Case Study: Investment Performance of The Lierly

Feb 24, 2021

Case Study: Investment Performance of The Lierly

This case study takes a look at historical financial performance for the lierly rental property in Fayetteville Arkansas.

“How have Arrived properties financially performed in the past?”

This is one of the more common questions we get. In this article, we’ll review the financial performance of The Lierly, one of our properties.

The biggest levers of rental property performance are the property income (rent), operational property expenses, and property value changes over time. A well-run rental property will command strong rents, have reasonable expenses, and appreciate over time with the local market.

The Lierly

Last Updated: Feb 23, 2021. Data is Based on Operating Performance for Q3 & Q4 2020.

Property Income

The Lierly is currently rented for $1,475 per month, collecting $8,850 in total rent for the last 6 months of 2020.  On an annualized basis this represents an 8.2% gross yield based on the $215,000 purchase price for The Lierly.

Property Expenses

In real estate, it’s typically better to look at the ratios of expenses to income than just the dollar value. The Lierly had an operating expense of $3,003, a ratio of 33.9% during this period. These expenses were things like homeowners insurance, property taxes, property management fees, and repairs & maintenance. This is calculated by taking the $3,003 in expenses divided by the $8,850 of rent. This means that for every dollar of rent, The Lierly paid 33.9 cents to maintain the operations of the property. 

Subtracting the expenses from the income means that The Lierly generated a net operating income of $5,847 during the second half of 2020. With no loan on the property, this $5,847 of cash flow represents a 5.4% annualized cash return.

The 33.9% expense ratio for The Lierly over the 2nd half of 2020 is excellent. However, it’s important to keep in mind that 6 months is a relatively small sample size. A large unexpected repair can drastically change the expense ratio for a property. 

Typical expense ratios for single-family homes are somewhere in the range of 30-50%. Where a particular property falls on this spectrum depends on several factors. These can include the location, year the home was built, and the price and quality of the home. 

Operating Expense Ratio: 33.9% for Last 6 Months of 2020 for The Lierly

Property Value Changes

In addition to the cash flow from the property, real estate investors also receive any increases (or decreases) in the property value when the property is sold.

Judging real estate values can be difficult since every property is unique. Sales of comparable properties is a good way to estimate the appreciation of a property. However, the actual appreciation of a property won’t be determined until the home is eventually sold.

Homes in Fayetteville have consistently appreciated around 3% per year. Using data from the Federal Reserve, Fayetteville home prices appreciated at a compounded 3.21%1 per year from 2000 to 2020.

Property Value Appreciation For The Fayetteville Housing Market:
3.21% Per Year for the Last 20 Years

Additionally, the value of any investment in The Lierly would be magnified due to the newly added mortgage financing (61% of the purchase price). This mortgage was added in Q1 2021. This added leverage will magnify any increase or decrease in property value to equity investors. 

Using debt in real estate is very common and is a great way to increase the returns of a property. However, debt amplifies the returns whether positive or negative. Debt will make a good investment even better, but it can make a bad investment even worse. 

Current property value changes are difficult to measure given they are not realized until the property is sold. However you can track directional trends for various markets using tools like Zillow’s home values tool

This historical performance is not a guarantee of future results. Many factors can cause these results to vary, and for a more detailed list we’d ask you to reference the Risk Factors contained in our Offering Circular

Other Resources

In addition to the above historical rental property industry data, we have several other resources that can be helpful as you navigate through projecting returns for your investment. 

  1. Property Investment Calculator – We created an investment calculator so that users can play with key assumptions and see the projected investment outcomes. 
  2. Historic Returns From Investing In Rental Homes – This article consolidates relevant historical data about the housing market and single-family home investing. 
  3. Understanding A Real Estate Pro Forma – This article from our Arrived Learning Section goes through a single-family property Pro Forma statement and defines each item. 

Footnote 1)

Calculated using the House Price Index for Fayetteville-Springdale-Rogers MSA from the Federal Reserve. Calculation dates were from Q3 2000 to Q3 2020.

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Webinar: Investing In Arrived

Ryan Frazier, Arrived CEO, and Cameron Wu, VP of Investments, will be hosting webinars to talk about how to get started with rental property investing. Sessions are held on Tuesdays at 9am PST and Fridays at 1pm PST each week (unless otherwise posted).