Q3 2021 financial review of dividends & property values for 28 arrived rental properties
Welcome to the Arrived Q3 Property Performance Review! In this post, we’ll dive deep into the operating and financial performance of 28 Arrived properties during Q3 2021. This is our second property performance review. View our Q2 2021 performance review article here.
Real estate investors primarily earn returns in 2 ways: cash flow from rental operations and appreciation as the property becomes more valuable over time.
The cash flow from rental operations is easy to measure since Arrived distributes a quarterly dividend. In Q3 investors received dividend payments that corresponded to an annualized cash return on investment of between 5.95% and 7.54%.
The property value appreciation is harder to quantify in the interim because we don’t know the final sales price yet! Until the property is sold, we’ll use the Zillow Zestimate to gauge the potential changes in property values.
In Q3, 6 properties had a full 3-month quarter of investor ownership. The other 22 were purchased by investors mostly in October, but as a special thank you to our investors, we distributed the income generated by those properties since September 1st. For simplicity, we’ll split out the performance of each group.
Cash Dividends From Rental Income
Based on our Q3 dividend paid in October, investors are on track to earn an annualized cash return on investment of between 5.95% and 7.54%. The Q3 dividends were slightly higher than our Q2 dividends, which ranged from 5.21% to 6.42% annualized.
6 of our properties just paid out their second set of dividends. Combining the Q2 and Q3 dividends for those properties gives an annualized range of 5.41% to 7.02%.
Not bad! The two largest single-family home public REITs, American Homes 4 Rent and Invitation Homes, currently have an annualized dividend between 1-2%. Most high yield savings accounts are currently paying 0.5% annualized. With our Q3 dividends ranging from 5.95% to 7.54% annualized, this means Arrived properties paid out at least 10 times the income of a high-yield savings account.
Below we can see the breakdown of the dividends for each of the 28 properties. The dividend period is the number of months the property was active in Q3. For example, The Kingsley paid out a $0.15 per share dividend for a 3-month quarter, whereas The Holloway paid out $0.10 per dividend over a 2-month quarter. The annualized dividend is included to better compare different time periods.
We’ll continue to do these financial review articles updating our numbers, but so far our new properties are performing similar to our first batch of properties.
Estimated Property Value Changes
Like we mentioned earlier, appreciation is harder to measure since we haven’t sold the property. We can use the Zillow Zestimate to estimate the appreciation, but of course there are potential errors and pitfalls.
For one thing, the Zestimate is an estimate, and not a firm offer to buy the property. This means that the actual property value could be higher or lower than the Zestimate.
Properties may have special features or improvements that Zillow’s algorithm doesn ’t know about. While we wouldn’t put significant stock in any one property’s Zestimate, seeing the entire Arrived portfolio’s change in property values gives a decent gauge as to how properties are doing.
Keep in mind that the change in purchase price is different from the change in equity value. Because the properties are leveraged, the effects of appreciation are magnified.
Here’s the Zillow Zestimate compared to the purchase for the 6 properties that investors purchased in April 2021. Though it isn’t final, they appear to be appreciating along with the rest of the US housing market.
Below is the same information for the newest batch of properties. Despite the properties being purchased very recently, the vast majority of properties already show a Zestimate that is higher than the purchase price paid by investors.
While property values have historically increased over time, investors should expect that changes to property values will be gradual and could include some short term volatility. This is why Arrived rental investments are structured to each have a hold period of 5-7 years.
You’ll also notice that some properties don’t have a Zestimate. Usually this is because Zillow doesn’t have enough data to accurately value these properties. For example, The Wentworth, The Mojave, and The Cupcake were all newly built homes, and Zillow doesn’t have enough data to estimate what the new homes are currently worth.
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.
Now let’s dive into the financials!
Here we’ll review the average and summary financial performance for Q3 2021. To see each property’s individual performance, go to the property page and scroll down to the Property Financial Breakdown section.
In September, 25 of the 28 properties were rented. The average rent collected was $1,930, and the overall rent average was $1,723 after factoring in the 3 vacant properties. The 3 properties that weren’t rented (Cupcake, Wentworth, and Mojave) were actually purchased at the very end of September and have since been leased.
Our leasing team has done an awesome job, and almost all of the properties are leased for 2 years! Having longer-term leases helps lower the vacancy and turnover costs, creating consistent dividends for investors.
Across the full quarter, we collected $66,735 in rent for the 28 properties.
These are the bulk of the costs that it takes to operate a property. It includes repairs & maintenance, property taxes, insurance, and property management.
The average monthly expense was $549 per property. This is 32% of the rent collected, which is typical in the single-family industry.
Net Operating Income
The net operating income is the income that’s left after the operating expenses. With an average rental income of $1,733 and expenses of $549, our properties generated an average net operating income of $1,174 per month.
For the full quarter, the properties generated a total net operating income of $45,086 out of the gross rents of $66,735. This strong performance is a result of getting high-rent leases and keeping operating expenses to a minimum.
Interest Expense & Loan Fees
The average interest and loan fees expense was $575 per month. The loans on Arrived property are interest-only to maximize the quarterly cash flow for investors.
Arrived AUM Fee
The assets-under-management fees for Q3 were artificially low. Although investors earned all the September income from the new 22 properties, Arrived did not start charging the AUM fee until October.
As a result, the only properties that paid any AUM fees were the 6 that have been owned by investors since April 2021. For those properties, the average monthly expense was $87.
Its great to see all the rental income that these properties produced! In October, we distributed nearly $24,000 of cash flow to investors that was generated by these properties. We also distributed $13,500 of bonus income that was tied to the property’s September performance. In total, these properties distributed total dividends of $37,500!
Annualizing the quarterly dividend results in a 5.95% to 7.54% yearly return on investment. All 28 properties are occupied, with no leases expiring over the next 3 months. We’re already looking forward to January, when we’ll pay out our Q4 dividend!