months)
- The gross rental yield is therefore $10,716/$69,900 or 15.3%
Now, here's how I stack up to that:
- The total costs of my units (includes both purchase price and remodeling costs): $579,342
- Gross monthly rents of these units: $10,890
- Gross annual rents of these units: $130,680
- Gross rental yield: 22.6%
A few comments on this:
- I wish I was earning 22.6% profit on these units. I'm going to be between 8% and 11% when it all shakes out (which should be this fall as my last unit is done with its remodel, it's filled, and I get to a point where I'm through investing big in remodeling).
- I paid for all my units in cash, but my return would be higher if I leveraged my places, as I noted on each property write up I've done on FMF.
- There's no accounting for appreciation in these numbers.
- One thing that helped me out big-time is that I bought my places near the bottom of the market (not at the bottom, but near it, just as they turned up a bit. If I had started two years earlier I'd probably have double the properties now and be looking at HUGE gains.) Unfortunately, those days are mostly over.
- My numbers are against the averages in a market, so it's not really a fair comparison. I'd like it better if I knew what the top 10% or top 25% were earning so I could compare myself with their results.
Well, that's it for now. I will give you a detailed update on my rental units once the smoke clears.
I'd be interested in hearing from those out there who own rental places. What do you think of the article? How do your results compare to those in the cities highlighted?