As everyone knows here, it is difficult to make predictions over the long term. The ROE calculation of 43% is meant to be something that you examine year after year and make appropriate actions to keep your ROE that high. There are going to be some years where your ROE is low and your property isn’t generating as much money as it should. Steps should be taken to counter that. There will also be years where the appreciation of the property will be higher than the 4% I anticipate. If it happens, great. If not, oh well. Real estate is a slow moving beast so you can direct it properly. Still, the ROE calculation is meant to be a barometer of a 10 year cycle.
As for the mortgages being paid, I pay all the mortgages myself and I do all of them on auto-pay. I could have the property manager of each property do the payment of the mortgage for me, but the banks send the statements to me, and I find it helps if you get your hands into the nitty gritty.
Vacancies… The property is already fully rented so I did not account for vacancies in the first year. The rent is low, at $375 per unit and there is room to move that up to market (which has been running at around $425). I have learned that I have to aggressively rent my units out, so I have instructed my property managers that if a unit is vacated, immediately place an ad offering a rent discount on the first month. This helps generate interest right away and keep vacancies to a minimum. If vacancies happen, that’s the fact of life. However, I have minimized the vacancy risk by the aggressive discount and by the fact that the property is a 4 unit (SFRs have a vacancy disadvantage because once the tenant is out, you’re out the full rent amount, as opposed to multi-units, where if you have one vacancy, you at least have some rent income still available to come in).
3) Miilitary tenants
One of the things that attracted me to Huntsville was, like Jumby said, the fact that BRAC was closing a base in the midwest and expanding operations in Huntsville. There were other aspects to the BRAC report too, because they are moving defense contractors as well as personnel over to Huntsville. So the long term area prospects are good.
I will tell you that I am not specifically targeting military personnel as tenants (and certainly not officers). A lot of investors make the mistake of going after high value tenants (military officers, high income people), and as such buy expensive rental properties as such SFRs. Many investors will buy rental property based on the question, well if I had to live there, what would I like to live in? I avoid that line of thinking entirely because I pursue properties that have cheap rents. Cheap rents allow you to appeal to a huge population of minimum wage earners, vs. having to fight for high income tenants, which are few in number and are chased after by most everybody.
Let’s also remember the “high number” of foreclosures affecting everyone in the country. If Huntsville does go into a situation where there are a lot of foreclosures, forcing owners to rent instead of own, where will they go? WHERE THERE IS CHEAP RENT.
Also another advantage of cheap rent is that you are able to keep vacancies to a minimum.
And lastly:
4) Are the hassles worth it?
Um, let me see, I am able to make an asset which was previously doing jack to all of a sudden generate a 43% return.
I am able to pay ridiculously low taxes even though I have a household income of over $200k.
I’m sure there are others who will pick holes into my investing and will say, well you’re too risky, or you’re a sucker for buying into the real estate makes people rich crowd, or any other comments. And I don’t doubt that this is risky. However, you can minimize risk several ways (as I’ve outlined here) and you can use the factor of time to both make you money and minimize your risk.
