Rental Properties in Atlanta – What is my Return-on-Investment ROI?
Since 2007, the world has come to Atlanta to buy rental properties in high numbers. In this article we will discuss the reason behind this as it relates to Return-on-Investment or ROI. First I will paint some background information as to how Atlanta became such a great place to invest in property.
As we all know, we faced one of the greatest real estate crashes in our time from 2007 to 2012. All of America was affected, but some areas were affected more than others. Atlanta, Georgia was one of real estate markets that was majorly affected by this real estate crash. Why?
Atlanta was hit so hard because it was one of the markets that experienced significant growth during the 90s and early 2000s. More than 100,000 new people were moving to the Metro Atlanta area every year. Our climate, airport, jobs, and low-priced real estate were all contributing factors towards this growth. With fast growth, builders were selling homes as fast as they could build them. Cheap loan products with low costs and little to nothing needed as down payments made buying these new homes and others very advantageous to home buyers.
In fact this was the perfect storm for colossal failure and foreclosures. Many of these buyers really could not afford to own homes. But because of the little money down and minimal financial risk, people were buying homes they could not afford. Any change in their financial future, however, would mean a home would not be maintained and mortgages not being paid. These soon became the thousands of foreclosures that started in 2006 in Atlanta. But not only were first-time home buyers buying what they could not afford, so were people at every income level. People were buying $500,000 homes that should have been buying $250,000 homes and so forth. The loose lending market essentially created a demand of buying that did not exist.
Investors were paying attention to the looming collapse in early 2006 and lurking to find the deals. Local investors had the best intel, so they bought all of the early deals. Investors from other parts of the United States were the next buyers in Atlanta. By 2008, international private investors were buying the foreclosures in Atlanta for rental properties or wholesale properties to flip to other international investors. By 2009, hedge funds and other private capital firms starting buying in Atlanta. Today, there are still investors buying and selling hundreds of properties a month in Atlanta.
What is ROI?
Return-on-Investment (ROI) is defined as: the total financial return earned on an investment in one year divided by the total initial cash investment plus other capital improvements. Below is a formula to show this in a practical way.
ROI= (Yearly Rental Revenue – Yearly expenses) ÷ Basis {which is Initial Purchase + capital improvements}
Definitions:
Rental Revenue includes Rent, late fees, application fees earned, or any other income received associated with property.
Yearly Expenses include taxes, insurance, loan interest, depreciation, property management fees, maintenance costs, and any other costs associated with the property.
Initial Purchase is the Sales Price paid for the property.
Capital Improvements include any items repaired or replaced that add value to property and can be capitalized or added to the basis of the property. Examples include carpet, cabinets, appliances, roof, landscape improvements, additions, outbuildings, etc.
Basis = Initial Purchase + Capital Improvements
ROI Example: Rental Property 1:
$85,000 Purchase Price + $12,000 capital improvements
$97,000 = Basis in property
$11,000 Yearly Rent + $100 late fees + $300 non-refundable pet fee
$14,000 = Total Rental Revenue
$1000 taxes + $700 insurance + $1400 management fees + $300 maintenance costs
$3,400 = Total Expenses
ROI= $14,000-$3,400= $10,600 net income
$10,600 net income ÷ $97,000 basis
=0.10928 or 10.93% ROI
Can you buy today in Atlanta and make a decent profitable return or ROI on your investment?
In short, the answer is YES. However, the ROI will be lower than if you purchased a similar property in 2008. I am hoping you understand that more specifically now with the example above. The more the basis, the less the return. The more you can increase rents and reduce expenses, the more the ROI will be. Before the market crashed, good ROI was produced by getting loans. During the crash, investors used cash to purchase the real estate. Now loans are coming back into play because the properties just simply cost more. So if I am to invest my cash and want to earn a 15% ROI, then I may need to get a loan at 6% for a portion of the costs, which will allow my cash to produce a higher return than if I put all cash in the deal. We are still seeing private capital firms buying properties in Atlanta. They expect to produce a +/- 6% ROI on their cash investment. They are also borrowing money so they can increase their investors’ returns and free up capital to buy more property.
Small investors should not consider buying and owning rental property if they cannot produce at least a 8-10% return on their cash money, and a loan should not be considered unless you have plenty of cash reserves. Investing in real estate can be risky, but also can be very rewarding. Bravo Group Real Estate Services is a boutique real estate brokerage firm in Atlanta that specializes in investing in rental properties in Atlanta. We offer turn-key services including purchasing, renovating, and property management services to make sure your investment continues to make a positive ROI for years to come.
