Am I on the right track??

Question

Hi all. I would love some input from you seasoned RE investors. Part of my character is to question what I'm doing as much as possible.

On many articles, YouTube videos, podcasts, forums,... I see investors talking about their numbers, and it seems to me that I'm not doing well enough. Returns of more than 10% net per year, complete cash out refinancing, and so on,... seem to happen quite often in the US, and it makes me wonder if I should continue with my "not as terrific" investment or if I should search for better numbers.

This is what I currently invest in, and until not so long ago, thought it was pretty good: 1 bedroom apartments in a big city, about 8 miles from the city centre, where everything happens and everyone wants to be. (the area/city seems to have more tenants than apartments...)

-Purchase plus costs/Commissions etc... : 175 000 USD

Monthly nrs:

-Rental income : 1750

-Condo costs : 700

-total tax plus CPA costs: 100

-unforeseen: 50

Net return per month = 900 USD for a 6,17% return per year. Let's call it 6.

Couple of positives about the property (there are 100 000 plus units with pretty much the same nrs):

- rent to section 8 tenants only, screened by us, so backed by the government.

- inflation adjusted rent (might be a pretty good plus in the years to come). So net return py will only increase with time.

- safe to say we purchase the apartments about 10% below market value (after our refurbishment). They typically get valued at about 195 K.

- big catalyst for capital gains due to construction of a high speed train to the centre very close by (changes the commute to the centre from 1hr15 min to 15 min in a few years, when train station is completed).

- the whole team (lawyer, broker, builders, ...) are great, transparent, very reactive and sharp.

My question: I own 2 without mortgage, they work, they're safe, backed by the government, reliable, etc... The plan was to refinance both somewhere this winter, or beginning of 2021, and with the amount, buy 4 to 5 more of exactly the same.

Is this a good idea, or should I try to find better returns? It seems like better returns are often in riskier (and maybe less recession-proof) areas, I could be wrong. I feel like I can scale well in this one (I have even partnered up with my broker to bring those to my colleagues/friends), but I also am not making the monster returns I'm seeing on the forums...?

I ultimately want to live off my real estate, and quit being an (although well paid) employee... The sooner the better.

One detail: I am not a resident/citizen of the US, I work and live about 10 000 miles away, so being heavily involved in a BRRR strategy might be a potential challenge, I wouldn't be able to follow up locally.

All your honest analyses and opinions are greatly appreciated!

Mathieu Roegiers · Answer

Randy, many thanks. Love the feedback! (Zero offense taken btw, I want to learn).

1. Indeed, I always felt I put way too much cash in downpayments in general. Great as I'm not overleveraged at all, but I consume a lot of capital. For this particular one though, it was never the intent to buy all cash, it just had to happen like that as I am not a citizen/resident and we needed to move fast. It is still the plan to refinance in 6 months to a year (whenever we can lock in a great rate)  and get capital out, to redeploy.

2. A 20% net cash on cash return : very impressive! I am a bit wary of giant returns as, from what I've seen, they tend to be in areas that do not hold very well during recessions, but I'd love to be proven wrong. (I don't want to end up with Clayton Morris style dramas...).

3. Expenses are kept at minimum. Indeed the 700 usd is a fixed condo cost, property management is free and part of the package when purchasing. The properties run themselves once our tenants are in, and we're keeping a tight control on unnecessary expenses, trying to maximise net returns wherever we can.

(4. The net return of 6 is a starting point, rents are inflation adjusted. I own 2, was planning to refinance to 7 units total, which means just by scaling, the net return would increase considerably (1 CPA for 7 properties iso 1 CPA for 1 property, 1 bank account for 7 iso 1 for 1, ... etc). I'd expect this to become 7 to 9% in the years to come just by scale and inflation adjusted rent).

(5. The area has a lot of potential. I never plan on capital gains, but the location is great. (6,5 miles from Central Park in NY..). The high speed train station should be built in about 3 to 5 years, and it has been a big catalyst since the announcement.)

I do love your cash flow performance though. Seems like with a relatively low investment, you are able to pay yourself a solid monthly salary! Enough to quit my job! Feel free to connect if you wanna discuss more.

Randall Alan · Answer

How to do better:

I have 40 units... average over $500 per month per door after Principal, interest, taxes, insurance, and a minor reserve that typically covers most monthly repairs.  Here's my thoughts how I out perform you (no offense intended whatsoever)... just the crux of your question as I perceive it:

1.  To maximize profits you need to extract maximum rent for the least input of capital.  I generate my $500 per door income off a $30,000 cash outlay... financing the property at usually 75%.  For the $175,000 you spend to buy one door, I can buy just under 6 doors.   Simple math says I will generate $3,000 on my investment versus your 900.

If you want to know what my properties look like, I aim for an average of a $75,000/door purchase price that can rent for $1,000 a month... so if it's a duplex, it would be $150,000 and generate $2,000 and net at least $1,000.  And we frequently get better deals... we're buying an 1100sf single family house this week for $45k.  It will need $5-10k worth of work, but at $55k all in it will perform even better and we already have a renter lined up at $1000/ month! Point being, there is an optimal property for every area that will minimize expense and maximize rent.  I think this is a big part of what you are missing.  We have also bought properties that cost more, but they have to rent for more to offset the extra cost.  In our area $75k seems to be the sweet spot.. Yes, I'm sure our tenants are more blue collar than a $175,000 big city renter, but they are all pretty descent people... we require 3x the income to rent as a bare minimum... so we aren't doing D class rentals.  We also personally meet the tenants when we show the units , so we can get a good feel for their nature.

2.  You need to avoid as many unnecessary expenses as possible.  In your case, condo expense I presume is an hoa  fee plus possibly management fee, perhaps?  Not quite sure, but regardless.... any money you are paying that you don't have too is lost income.  I get in your situation you have to pay it, but the point being that if you select a property that doesn't have those things, all that extra money goes to you.  We don't like HOAs or condos because we lose control, and they cost us money we don't want to spend.  At $700, that is nearly half of your profit going out the door.

3.  We self manage.  I get you are 10,000 miles away... but you are giving up a large chunk of income every month for the freedom you gain by having property management .  On our leveraged properties that is like 20% of our gross profit after PITA!    My suggestion if you have the time is to look into local deals and self manage if you want to maximize your profits.   It's really pretty easily.  We were self managing 20 units while still working full time jobs.  Did most of it by text from our cell phones.

4. By leveraging our properties, we are building appreciation on $450,000 worth of real estate (6 at $75k) outpacing you by 2-3 times just by virtue of the dollar amounts involved (all other things being equal).  Leveraging means more to manage (people and problems), but the return is worth it to us.  Financing your properties - presuming you can do so and get a good rate will always give you a better return than a cash purchase.

A lot of the ideas above will depend on how you want to run your business.  6% cash on cash isn't horrible compared to the stock market, and probably helps you diversify...but maybe I've shown there is a path to doing much better in real estate.

Hope you find a few nuggets!

All the best!

Randy

Mathieu Roegiers · Answer

Thanks for your input, appreciate it, although not very relevant to my own situation I believe.

On your first point: I included that in my comparison and discount what I see written down. But the gap between a 6% return and an 11% return is quite big... People don't just embellish their numbers by 5 %

Second point: that's one of my remarks/questions... Is the chase for better returns worth the hassle, or risk? Or can super returns be achieved with just as little head ache in great areas... ?

Third: I clearly do not have any problem with Analysis Paralysis, I'm still a very little fish, but with 6 properties on 3 continents at age 38, I don't think I'm a hesitater.. Nor do I want to or care one single bit about bragging "down at the club".

This has nothing to do with anxiety, but yes, I think every one should rethink and question him or herself, in general. It's a natural behaviour if you want to win, to achieve. That does not mean AT ALL that I'm lying awake at night because I absolutely want to match the bragger.

But if there's that much better to be achieved, it would only bring me closer to my goal of financial independence quicker..

In general, what interests me more, is the nrs I achieved... Are those low, medium or good returns, how do other people see this deal, will it allow me to achieve what I want quite well or should I try to get better deals....?

Linda Weygant · Answer

I actually talk about this exact mindset in my podcast (#244).  People tend to compare themselves to the stuff they read elsewhere and then doubt their own investments.

First of all, people brag.  Numbers get rounded up.  The bad crap that happens in this business to lower those figures is either glossed over or hasn't happened yet.

Second, when people talk, you have zero idea about the details of their deals.  A+ class vs D- class, location, condition of the property at purchase and all the other dozens (hundreds?) of issues that affect the investment.

Analysis paralysis keeps more people up at night than anything else, in my opinion.  Trying to make your deal match the guy in your club or that woman online is just headache inducing.

If your property is truly dragging you down and putting you behind in your goals, by all means take a second look at it and reevaluate it.  But if you're just anxious because somebody else has a better deal, then stop.  Put the spreadsheets away and go take a walk in the park.  You're fine.