Finding confidence to go from 1 low-ROI rental property to the next step in REI

[Ruika Lin]

New member here and in the FI community in general. Would love to hear some advice from fellow investors in the community to take REI to the next steps.

Currently, I've been holding a rental property (2b1b tiny garden style condo unit) for 10 years in Northern Virginia (NoVa) with no particular goal in mind, as I've had a comfortable W2 income during this time. Due to some changes in my life & family situations, I'd like to gradually move towards more passive income & optimizing for time with family.

After looking at the numbers of the NoVa unit, I've come to realize just how poor of a ROI it's been. I bought the property all cash in 2014 and have been managing it remotely through a property mgmt company. Despite it being a great location (super close to DC & metro), it's also transient enough that renters come in and out every 2 years on average. Between HOA, 9% property mgmt fee, taxes, insurance, maintenance/repair, advertising fee, etc., the CoC ROI is super low (again because I bought it all cash). It certainly does not meet the 1% rule either.

And according to Redfin/Zillow estimates, appreciation after 10 years has been small as well, since it's a garden style condo. (I heard from a local realtor that town homes & SFH appreciate much better than condo units.)

It's curious to think that it's such a nice location being close to everything (and I used to live in that area myself as a young professional & loved it), but from a REI standpoint, it's not as great.

In 2024, I'd like to re-evaluate this rental and potentially do a 1031X to aim for a higher ROI property, optimizing for higher cash flow and potentially even expanding to more units, if doing financing. Facing this possibility, I'm however stumped with low confidence thanks to ALL the knowledge learned about REI now (but not systematically) & struggling with where to start. For example,

* I'm now even wondering if coastal cities are ever good places for REI, and wondering how to even get started in highly-recommended states like Ohio & Illinois (I have no friends or family in either states).

* Financing is something I've never done before, but would love to start trying. But of course it's a beast on its own given the state of things right now.

* Finding a good deal & managing a rental remotely can be a lot of work. I also was researching a little bit of real estate syndications and heard about a few networks out there for accredited investors. With optimizing cash flow as a goal in mind, I now also wonder if syndications should be my route to take, effectively outsourcing the field work to someone clearly more experienced than me, and I just supply capital. This sounds pretty good to me, except for course it's a whole topic on its own.

I'd love to hear the community's thought on this crossroad and any guidance you could kindly offer. I'd love to gain confidence & take actions to move in a better direction REI-wise next year.

 Thanks for reading my post!

[David L.]

The first investment property is the hardest one to get, so congrats!

I don't claim to be an expert, and haven't retired off of REI returns yet either. I have a small portfolio of rentals (5) and a non-trivial but not huge amount invested in a fund and a couple of notes, for passive income.

First thought I had in reading your post was: would you be able to substantially improve your returns from your current garden apartment by switching to a Mid Term Rental strategy?

Meaning, do your condo docs allow you to rent on 3 month leases? And if so, is the market rent for 3-month furnished units at that location worth the additional expenses of:

1. Furnishing the unit -- mostly a one-time or at least long-lasting investment

2. Higher property management fee -- you'd have to check, but possibly as high as 15%, rather than the 9% you're paying now

3. Paying all utilities yourself, including internet -- possibly mitigated if any portion of the utilities (such as water/sewer or gas) are already covered in your condo fees

It doesn't make sense for every property, but a garden style apt in a convenient location might pencil out nicely for mid-term, so it's at least worth checking.

Putting that aside, my concern with syndications right now, more than ever, would be in finding one that's exceptionally well run, with a stable pool of assets. A lot of people overpaid for large multifamily over the past 3 years or so, banking on the following, in perpetuity: fast rent growth, historically low interest rates on capital, and historically low cap rates (property values, if and when they resell).

Any of them that are holding assets that are cashflow negative right now must be sweating, and even if they're at least marginally cashflow positive, if they only locked in their institutional financing on their properties on 5 year terms, they're likely about to enter a world of pain when they try to refinance over the next 2 to 3 years. 

I'm not saying there are literally no syndicators worth investing with right now. I'm just thinking I would be extremely cautious and exercise extreme due diligence if I personally went that route right now.

If you acquired more properties yourself, directly, are you comfortable with renovations? For instance, if you stayed in the NoVA area, does your property manager have access to reliable contractors who charge reasonable prices?

If so, I don't know the NoVA market conditions very well, but in many areas this is a great moment to pick up a property that needs substantial renovations, whether on MLS or by connecting with wholesalers.

Hopefully others will have more specific advice in response to your questions.