Cash on Cash Return for Rentals in Phoenix Suburbs - Merrill's Market Madness #70
Cash on Cash Return for Rentals in Phoenix Suburbs - Merrill's Market Madness #70
Good morning everyone and welcome to a new edition of Merrill's Monday Morning Market Madness! Coming at you today, taking a look at the housing market in the Phoenix metro area. We'll be discussing you know trends and topics and what average prices have been doing and discussing a little bit to cool off what we're seeing in the market and then what I'm most excited to talk about today is a breakdown of what kind of return on your cash you could expect to see on a very typical investment and today I'm focusing on the cities in the east valley if you're not in our set in the east valley I plan on doing another episode well I'll focus on more some west valley or mid or north area cities to show you a breakdown of some of those numbers as well but i think today's episode will give you a really good understanding because i think there's a myth going on right now. A narrative that prices are just getting too high and that there's just no money to be made in real estate and that it's not a good time to invest and I'm hoping to dispel that rumor because we're still seeing some pretty incredible returns on the rental market right now so we've been buying up rentals and I think it's an amazing time to invest because of how low-interest rates are and I'm hoping to convince a couple of people who've maybe been on the fence that they might want to look at doing that but before I get into those numbers I'm going to start with the month supply of inventory number.
So, right now we're sitting at 7 754 active listings in our MLS there's 12 800 listings that are pending only 7 482 homes have closed in the past 30 days giving us a month's supply of inventory of 1.04 this is the first Monday morning market madness episode that we've ever done i think or at least in a very long time with a month's supply of inventory above a one that means that you know right now that the total number of homes have closed over the third past 30 days that there's slightly more active listings than there are what is selling in a 30-day period but keep in mind there's almost 13 000 listings pending and we're still seeing a pretty darn competitive market out there i'm seeing so much more news and you know national whatever about the market slowing down and prices are turning and i am still maintaining that is not going to be happening anytime soon a month supply of inventory of one is still an extreme seller's market a balanced market needs a month's supply of inventory of like four or five months so unless we're going to somehow pull out another 30 000 active listings in the next couple of weeks we are going to be heading into next year still very much in a very very strong seller's market.
I believe that what we're experiencing right now is just normal seasonal slowdown the market always slows down this time of year and then it picks up again as we head into the spring in fact you know last year was a bit of an anomaly I think some people are looking at the numbers like oh well last October and I have last October's numbers last october 10 026 homes closed in the month of October this year only 7930 so that's a 20 decrease in units from this year to last year but last year was an anomaly because of covid normally our biggest months of the year is like May well May and June well that was right when we were in the peak of everyone not even sure if they could leave their houses and so we saw a huge drop in sales numbers in May and June and then July, August and September, October were way higher than normal but if you go back to 2019, 8039 homes closed in 2019 versus 7 930 this year so almost identical to october of 2019 and in 2018 only 7 300 homes closed so very typical October that we are experiencing right now.
Despite home values being way up here's another metric to consider so the average sales price of all the homes that sold in our MLS in the month of October was 521 581. in 2020 the average sales price was 428 000. so almost an increase of almost 100 000 in the average sales price from October 2020 to October 2021. going back to 2019 it was 346 000 and in 2018 it was 326 thousand so an increase of almost 200 000 in the average sales price in the past four years the other metric that I found really interesting and really telling of you know what kind of market we're really in right now is the sale sold to list price ratio so all that you take all the homes that sold in our MLS in the month of October on average homes were selling for about 700 above the list price so so on average homes are still selling above asking if you go back to 2020 even though we were in a fiery hot market then as well in fact probably a little hotter than it is.
Right now homes were still selling an average of six thousand dollars below the asking price go back to 2019 and 2018 both of those years homes were selling an average of seven thousand dollars below asking price it so it's always been pretty typical for homes to be selling somewhere between one and three percent below the asking price but now we are still homes on average are still selling slightly above the asking price we're so so don't don't let the narrative fool you that the market is is shifting and that home values are going to somehow start plummeting there's really only one major thing that I think could absolutely cause our market to come to a big slow down maybe to the point where home values could fall slightly and that is interest rates and i'm gonna share my screen here with you real quick now interest rates let me be clear on interest rates before I show you the screen interest rates if they go up a lot it could see a slowdown in the market because it has a big impact on affordability I really don't think it's a situation where we're gonna see interest rates suddenly go up to seven percent and home values are going to plummet you know I just think most likely interest rates will continue going up slowly and the the pace at which homes are selling will slow down slightly you know worst case scenario maybe home prices dip I don't know five percent I doubt I really honestly genuinely doubt that happens but just you know that's that's my opinion of the worst case scenario so let me jump in here share my screen with you and show you interest rates this is according to Freddie Mac's website the 10-year treasury note has been trending up due to a decline in covid cases if you look at this blue line it shows you what average interest rates have been over the past year and right now we're sitting in an average on a 30-year fixed rate mortgage of 3.14 which is near the one-year high of 3.1 well 3.18 so still slightly below where we were at in April you know I again take it out to the five year or the ten year or the all time and rates are still ridiculously low I honestly think rates would probably have to go up closer to five percent before we would before we would really see some sort of significant reversal in the market now.
I want to shift gears now and talk to you guys about the rental market i'm really really passionate about owning rental properties about helping people to begin investing and buying rental properties and also educating people about owning rental properties and I apologize this is gonna be a little geeky but i'm a numbers guy so bear with me here I went ahead and put together this spreadsheet i'm going to see if I can zoom in on this just a little bit so that you can see my numbers a little bit better there we go now i'm looking at i've got them in alphabetical order so Chandler, Coolidge, Florence, Gilbert, Maricopa, Mesa, Queen creek and San Tan Valley now what I did was in order to just kind of make it a fair comparison across the board is I looked at if you go down here to where it says parameters i'm using homes that are single-story three-bedroom two-bathroom two-car garage between twelve hundred and eighteen hundred square feet no pool not in a 55-plus community on a lot size below eight thousand square feet and built after 1980 so so that way everything i was looking at in each city would have the same the same rules okay and what i did was i said okay let's look at what was the average price for that kind of home in the past 30 days and it was 442 000. so I'm not even saying you go out and find a deal just buy the average house okay you put 20 down on it because that's what you're typically going to need on a non-owner occupied.
I do have access to a 10 down non-owner occupied program if you want to hear more about that which means that your average mortgage on that home would have been three hundred and fifty three thousand six hundred and fifty three dollars your average monthly payment on that house would have been one thousand eight hundred twenty nine dollars and forty nine cents i'm using a sample rate of 3.75 percent keep in mind even though you just saw the average rates with 3.14 non-owner occupieds are a little bit higher rate this is one of the reasons why we really like to recommend house hacking if you're just starting out you're a single person or you don't have a big family yet it really works out great if you can buy a home as your primary residence live in it for a year turn that into a rental and then go buy a different primary residence but for those of us with seven eight i don't even know how many kids anymore you know that doesn't that that's really hard to get move your whole family every year or two so i'm sticking with the 20 down and using investor financing oka i'm using 600 a year for the insurance which depending on the house that might you know i've got several properties that are less than that i've got several that are a lot more than that too.
So i'm just trying to go middle of the number roads and then I also just took for taxes I just kind of took the median property and kind of averaged taxes all right the average rent for the exact same parameters over the past 30 days was 2 181 which means that your monthly cash flow would have been 351 and 51 cents annual cash flow 4 218 which is a return on your cash of 4.77 not super exciting i get it that especially when you start considering especially when you start considering maintenance vacancy management you know not a home run on the return on cash obviously if you decide to buy a rental we're going to be looking for something that's a little bit better than the average deal right and we're you know probably going to try to push the limits a little bit on the average rent and you know some of those things there to help improve that return a little bit but you can see i've got the same numbers for all of these other cities coolidge came out by far not even close as the best return on cash part of it is you'd need such a lower down payment the average price for that home was only two hundred and fifty three thousand dollars average mortgage was a thousand and sixty-three well the average rent was sixteen twenty-four.
So Coolidge came out with a pretty nice return and that's just you know your return on cash so i understand if these numbers first of all i just want to point out that this even with these numbers you have an opportunity to buy a house that someone else is paying for and now you've got this incredible asset that over time is going to go up in value but where it gets really exciting is not this first year when you own the property maybe the first year your return is only made talk to anyone who's invested in rental properties over the past five six seven ten years okay where it gets really exciting is when you buy a home with a mortgage you walk in you get to lock in your your payment for 30 years right but you get to continue renting it and and you know rents never go down ever okay even in a down market rents will at least hold stable and most likely rise all right think about it if the market is down people are losing their houses and what do they have to do they have to go rent okay so so it puts even in a down market it tends to put upward pressure on rent rental prices so where it gets really exciting is in my next spreadsheet where we look at what happens to your return on cash a year later if the market goes up by eight percent now the market in my opinion will go up by more than eight percent i'm predicting average prices will increase probably somewhere in the range of 10 to 12 we've seen an increase of somewhere around 20 to 22 over the past year so so i'm only talking about doing half but but i've seen some more slightly more conservative estimates so i'm going with eight percent all right so let's say let's let's keep our chandler example here i'm just using chandler because it's the first one on our list this first part of the spreadsheet is exactly the same but i'm going to come over to this blue field now and i made it blue because this is a projection not a guarantee this is you know just saying what happens if prices go up by eight percent over the next year well your house that you bought originally for 442 000 is now worth four hundred and forty seven thousand the rents will also go up if if typically what we've seen it's not an exact correlation but if average prices go up by eight percent on the sales the rents are probably going to go up at least that much if not more and so now your new rent is 2 355. you were renting it for 2181 so that means that your cash flow is now 525.99 so instead of 351 you're at 520 you gained almost 200 in just one year just one year later you've gained almost 200 a month in cash flow you do that year over year over year over the course of seven or eight or ten years it really compounds but don't forget the value of your property also went up forty thousand dollars so when you combine the value of your equity being up forty thousand dollars and your new cash flow at 525.99 your new return on cash is 47 just a year later okay so if you are beating 47 in the stock market or in your other investments then by all means please continue to do those but uh if you're a weekly uh you know 10 to 20 percent like i think most investors are then then or less then you might want to look at real estate we have helped a number of people who have maybe pulled cash out of their house you know with interest rates depending on where they got their original mortgage they were able to pull some cash out keep their payment very the same very close to similar and now they're buying other assets that are producing a huge returns on their investment and of course owning investment properties also comes with the great convenience of being able to do 1031 exchanges and this is just one year i kind of want the part of me wanted to go on and start showing you what it would look like in two years if the market goes up another eight percent the next year or even six percent or five percent you you'll have a more than 100 return on your investment in literally in just three or four years once you factor in the cash flow on the rental and the increases in value and now i get it there's no guarantee that the market is going to keep going up forever but keep in mind with even in down market your rents will at least hold stable or likely rise and you have locked in a home at a three point five three point seven five percent maybe even a four percent interest rate for the next 30 years uh honestly i mean no one's got a crystal ball but in my personal opinion unless there's some sort of incredible catastrophe that ruins us all okay you will always have positive cash flow on that property.
So if there's anything more I can do to convince you that you ought to be investing in real estate please let me know and again I will come out with a new episode next week starting with these exact same numbers but look at some different cities to give you an idea of what those breakdowns are if you want me to share this spreadsheet with you I'd be happy to do that as well uh stop my share here because that gets weird-looking anyway I hope you found this helpful or informative I'm sorry if I'm a little geeky I love looking at these numbers it's really amazing and I'm really passionate about helping people invest in real estate and so if you're thinking about doing that please reach out to me we can see if it makes sense for you and I hope you all have a great week. Thanks!