Note, this was originally written in 2018 (fed funds at 1.5-2.25%) vs. this update in blue color in 2023 (fed funds at 5.30%). That is a massive increase in marginal interest rates, so the math is a LOT different in 2023 in blue.
What is the economies of rental properties in Atlanta?
Atlanta rental property #4 – 4bed, 2bath, University, 9% ROE
Update – after 1 month, the price has falled to $338K. . . dropped by $12K. We have not adjusted the ROE #s, but still not a buyer at this price. The location is too “traffic-y”
Unlike most of our personal properties, this is in-town, close to University, and what we consider a “B+” class area. Although it is 1956 build, the interior has been completely renovated and it will be easy to rent. It looks like a 12% ROE deal with some potential upside. This has more capital appreciation potential that most of our outside-the-perimeter houses. Note: a friend who lives in this area had a few words of caution on this property /area:
- Major traffic – the main road is essentially a parking lot in the morning heading towards the city, and reverse direction on the commute home. Will be difficult to get in/out of the house
- For students – Lots of apartments in the area, and students prefer something on bus routes (if possible)
- For families – The schools are so-so (Greatschools.org has it as Elementary 8, middle 5, high 6)
The house. The asking price is $338k for 2,600 sq ft. Very close to University. Newly renovated, good space and value for money. This is a 4 bedroom 2 bathroom brick house built in 1956. Completely renovated on the inside with a finished basement downstairs. The greatest appeal of this house is its location. It is seven minutes away from I 285 and also 10 minutes away from University. Great location near very-hot local area.
Since it is an older neighborhood, there are lots of big trees and not a lot of grass. The lot size is fairly decent. There is a large patio in the front probably 25′ long by 8′ wide. Newly painted on the inside and out.
When you go inside you notice that the rooms are not large maybe 10′ x 10′ which is somewhat common in that era. The hardwoods are in great condition, newly stained. The trim and molding is very clean – ready to move-in.
Modern kitchen. This was a pleasant surprise. Recessed lighting, stainless steel appliances, new tile on the floor, granite countertops. It looks like custom made maple cabinets. Everyone, anyone, would like this galley kitchen. The owner obviously spent some money on upgrades.
There are 3 bedrooms upstairs – The rooms are perhaps 11′ x 11′. With a queen bed, you have to be somewhat utilitarian with the furniture. This is very common for the area, and still very rentable. The windows are new, which saves an investor about $200-$250 per window.
Modern bathroom. There is only one bathroom upstairs, but it is a nice one. Very modern sink tile shower, frameless glass shower stall, modern gray paint color. Very inviting. It would be nice to have an extra half bath upstairs, but these older houses were not built that way.
Big downstairs. This house is 2600 ft.². A lot of that room is actually downstairs in the finished basement. There is a huge living area, bedroom, bathroom, laundry/utility closet. The main room downstairs is probably 30′ x 20′. As you can see in the picture it has enough room for a very large eight person sectional and eight person dining table. Newly painted. The ceiling has tiles and fluorescent lights – not my favorite – but still presentable. Neutral carpet downstairs of above average quality.
One bed, one bath, one large laundry/utility closet downstairs. The bedroom is a little small perhaps 8′ x 12′. In contrast, the bathroom is a good size and has modern finishes as you can see below. Also the laundry room is very spacious with enough room for the current owner to put in a work bench area. Also there is another storage area where the HVAC is located under the stairs, which could easily fit multiple moving boxes. There is a very large deck. It runs the full length of the house in the back it is perhaps 12 feet wide. The pictures below do not really do it justice, because they were taken at 6 PM at night. However you can tell that it could easily entertained 10 to 12 people and is located directly off the kitchen.
The biggest downside is it’s directly off a very large street call North Druid Hills; The entrance to the driveway is a little tricky because it drops about 5-6 feet very quickly from the road – you will bottom out your car if you pull in too quickly. If it had a different driveway set-up, it would be worth $25,000+ more. From my friends feedback, the location on the main street will be a problem. Note: always good to drive to/from the house during commuting hours to get a feel for the traffic patterns.
Comparables: Looking at similar properties within a 2 mile radius, you will see that three bedroom two bath with significantly less square footage are the same price or more. Clearly this is a neighborhood where many investors have been flipping properties, because you will see different types of upgrades. Believe the $350K price is about right. I would expect them to get several offers. Looking at the purchase history – it sold for $190K in 2014. I guess, they put in $80-90K in repairs . . so they will likely net $60K in profits.
What would it rent for? Not knowing this area that well, we estimated a rent-rate of $2,800, but after doing some research, it will most likely rent between $2,300 – $2,500. Lots of student, hospital housing and apartment buildings. Also, November is an odd time to rent for a University area. May be different pricing in June, but a smart estimate is $2,400 a month. After feedback from a friend (hat tip: MK), we need to reduce this rent to $2,200. Which will affect the numbers below.
With $2,200 target rent on a 15year (our favorite), this drive a 9%+ return on equity, but it is all internal paydown of principal. No cash flow. That is not good for everyone.
What are the numbers?
- Purchase for $350,000
- Put $90k down payment (25%), borrow $260K at 4%
- Very little fix up required
- Rent at $2,200
- Monthly payment of $2,200 (interest, principal, tax, insurance)
- Monthly cash flow = $0
- Monthly principal paydown = $800
- Yearly rent = $24,200 = $2,200 x 11 months (1 month vacancy safety buffer)
- Yearly return (cashflow + principal paydown) = $8,800
- Return on equity (ROE) = $8,800/$90,000 = 9.7%
Today in November 2023, a 15 year mortgage with good credit score for investors = 7.5%+. That comes out to monthly payment of $2,700+. That is is a $500 difference from 2018, all in interest payments.
Basically, the math did not make sense in example #1 at 4% interest rate. At 7.5%, definitely not.
Separately, and importantly. That same property in 2023 is worth about $500K. So, of course that changes the math too (yes hindsight = 20/20).
Overall:
- Property area: A
- Property condition: A-
- Property lot location / traffic: B
- Ease of renting: A
- Potential for capital appreciation: A-
- Potential to raise rents over time: B+
- Investment needed: $90,000 down
- Potential return (using bank leverage):9.7%+ return on equity
- Cash flow: approximately no cash flow and $800 loan principal pay down monthly
Atlanta rental property #3 – 4bed, 3bath, over priced
This is the house we would not recommend an investor to buy. When searching the FMLS, this did meet some of our initial criteria: good location and low price per square foot. However, when we visited the house today – we quickly remembered that you should always hold judgment until you visit it directly.
This house is listed at $225,000 for four bedrooms and three bathrooms. It says it is 3400 ft.². From the outside, it sure looks OK. As you will see in the next few pictures and comments, it is not.The picture below shows the neighborhood. There are perhaps 50 to 60 homes. No swim and tennis. Interestingly, half of the neighborhood is composed of duplexes as shown below which oddly have freestanding carports. While this might be commonplace in some parts of the country, in Georgia this is just plain odd.
For schools, the ratings are elementary 10, middle school 8, high school 7. It’s not great, but doable. When you enter the house, the left-hand side has a combined living and dining room. It has support beams placed in the middle of the room. While we do have rental properties with those awkward pillars, it’s always better not to have them. Continuing on through the left of the house you see the kitchen painted in a lime green color. Clearly that needs to be painted. All the appliances look original from the 1990s in white. For our approach, we like to have stainless steel appliances throughout the kitchen; for this kitchen that would be approximately $3000.
Another feature that’s undesirable is the washer and dryer in the kitchen. While you do see this with some frequency, no one wants dirty laundry next to the kitchen table.
The backyard maybe the best part of the house. Good size deck perhaps 20′ x 10′. The lawn is not large but it is fenced in and flat. Perfect for a dog or cat. Two car garage attached. The great room is carpeted which we are not fans of. While many homes in Georgia have 20′ tall ceilings for the great rooms, we find it a waste of space, difficult to heat, and a dated look of the 1990s. The walls need to be repainted. Carpet needs to be replaced with laminate or engineered hardwood. Painting the entire house is probably $4,000 and new flooring maybe $12,000. Going downstairs you will see a fairly large space of three rooms that are poorly finished. Cheap looking laminate. Over the last three years, we increasing use laminate in our houses. However, laminate comes in many different thickness, colors, finishes, and durability. This was a cheap one.
I believe they are counting 1 of the downstairs rooms as a bedroom, but there are no doors, and no bathroom downstairs. Interestingly, the paint is the best part. In terms of workmanship, you can see that the closet is unfinished, they used ceiling tiles like you might see in an elementary school, there are gaps in the laminate, and the wiring has put electrical switches in odd places. There has also been some type of moisture or slight water damage – some of the pieces are curling – never a good sign.
As a real estate investor, we would much prefer this basement to be completely unfinished – because you know what the electrical and plumbing looks like underneath – with a $15,000-$20,000 reduction in price.
If you haven’t had enough negativity on this blog post so far we will take you upstairs and comment on the bedrooms. There is mismatch carpet. The master bedroom is about 15′ x 10′ and the two other bedrooms are very small maybe 9′ x 9′. When you go upstairs you will notice that all three bedrooms and two bathrooms are very close together and there is a slight feeling of claustrophobia.
Generally, we believe this house will require a minimum of $30,000-$40,000 to meet our expectations of quality. Nicer house equals better tenant. On the surface nothing looks entirely broken, but it doesn’t pass our ultimate sniff test: “Would we be happy to live here?” The location is good, backyard is good, the neighborhood is a little strange with the duplexes, and the interior needs a lot of fix up.
As a point of reference, there is a rental home in the neighborhood that is smaller and rents for $1500 a month by a national single-family rental company. We compete with these guys all the time, and typically can charge $100-$200 per month more in rent because we have more premium appliances, flooring, paint, layout, better marketing.
This house needs to rent at $1700 to get the full value, but there is too much upfront fixing needed to make it a wise financial investment. This is a pass.
Atlanta rental property 2: Analysis of 4B, 2.5B, 15% target ROE
We visited a property this morning in OTP North Atlanta. Stucco on the outside very nice lawn front and back. Good location very close to all major shopping and restaurants. Built in 1996 only 1 mile from Georgia 400. Schools are Elementary 9, Middle 8, High school 8 (greatschools.org).
When you go inside you see that it has no carpet. Downstairs original Hardwoods. Very clean, well painted, ready for move-in. The front rooms are about 12′ x 12′ the den is about 15 x 15, but the floorplan is so open that it does not feel small. Half-bath downstairs two full bath upstairs.
Kitchen is very functional and neat. Granite countertops nice cabinets pendant halogen lights view into the den. Stainless steel appliances. Generally, a good value. You can tell that this house was well taken care of, and it is original owners 20 years.
Master bedroom is a little small, but the bathroom is full size as you can see. Walk-in closet and linen closet in the bathroom open hallway and laundry shown.
A total of four bedrooms upstairs. Each of the smaller bedrooms is about 11 x 11. With a full Jack and Jill bathroom. The flooring is engineered wood or laminate, no carpet. Tile in the bathroom.
Major selling feature is the deck and downstairs patio. From the den you walk out onto the patio that is probably 25 x 10. When you go downstairs there’s another extended deck patio which can comfortably seat 10 or 12 people. The lawn is large and flat, perhaps 100 feet long by 30 feet deep, very flat.
Surprise, there is also an unfinished basement. The downstairs basement is made up of four or five small rooms that are framed out. This can easily turn into an extra bedroom and workspace downstairs.
Generally, the location of this house is excellent. It’s very difficult to get a house of this quality and size for this price close to Georgia 400.
If I were to list out any downsides: 1) it is close to the large road so in the morning and evening there will be some traffic sounds 2) The stairs were painted black which is a little bit unusual and becomes a focal point for no reason (however paint is very cheap to fix) 3) looking at comparable prices in the neighborhood they are all at the 250 to 290 price range, so 270 is likely what they will accept – considering the size, location, unfinished basement. 4) HOA fees are usually $500 a year.
Analysis:
- Assuming a purchase price of 270, it will require $70,000 down payment. Loan of 200,000.
- At a 4% interest-rate it is $8000 annually and interest payments
- Looking for comparable rents there were none. Our estimate is that $1900 would be the minimum and probably $2000 is likely.
- With 11 months rent, you will have $22,000 in gross rents. Insurance will be $1000 estimate, taxes last year were $2500.
- Set the math looks like this. $22,000 -$8000 -$1000 -$2500 equals $10,500. $10,500 divided by $70,000 original investment equals 15%.
- This is the initial return on equity, but overtime this changes a little bit because 1) rents increase, 2) interest portion of mortgage decreases 3) potential capital appreciation
Overall:
- Property area: A-
- Property condition: A
- Ease of renting: A
- Potential for capital appreciation: C
- Potential to raise rents over time: B
- Investment needed: $70,000 down
- Potential return (using bank leverage): 15%+ return on equity
- Cash flow: approximately $230 cash flow and $600 loan principal pay down monthly
Great books on rental property investing:
- The Book on Rental Property Investing, Brandon Turner
- The ABCs of Real Estate Investing, Ken McElroy
Atlanta rental property 1: Analysis of 6B, 4B, 10%+ target ROE
One of our favorite hobbies is to take a look at potential rental properties. In the past, this was a bit difficult because we did not have a real estate license. We had to work with realtors to get inside the house and take a look. Now that we have a real estate license, we are able to lock box into many houses. This is the first one we looked at.
Good bones. Kind of unique because of unfinished basement. We would probably only recommend if you can get it for $20K cheaper, perhaps $250K-ish.
This is in a northern suburb of Atlanta. Perhaps 40 miles north of the airport. It is a smaller neighborhood of perhaps 20 to 30 homes.
It is roughly 2,800 ft.², excluding a large unfinished basement. Asking price is $270,000. Comes out to $100/sq ft. For schools it is rated 10 elementary, 9 middle, 6 high school. (Greatschools.org)
The first thing you will notice is that it is on a middle of the street, newer construction (2006), front patio, and large deck in the back. All good things. The grass is overgrown, there are old newspapers in the driveway some of the siding needs to be repaired, but generally the curb appeal is there. The big tree in the front covers half of the house, but that is a small thing that can be trimmed up and made less awkward.
Once you go inside you see that it’s a fairly traditional floor plan. Dining room on one side and a living room on the other. You walk past the stairs and you get to the large living space that is open and connected to the kitchen. The floor plan is critically important because it is not something you can easily change. On HGTV they’re always walking knocking down walls and stuff, but that’s prohibitively expensive and time consuming. Open floor plans are in.
1 Bedroom on the main floor – not a master – but convenient nonetheless. Gives you options if you have an elderly parent visiting the house or great for a private office on the main floor. More options.
Kitchen is good. Dark cherry cabinets, good hardware and a granite (perhaps man-made Corian) counter top. Opened the drawers and they are functional and cleanly used. The flooring is not our favorite but it is in good condition.
To-story great room that opens up to a exposed walkway upstairs. Some of the paint is spotty and poorly done. The master bathroom is better than average, and tile and plenty of space. It will not require major fixing. Remember, paint is cheap. Even flooring can be a good investment.
Thankfully, this house has lots of space. It has six bedrooms. Four bedrooms upstairs one of the main floor and one downstairs. As a general rule, the more space is better. You have families with 2-3 children. More people are working from home. College-graduated kids are boomerang-ing and living in with mom again. It’s always nice to have an office, guestroom, playroom.
The downstairs unfinished basement was a surprise. It is only 25% complete – 1 bedroom and 1 bathroom are complete. It is completely covered with cedar planks like a cabin you would see in North Carolina. There is no drywall, only all cedar planks. Some people like this, for me it was a bit odd to see a rustic cabin interior randomly in the basement of this house. Perhaps with some lighting, it would seem brighter and less heavy. Either way, it is only part complete, and a bit peculiar. Note: If you want your house to sell or rent well, don’t do weird stuff.
You can see that also the previous owner started building a bar out of cedar as well. Lot of work left to do downstairs.
The picture on the top is of the backyard. There is a large patio underneath the deck, and then a good sized yard. With a fence, it would be ideal for pets – another rental draw. Note, the yard is a bit uneven – from the patio, there is a berm (goes up about 4-5 feet, then back down). The row of houses is also on incline, so starting from 4-5 houses to the left rain water will come down from he neighbor’s backyard, through his backyard and create a gully. Not a hazard to the house, but something to consider.
The picture on the bottom is a park that is essentially adjacent to the neighborhood. You could easily walk from this house directly to the soccer field in less than 5-6 minutes.
Analysis: Overall, we believe this house does provide good value in terms of square footage – you will see similar priced homes having 500 less square feet of space and no basement. Ideally, you would like to negotiate it to a lower price so you have extra $$ to finish out the basement. We think you will get $1,900 – even with an unfinished basement. If you finish out the basement, get even more. $2,300?
The house was in reasonable condition I would say it’s a B rating. The flooring was not bad and most of the carpet could just be cleaned. Windows are fine. Granite counter tops are fine. Cabinets are fine.
The big wildcard is the downstairs basement. From a renter’s perspective, there’s not a lot you can really do with the downstairs besides use it for storage. A really great idea would be to find a tenant who could fix it up while also paying you a diminished rent. It is a win-win because the tenant pays less rent and you get a more complete basement when they move out.
- In terms of math, for $270,000 you would put down $70,000 and borrow the rest. Investment properties require 25% down.
- With interest rates at roughly 4% on a 15 year fixed loan – your $200,000 loan would be $8,000 a year in interest.
- If you can rent out the house at $1,900 a month x 11 months (hat tip: GD) you get $20,900 in gross rents. Believe that $1,900 a month is doable because there is a property very close by that we own which rents for $1700 – a lot smaller, not as nice.
- Excluding the basement, probably $10,000 in repair. $5000 for interior paint and another $5,000 for general cleanup and improvement of the deck. Note – to finish the basement, it would be $30K. . . which is not included in these numbers.
- Let’s assume insurance is $1,000 and taxes are $3,500. $20,900-$8000-$1,000-$3,500 = $8,400 net rents.
- $8,400 divided by $80,000 (original investment + $10,000 of fix up) = 10.5% return on equity annually. Not too shabby.
- Note, that this assumes you’re doing the property management yourself. Property managers will charge anywhere from 8 to 10% annually and sometimes can be higher if you have a lot of turnover. So you need to put the sweat equity in yourself if you want to get 10%+ annually.
- Property area: B
- Property condition: B
- Ease of renting: B+
- Potential for capital appreciation: C
- Potential to raise rents over time: B
- Investment needed: $70,000 down + $10K in fix-up
- Potential return (using bank leverage): 12%+ return on equity
- Cash flow: approximately $300 cash flow and $600 loan principal pay down monthly
Leave comments if you have any other questions on how we look at rental properties, or specifics on this particular house. As of 10/25/16 it is showing as still available in North Atlanta – outside the perimeter.
Great books on rental property investing:
- The Book on Rental Property Investing, Brandon Turner
- The ABCs of Real Estate Investing, Ken McElroy