net worth vs income/cash-flow thoughts

Investor · Charleston, SC · Member since 2011 · 606 posts · 413 votes

3y

First congratulations on steps you took over the years to build your portfolio. I think many people see the rental process is a way to make a high return but most rentals make between 3% and 8% when everything is accounted for (but most people don't account for everything). You can make more than 2.5% and selling some properties and investing in syndications is not a bad idea but you have less control (so get a good operator). I am a LP in many syndications as well. I think you should also look at investing in mortgage notes and/or doing some private lending which is pretty passive and can get double digit returns if done right.

1 Reply

Bob Willis

Investor · Curtis, NE · Member since 2019 · 231 posts · 140 votes

3y

I think you have made a great and relevant observation. You have built substantial wealth with real estate (on paper) but there are limited ways to really get to it and enjoy it on a day to day basis. You want cash flow. The best way to enjoy and get to my equity has been a question I have been asking myself for about of a year now. I remember someone once posting, "You can't eat equity." I've pivoted some of my investing from real estate to, what I hope, are higher returning investments. These investments have better cash-flow, but less appreciation. But that's what I want at this point. I don't think it's a coincidence that some of the individuals with big "brands" here on BP have published books and built out their wealth in other, ancillary ways. What @Randy Rodenhouse says above is a more passive strategy to get better returns. It is something I've considered, but losing control is a limiter for me. Good luck and let us know if you pivot.

2 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Net worth isn't money...it's just an expensive trophy. Money, to be usable, must be liquid...and replaceable as it's being used. You can't use net worth, so for me, it's nothing more than a trophy. It doesn't work for you just because the number is high...as you can see.

However, cash flow is usable, and by its description and source, it is replaceable. I bet you have a lot of equity just wasting away in these properties...also useless.

Here's what I read from your post above. You have two priorities:

1 - Net Worth: A useless number that is nothing more than a trophy.

2 - Number of properties you own: Another useless number that is a series of smaller trophies.

3 - Building up equity (assumed): A wasteful number, costing your money that its face value. The larger the percentage of equity you have on a property, the less value it has, and the more money you are wasting away.

3 Reply

Alan AsriantsBusiness Member

Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes

3y

What kind of cashflow are you getting on $5.5M of equity? I try to average 10%+ on cash invested. If so 550k a year is some serious cash flow. Maybe I'm not calculating ROI well. Would like to understand that figure as well.

[email protected]267-767-0111

Alan Asriants - New Century Real Estate 590 Reviews

View Page

1 Reply

Erich Henson

OP

Rental Property Investor · Viera, FL · Member since 2019 · 33 posts · 22 votes

3y

Quote from @Alan Asriants:

What kind of cashflow are you getting on $5.5M of equity? I try to average 10%+ on cash invested. If so 550k a year is some serious cash flow. Maybe I'm not calculating ROI well. Would like to understand that figure as well.

I'm making around $150k a year in cashflow. I'm itching to turn this "dead" equity into more cashflow. I know it can be done but it will take some maneuvering. Nothing happens too quickly with real estate, it would seem. I would LOVE to make 10% return on my equity... I'm sure I'll get there as I move things around over time.

2 Reply

Jason Merchey

Investor · Hendersonville, NC · Member since 2013 · 754 posts · 281 votes

3y

I personally am aiming for 7.5% ROI and consider diversification to be key. I will say that I'm interested in "hitting singles and doubles" and I think your active approach to investing is more like swinging for the fences. That is, with the kind of equity you have, I would say you could continue to increase and diversify your passive investments, and aim for a "barbell strategy" that combines the double-digit returns commonly earned in the MF/commercial value-add and stabilized sphere with the single digit gains you can get from anything from CDs (paying 5% per year now) to debt funds which pay 6-10% per year to stocks with dividends (2%-X% per year overall, over time).

In short, there is a huge potential to gain some major windfalls in active investing, but there is SO much work involved, and a fair amount of risk. I would say it only beats passive investing if a) you're loving the hell out of it and b) making 15%+ per year more years than not.

Otherwise, I would advise taking the easier path and letting GPs in numerous MF and commercial/industrial funds do the heavy lifting for you. You're a millionaire, that's what a millionaire can do. It's true capitalism. When that works, it's called "mailbox money," and it's absolutely feasible if you have $5m to put at risk. Using $5m in equity, an LP using a diversified barbell strategy will probably see $350k+ per year in cash flow and equity gains on average..... I left "toilets, tenants and trash", lenders, real estate agents, handymen, property managers, etc. behind a few years ago, and it's one of the best decisions my wife and I ever made. No doubt about it.

Obviously you can IM me, but I would also refer you to Brian Burke's great book The Hands-Off Investor, published by BP. It's a roadmap to making solid investments as an LP, and Praxis is a pretty good model for how a value-add MF sponsor makes money for it's investors.

1 Reply

Jon Puente

Lender · Charlotte, NC · Member since 2020 · 224 posts · 221 votes

3y

Hey Erich,

You have done amazing, so dont discount your accomplishments! The truth is that return on equity and Cash on Cash return are all based on leverage. The more leverage you have, the higher the ROE and CoC are. Leverage also means risk and can be a double edge sword.

If you really want to pull some equity, then just do a portfolio DSCR Cash-out and put the equity to use and your ROE and CoC will go up, but then you also have more debt.

1 Reply

Dolly Caswell

Investor · Eagle River, AK · Member since 2015 · 121 posts · 45 votes

3y

I completely agree with the financial analysis of your equity vs cash flow. Although I don't have quite as much equity as you do, nor the number of properties, I am in a similar situation with LOTS of equity, and very little debt. I've begun wondering just WHY am I doing this?? I've put a ton of money into the properties fixing them up. One is relaively stabilized with decents rents and tenants, but another is partially vacant and about to be totally vacant due to flooding (and the needed repairs) before I can get another tenant in there. Each month I watch the cash dwindle down in my bank account due to paying contractors (for the above flooding repairs) and the vacancies. To make matters worse, one of my contractors, a plumber, is failing to do the job he bid on and was paid to do. He continues to put other jobs in front of mine which he bid last December and was paid 1/2 up front in January. He is the biggest reason I will still have a vacant property because it was supposed to be completed in March for the new tenant April 1. I am at my wit's end with the man. Each week he assures me he'll "be there tomorrow, or the weekend or etc etc." To never show. It has been a stall from the beginning. I never should have paid him 1/2 in the beginning. I've tried to have others go in and finish the job, but they aren't sure what he's done and where to go next. To make matters worse, Alaska is facing a tremendous "skilled labor" shortage right now. Electricians, plumbers, nearly everyone in the trades is high dollar and hard to find. Not sure where this rant is going, but any advice from anyone would be appreciated. I trusted and believed this man as he has worked for me faithfully for over two years and has now suddenly "fallen off the rails."

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

3y

Quote from @Erich Henson:

Quote from @Alan Asriants:

What kind of cashflow are you getting on $5.5M of equity? I try to average 10%+ on cash invested. If so 550k a year is some serious cash flow. Maybe I'm not calculating ROI well. Would like to understand that figure as well.

I'm making around $150k a year in cashflow. I'm itching to turn this "dead" equity into more cashflow. I know it can be done but it will take some maneuvering. Nothing happens too quickly with real estate, it would seem. I would LOVE to make 10% return on my equity... I'm sure I'll get there as I move things around over time.

U might look at some NNN opportunites those will give you 5 to 7% ..

Podcast Guest on Show #222

JLH Capital Partners51 Review

Website View Page

1 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

3y

Quote from @Joe Villeneuve:

Net worth isn't money...it's just an expensive trophy. Money, to be usable, must be liquid...and replaceable as it's being used. You can't use net worth, so for me, it's nothing more than a trophy. It doesn't work for you just because the number is high...as you can see.

However, cash flow is usable, and by its description and source, it is replaceable. I bet you have a lot of equity just wasting away in these properties...also useless.

Here's what I read from your post above. You have two priorities:

1 - Net Worth: A useless number that is nothing more than a trophy.

2 - Number of properties you own: Another useless number that is a series of smaller trophies.

3 - Building up equity (assumed): A wasteful number, costing your money that its face value. The larger the percentage of equity you have on a property, the less value it has, and the more money you are wasting away.

sometimes this depends on what you do in the RE space and where you want to go.. Net worth has a big impact with community banks for those that need other types of loans other than for rental property..

Podcast Guest on Show #222

JLH Capital Partners51 Review

Website View Page

2 Reply

Corby GoadeBusiness Member

Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes

3y

Congrats, sounds like you've done really well!

I'd be thinking about two things if I were you:

-How is your quality of life? This is #1. If you are living the life you want to live, then don't worry about the ROE so much. You only stated that you THINK your numbers should be higher, but are you living the life you want? Is it an ego thing or do you truly need better ROE? No judgement either way, just something to consider.

-I see you are in KC- is that where you are investing? Generally, you'd get much better returns over time in a market with better equity growth. Sure, they're a slow burn at first, but if you are looking for higher returns and more passive experiences in the long run, you'd be better off finding properties in markets with more aggresive equity growth and landlord friendly laws. That comes hand in hand with aggresive rent growth which creates better ROE.

Good problem to have, best of luck!

2 Reply

Neil Cronkrite

Investor · Wheat Ridge, CO · Member since 2013 · 75 posts · 41 votes

3y

Congrats on growing the portfolio. Very motivating! As others point out, exploring triple net lease properties, syndications, and selling on an owner carry can help reduce the asset management burden. We syndicate medical office buildings and work with investors who really desire to be hands off and trust the group. Congrats again on the portfolio.

1 Reply

Dylan Speer

Investor · Denver, CO · Member since 2023 · 161 posts · 52 votes

3y

Hey Rich,

Have you considered selling a rental or two and exchanging into a DST? Or even selling one or two, paying the taxes, and investing in some alternative investments? I'm an analyst at a real estate investment advisory firm that specializes in helping clients either exchange into DSTs or invest with cash into alts.

Most of the alts on our platform (self storage, MF, student housing, oil & gas mineral rights), pay about 10-15% cash flow annualized, paid monthly, with about 10-19% IRRs at the end of the 2-6 year hold periods.

Curious what your thoughts are on these. Most of our clients have almost identical situations as you.

1 Reply

Joe VilleneuvePro Member

Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes

3y

Quote from @Jay Hinrichs:

Quote from @Joe Villeneuve:

Net worth isn't money...it's just an expensive trophy. Money, to be usable, must be liquid...and replaceable as it's being used. You can't use net worth, so for me, it's nothing more than a trophy. It doesn't work for you just because the number is high...as you can see.

However, cash flow is usable, and by its description and source, it is replaceable. I bet you have a lot of equity just wasting away in these properties...also useless.

Here's what I read from your post above. You have two priorities:

1 - Net Worth: A useless number that is nothing more than a trophy.

2 - Number of properties you own: Another useless number that is a series of smaller trophies.

3 - Building up equity (assumed): A wasteful number, costing your money that its face value. The larger the percentage of equity you have on a property, the less value it has, and the more money you are wasting away.

sometimes this depends on what you do in the RE space and where you want to go.. Net worth has a big impact with community banks for those that need other types of loans other than for rental property..

True, but unless you have that as part of your plan, you're wasting potential returns.

0 Reply

Alan AsriantsBusiness Member

Real Estate Agent · Philadelphia, PA · Member since 2019 · 1k+ posts · 1k+ votes

3y

@Erich Henson

It’s awesome you have that much equity because you can definitely use it to move it around and get some more serious cash flow, even at todays rates. Best of luck !

[email protected]267-767-0111

Alan Asriants - New Century Real Estate 590 Reviews

View Page

1 Reply

Harvey LevinPro Member

Property Manager · Indianapolis, IN · Member since 2012 · 205 posts · 157 votes

3y

@Erich Henson

You might want to consider selling on contract. If you get a decent downpayment and charge 10-12% interest you will do very well. Also, contact sales are usually at a premium sale price due to inherent risk Be careful with rent to buy. In Indiana, for instance, the "seller" is still considered a landlord and responsible for all repairs regardless of what the contract states. Several large rent-to-buy companies have recently found this out. A contract sale is different. Also, check with your attorney and CPA . My understanding is that in a contract sale all profits are paid as they come in at the cap gains rate but I may be wrong .

1 Reply

John M.

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

3y

Ive been in your shoes and the only reason i got into commercial real estate is that i was able to trade up my equity via a 1031 and triple my ROEfrom 2-6%. i would sell your losers and keep your winners

2 Reply

Jeff S.

Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes

3y

@Erich Henson chances are your return is low because your properties have increased in value so much and that is a good thing. Your rents will catch up and that is appreciation too.

If you sold everything your return would be outstanding. That is how syndications give better returns.

1 Reply

Carlos Ptriawan

Member since 2019 · 7k+ posts · 4k+ votes

3y

Quote from @Erich Henson:

I've been investing in real estate for 15-20 years. I used the infamous BRRRR method to purchase beat-up single-family homes and turn them into rental properties. With my background as a mortgage broker, I was able to obtain decent financing to accumulate about 57 rental properties (mostly houses, but some 2-4 unit properties). I also have a 10-plex and some office space. I own approximately $12 million in real estate with about $5.5 million in equity.

I feel like I've done a decent job of creating value because I started with basically nothing and now have several million in equity but the problem as I see it is that my cash-flow is not very good at all. For example, my Return on Equity is only about 2.5%. I just feel like someone with $5 million in net worth should be making more than me.

I've made some changes with my property management, which has greatly improved the quality of my incoming tenants so I think that will help. I also joined a real estate group that allows me to invest in syndications that seem to have pretty high returns on investment. I recently invested $175k into three syndications so I will see how those go and if they are as good as they claim to be, I'll probably sell off some of my rentals and invest more in those.

I'm curious if anyone out there can relate to this my situation and I'm curious to know what you did or are doing about it. I'm not complaining; I think it's a good problem to have, but I just feel like I am doing something wrong or missing something important. Thank you for your interest.

Erich

Something doesn't really match up, if your average LTV is 45%; and your start is 80% LTV, you've been investing for 15-20 years it means the appreciation is too slow. I know the KC market only goes up in value pretty recently.

You may want to follow how the GP in syndication works, that they try to sell property in the 3rd or 5th year after purchase.

I have another question, is your position as a mortgage broker giving you a special advantage in RE investing (cheaper rate,etc,etc) or no ?

0 Reply

Brock Mogensen

Real Estate Syndicator · Milwaukee, WI · Member since 2018 · 1k+ posts · 907 votes

3y

Net worth vs cashflow is a tough comparison. Personally, I'd rather have the higher net worth. A good target to aim for is 8-10% return on your equity. 2.5% seems pretty low. Unless you see that increasing over time, could make sense to strategically exit your assets and put it into something with higher yield.

1 Reply

Jason Nguyen

Real Estate Agent · Fairfax, VA · Member since 2019 · 79 posts · 68 votes

3y

If you want more cash flow, trim down the number of units and stay afloat with 100% equity on all the properties with highest appreciation rate. No mortgage means more cash flow, less units mean less expenses and less management. Let the appreciation ride up your portfolio while enjoying all the cash flow that you got.

2 Reply

Erich Henson

OP

Rental Property Investor · Viera, FL · Member since 2019 · 33 posts · 22 votes

3y

I want to thank you all for your great advice. I really enjoyed reading everyone's take on the situation and I will definitely use some of your ideas. Thank you again.

0 Reply

John M.

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

3y

The other thing to consider is can you use one of those lower performing properties as leverage. If you have a property that is 100% paid for and has a low ROE, maybe you can use the equity to apply against your next property in the form of a lien without pulling the cash out. I know you can do this in commercial. For example instead of putting 30% down on a new deal as required by the bank these days, the bank may allow 20% down and have a lien for the other 10% on your paid off property. Thus your new investment will have a better cash on cash return. As the new tenant pays down the mortgage and creates forced equity then the lean on the leveraged property can be removed. This would be a good move if you have a property in your portfolio with a low ROE, but has a higher appreciation potential. I would sell off those low ROE properties that don't have a great history of appreciation or appear to be stagnate for future growth.

0 Reply

Tanh Truong

Investor · Cincinnati, OH · Member since 2018 · 136 posts · 87 votes

3y

There are hundreds of ways of looking at an investment and grading it. I think it really depends on your goals, if you're content with where you are and what the cashflows are doing, then keep on trucking along. If you're looking to grow, imho I think the ROE is on the lower end and you can utilize that equity in a better manner (i.e. selling and putting the capital elsewhere for higher returns or LOC).

0 Reply

net worth vs income/cash-flow thoughts

net worth vs income/cash-flow thoughts

Most Popular Reply

24 Replies