In December 2020, I purchased a duplex in Rhode Island. The goal was to finally own real estate, and begin to build a portfolio of properties. When I look at the market now (high interest rates aside), the inflation of real estate prices leads me to believe that real estate isn't such a great investment these days (or at least in the markets I've evaluated).
To do some quick math, my property currently has both units rented and brings in annual revenue of around $43,000. The value of my property according to Zillow is currently $430,000, but I paid $300,000 back in 2020. A simple metric to calculate is the gross yield, which factors in the revenue divided by the purchase price or value of the home. In December 2020, the gross yield was 14.3% ($43K annual revenue / $300K purchase price). Today, yields around 10% (43K / 430K value).
I currently live in Cambridge, Massachusetts, one of the highest cost of living cities in the United States. It is the most expensive city in the country for renting a 1 bedroom apartment, and while the demand for living here is astronomically higher than my rental in Rhode Island, one can still look at the gross yield to compare the potential return on an investment.
On my daily walk through the neighborhood, I noticed a once burned multi-family become purchased, renovated, and listed for sale. Upon passing the open house sign, I couldn't help but pull up the listing on Zillow to see what the unit was going for.
$6,000,000 for a 4-family. So, let's take a look at the gross yield and put our investor hat on.
According to Rentometer, a useful tool to calculate the average rent of an apartment or property based on others in the area, a 3 bed, 3 bath unit within this location rents for around $4,700. There are four of these units, so the property brings in $18,800 per month, or $226,000 per year when annualized. That is a gross yield of 3.7%.
I understand this is a very simplistic way of viewing this property, but according to my calculations, it doesn't even pass the initial sniff test and should be disregarded. My high yield savings account currently yields a 5% return, and I don't have to tie up any capital, worry about fixing toilets, paying astronomically high interest rates, or tying up a bunch of cash. Unless someone else is willing to pay significantly more money than the $6,000,000 (making this more of a flip than a buy and hold), unless this is a pure appreciation play (which, IMO, is a poor strategy for investing in real estate if that's the ONLY way to earn a reasonable return), or unless the seller would be willing to drop the price significantly, I see this as a very poor investment.
When investing in a hot market (which real estate has been for many years), you have to look at the numbers and ask yourself: are you an investor, or a fool?
I hope you've found this valuable, and if you have, please give it a share with those who would find it useful.
