Linearly of Purchase Price vs. Return

A new client (thank you UP!) provided us with her investment parameters. Part of her parameters was a desire for the rent to be at least $1,300/Mo. While a straight forward request, it caused Cleo and I to re-evaluate some long held opinions concerning the linearly of purchase price vs. return for single family homes in the Las Vegas investment market.

Our opinion has been that somewhere not far above $1,300/Mo the ROI starts to decrease. The questions we will address in this article are:

  • Linearity of purchase price vs. return. For example, if a $200,000 property yields a monthly rent of $1,200/Mo will a $400,000 property yield a monthly rent of $2,400/Mo?
  • What is relationship between number of bedrooms and monthly rent?
  • What is the relationship between monthly rent and time to rent?
  • Number of properties rented in the various rent price ranges.
  • Number of properties rented in the various property price ranges.

The way we approached these questions was to look at real data from the target area we look at every day when we search for investment properties for our clients. The general area is shown on the map below. Note that certain areas, subdivisions and even certain streets within the highlighted area are excluded from our search. Also, we only consider a very specific single family property configurations (for example, no pool, 3+ bedrooms) and even within this configuration several floor plans are excluded.

We started by gathering 12 calendar months of historical data for properties that matched the flowing criteria:

  • The properties configurations matched our investment criteria.
  • The properties sold for between $100,000 and $400,000 and were rented during the 12 month period.

Approximately 355 met all of the above criteria. However, like any other real-world set of data, some odd data points were eliminated and we made some (hopefully valid) assumptions.

Odd data points which were eliminated includes:

  • One property had a monthly rent of $130,000.
  • A few properties that had very low purchase prices compared to the SqFt of the property. We believe that these properties were likely in very poor condition and significant funds had to be spent in order to get them market ready. Between 10 and 15 properties met this criteria and were eliminated.

Assumptions:

  • In order to make the return calculations as comparable as possible, we assumed that all properties were financed with: 20% down, 30 year terms, and 4% interest.
  • We used our ROI20 return calculation. This is not a standard formula. A simplistic view of the formula is: (AnnualRent - AnnualDebtService - ManagementFeeAnnualRent - AnnualLandLordInsurance - AnnualRealEstateTaxes - AnnualHOAFees - AnnualOtherFees)/((DownPayment% + ClosingCosts%)PurchasePrice)
  • We assumed that rents were relatively constant.
  • We ignored price fluctuations during the 12 month period. Prices were not flat as you can see on the chart below which comes from the Greater Las Vegas Association of Realtors who obtained it from CoreLogic. However, we did not know a good way to "normalize" purchase prices so we simply assumed that fluctuations in prices "averaged" out.

Results:

ROI20 vs. Purchase Price

As all real world data, there are a lot of fuzzy points but I believe that there is a relatively clear pattern of decreasing ROI20 as you increase property purchase price.

Beds vs. Rent

Our opinion that each additional bedroom beyond three adds about $100/Mo to rent appears to be valid

Time-To-Rent vs. Monthly Rent

This result was a bit of a surprise since we assumed it would take longer to rent a higher priced property. It does not appear to be the case.

Purchase Price vs. Quantity

We were curious as to the number of properties purchased and rented by volume.

Rent Range vs. Quantity

As we expected, the center point is about $1,200/Mo.

Summary

  • Linearity of purchase price vs. return? Profitability drops as price increases.
  • What is relationship between number of bedrooms and monthly rent? Each bedroom seems to add about $100/Mo to the rent.
  • What is the relationship between monthly rent and time to rent? There appears to be none.
  • Number of properties rented in the various rent price ranges. See the graph.
  • Number of properties rented in the various property price ranges. See the graph.

I hope you found the data interesting. We did. Once again, remember that the data is only for a very specific area and property type and does not reflect the Las Vegas Metro area.

Eric Fernwood (Realtor)
VIP Realty (Vegas International Properties)
7570 Norman Rockwell Ln., Suite 140
Las Vegas, NV 89143
702-358-8884
EricFernwood@gmail.com
www.LasVegasRealEstateInvestmentGroup.com

© 2014 Eric Fernwood, All rights reserved. EricFernwood@gmail.com, 702-358-8884

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