Q2 2021 FINANCIAL REVIEW OF DIVIDENDS & PROPERTY VALUES FOR 6 ARRIVED RENTAL PROPERTIES
Understanding a property’s financial performance is a key part of investing in real estate. One of our goals at Arrived is to demystify real estate investing, so we will periodically review the financial performance of our properties. Investors in single-family rentals can earn money in two ways: 1) dividends from the rental property operations and 2) equity growth from property value appreciation.
The below review will focus on the Q2 2021 performance for 6 of our properties. Dividends paid were between $1,324 and $1,743 per property this quarter which translates to annualized cash returns of 5.21% to 6.42%. Equity growth from property value changes are being illustrated using third-party estimates, but the actual returns will not be realized until either the property is sold or an investor sells their shares.
Remember that past performance is not indicative of future returns and that every property is unique and may not be representative of other properties or other markets.
Earn Money In Two Ways: Income & Appreciation
We have organized this article along those two sections. Below are the main topics we will dig into under each section.
- Dividends From Rental Property Operations
- Rental income
- Operating expenses
- Financing expenses
- Dividend paid to investors
- Cash reserves
- Equity Growth from Potential Property Appreciation
- Estimated property value changes
- Impact of financing on equity returns
Dividends From Rental Property Operations
Below are the financials for these 6 properties from April 1st to June 30th 2021. These historical property financials are posted on the individual property pages, and will be updated each quarter.
The first line item is the gross rental income generated by the property. It’s exactly what it sounds like – rent and any fees paid by the tenant. 5 of the 6 properties rented on April 1st, and The Plumtree had a lease that started on April 15th.
There are many different costs to operating a property! This line includes repairs & maintenance, property taxes, insurance, and property management. These costs are paid using the rent collected.
Single-family rentals tend to have an operating expense ratio of around 30-50%. This means 30-50% of rent collected is going towards paying operating expenses.
The operating expense ratio for our properties in Q2 was between 20% and 26%, significantly better than industry averages. However, this was for a relatively short time period and it’s likely that the expense ratio rises closer to industry standards over time.
Net Operating Income
The Net Operating Income, or NOI, measures the operating cash flow from real estate activities. how much income a property generates before factoring in financing costs and income taxes. It is a common metric used in real estate to evaluate the strength of a property’s cash flows. With almost no vacancy and low maintenance, this was a great quarter for our property owners.
Interest & Loan Expenses
Each property is financed with an interest only mortgage from a bank. This line item is the interest and fees that are due to the bank each quarter. The interest rate is fixed so this cost will be consistent each quarter.
This loan is non-recourse to investors which means that investors are not personally liable for repayment of the debt.
Arrived AUM Fee
Arrived takes a management fee of 1% of the Raise Amount per year for our continued work to operate the property. The annual amount for each property can be seen on its property page, and is always visible and disclosed before investors commit to an investment.
Allocation to Cash Reserves
Each Arrived property has a cash reserve for a rainy day. In quarters where there were few expenses, we’ll add to the cash reserves just in case they’re needed in the future. This is to make sure we have plenty of cash available for each property to pay for future planned and unplanned expenses.
We can also use the extra funds to make more property improvements to further boost rents and values. Any additional cash in reserves still belongs to the investors, and will be fully distributed when we sell the property.
Arrived will never ask investors for additional money for a finalized investment. That’s part of the reason why we allocate some money to cash reserves instead of paying it out as a dividend.
Dividend Paid to Investors
Finally, the most exciting part! After paying all the property expenses and preparing for the future, now we are left with the dividend that we pay to investors!
Each property paid out a dividend between $0.13 and $0.16 per share or $1,324 to $1,743 per property. That translates to an annualized dividend of 5.21% to 6.42%! That cash dividend gets deposited directly into our investors bank accounts. Since our investors don’t have to manage the property themselves, this is truly passive income!
Note: Annualized dividend calculation is done with this formula: Dividend / # of days in period * 365 / Raise Amount
Cash Reserve Balance
The last item in the financials is the cash reserve balance, which as we mentioned serves as an extra cushion for future expenses. This item shows the property’s cash balance at the end of the quarter. The reserves are held in a unique bank account owned by the LLC that owns the property.
Property Value Appreciation
Estimated Property Value Changes
While investors earn the dividends in cash now, they can also make money as the value of the properties increase. While property values can go up and down over the short term, historically they’ve appreciated about 4.22% per year across the country 1.
The hard part about measuring property specific appreciation is that the final sales price isn’t known until it’s actually sold. Thankfully there are 3rd party platforms (like Zillow and their Zestimate) that can help estimate the value of the property over time. It is important to note that these services usually provide a range of possible values and all have some margin of error. Below we can see 6 Arrived properties, their purchase price, and the Zillow Zestimate and Range on July 1st 2021.
The 6 properties shown here seem to be appreciating, which is a step in the right direction. The estimated ranges seem to be slightly higher than the purchase price. Of course property values will continue to change over time and it is still to be determined at what price this home will eventually sell at. Hopefully the property will continue to appreciate over the next few years, so that it’s worth significantly more than investors paid.
You’ll notice in the table above that The Soapstone and The Lierly appear to have potentially appreciated significantly more than the other 4. The reason for that is that they were our first 2 Arrived properties and they were purchased well before the other 4, so they’ve had a longer time to appreciate. Going forward our new properties will be unlikely to have a change in value this large after only 1 quarter.
Impact of Financing On Equity Returns
While it’s important to view the potential changes in the value of the property, those changes don’t necessarily reflect investment performance. Arrived properties use debt to finance part of the property, which will magnify the upside and downside of the potential investment. That means the change in property value will be different from the change in equity value.
Let’s look at two examples, one by purchasing a $1M home with no financing and one by purchasing a home with 50% financing. The below returns are entirely hypothetical and are just meant to show the impacts of using financing. Your actual personal investment results will be different depending on fees and the specifics of your investment.
- No Financing: If the property values increase 20% to $1.2M then your return on investment is equal to the property value change of 20%.
- 50% Financing: If you buy the same property with 50% financing (a $500k loan) and that property value increases the same 20% to $1.2M, then your equity in the property is going to increase from $500k to $700k. So your return on investment is actually going to be 40%.
It’s important to note that while using financing to buy investment properties can increase your returns (as seen above), it can also magnify your losses in the event that the property values decrease. That is why real estate is an investment that can be more appropriate when held for longer periods of time. Since real estate has tended to appreciate over long periods of time, if you can hold over the long term you have much higher chances of riding out the downturns and selling while the property values are higher.
To estimate the current equity value of the 6 Arrived properties, we can use the below tables. Scroll through the gallery to see data for all properties.
- First column, has a hypothetical range of property value changes that represent how the property value may differ from the original purchase price.
- Second column, shows the hypothetical property value in the different hypothetical scenarios.
- Third column, lays out what the total equity value for each property would be at the corresponding hypothetical property value. Note that this includes the cash reserves for each property, and we assume that the cash reserves are the same as the initial reserves. This calculation also does not include any selling costs.
- Fourth column, shows the percentage change in equity value from what investors put into the property to what their equity investment would be worth at the corresponding hypothetical property value.
Keep in mind that the above range of hypothetical property values and all the corresponding information are being presented before any fees associated with selling the underlying property.
Overall this was a strong quarter for our Arrived rental properties. We’re thrilled to be paying out annualized dividends in the 5.2 to 6.4% range to our investors, and property values appear to be rising. We’re looking forward to continuing to bring high quality rental properties to our investors. Sign up below to start investing!
Footnotes – https://learn.arrivedhomes.com/historical-performance-in-the-single-family-rental-industry/