Feedback / suggestions on my rental investment returns.

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Feedback / suggestions on my rental investment returns.

Joe Jackson
Arlington Heights, IL · Member since 2016 · 5 posts · 0 votes

I read through a few posts here, trying to see what returns people are shooting for.. and most don't fit my situation. 

I made my money in tech, and want to be able to not have to worry about money for the rest of my life. 

My mom's a realtor and my dad and father in law are extremely handy... which made my decision to invest in real estate easy. 

We've done a few flips and made big returns, but what I've liked more recently are picking up foreclosures for about $200k, fixing it up with about $5-10k, and renting from $2000 to $2200 a month.. I've had zero problems with our long term renters on our now, 5 units.

I'm not familiar with all the investment terms used here, but I'm making about 6-7% free and clear. (This includes  expenses like hoa's, property taxes, insurance.. and even things like income tax on profits and depreciation tax credits)

So for example,  the ~$205k condo returns $14,350 after income tax and all expenses (ie where I call it 7%)

I still have lots of cash on hand, and am curious what you guys think about these numbers and if there's anything else I should consider. 

I want to keep things very low maintenance and pretty low risk. 

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Chris T.
Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
9y

welcome @Joe Jackson

It seems like the current strategy you have works well for you - low maintenance and low risk. 

If you want a higher return on your cash, you could leverage it with mortgages.

If you want to take on a higher risk and better returns, you could look into crowd funding, big MF and other syndication. But you will have less control over those. 

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  • Chris T.
    Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
    9y

    welcome @Joe Jackson

    It seems like the current strategy you have works well for you - low maintenance and low risk. 

    If you want a higher return on your cash, you could leverage it with mortgages.

    If you want to take on a higher risk and better returns, you could look into crowd funding, big MF and other syndication. But you will have less control over those. 

    1Reply
  • Larry Fried
    Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes
    9y

    @Joe Jackson I don't know if it is something that will work for you, but I wrote about a very passive RE investment that is so far bringing me excellent low double digit returns. I wrote an article about it after my first investment (I've since made two more):

    Have I Found the Holy Grail of Passive Real Estate Investing?

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  • Joe Jackson
    OP
    Arlington Heights, IL · Member since 2016 · 5 posts · 0 votes
    9y

    @Chris T: What does big MF mean? 

    How do people protect their assets when they mortgage say, 100 units, and if things go south? I posted a separate question about protecting myself, and it's clear the way to go is with an umbrella policy. 

    I'd assume an LLC would be better for this situation, but it'd cut away my bottom line even more, bringing by risk for reward into question.

    Definitely something for me to think on. I appreciate the quick response.

    @Larry Fried: Read the article, I'm going to check out crowd funding. Haven't ever looked into it.  :) 

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  • Larry Fried
    Investor/RE Broker · Eugene, OR · Member since 2014 · 3k+ posts · 968 votes
    9y

    @Joe Jackson I see you are new.  To be able to mention someone in the thread or someone you are colleagues with, be sure to type the @ then start typing the name until it appears in a dropbox, then select.  The selection will then be highlighted and a link.

    Just so you know, the investment I wrote about it is not at all typical of the crowdfunding space, but there are lots of choices out there.  I happen to like this one in particular.  So definitely do your research.  

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  • Brandt Smith
    Cypress, TX · Member since 2016 · 132 posts · 49 votes
    9y

    @Joe Jackson my first piece of advice is to get highly educated. It is possible to accidentally make money in real estate, but it is also possible to lose money if you don't know what you are doing. Even if you make a profit you often find you left a lot of money on the table.

    I'm a big fan of buy and hold but it sounds like you own the properties free and clear. One of the big advantages of real estate is leverage. You use little of your own money to control a property. For ~20% down, you get passive cashflow. This allows you to put your money into other properties.

    The best way to determine how much leverage to use is to analyze your investments. Some people use cash on cash, but I prefer to use IRR (internal rate of return) which is more sofisticated and takes into consideration the time value of money and all your cash flows in and out of the deal. Whatever gives you the best return is the best investment. Hint...it usually is the least amount of your own money in the property.

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  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    9y

    @Joe Jackson

    There a number of things you didn't really talk about that really factor into what you may consider. The biggest are probably your tax situation and time situation. Are you high tax bracket or low? Working all day? Also, one big thing left out there is appreciation potential and area types. That could turn a good return into a very good return even without leverage. Course its also hard to quantify but think about it like an option if we are already doing ok.  Its kind of like getting both a salary and stock options in tech.

    If you are not in a high tax bracket and/or are not going to get real appreciation you may want to consider lending as the returns are higher and you get a lot more risk coverage because its backed by RE and typically by the assets of the person you gave the money to.  I see 12% returns all the time on lending and it can be even higher. 

    In addition, I am curious why you would not use leverage? most returns here typically include leverage 

    You also can get good returns in larger deals where you are just the passive investor. They will typically leverage those funds so its tough to compare against the numbers you gave but I estimate you are at 17% if you used leverage (most poeple do) and probably a little higher if you include principal paydowns which are decent returns if you are in a decent area (class A, B) especially today. In addition, I am not sure if you included reserves but you should probably include reserves for capex, opex, vaccancy etc. which may reduce the returns if you include them. I think not including them though is a mistake and esp. in condos those costs can very lumpy and out of your control because of the HOA assessments. All larger deals will basically include these reserves for you so keep that mind when comparing.

    Including things like reserves, appreciation etc. is what you typically see on here referred to as calculating the total return on the investment or IRR. That is normally one of the better metrics to use because it includes everything.

    I have done lending, larger deal investing, home investing and condo/cop-op so feel free to reach out. 

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  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    @Joe Jackson, I own several residential rentals free and clear like you do. 6-7% is a very respectable return for no debt.   Also, I'm assuming you might have some price appreciation as well. How much do you estimate there per year in your market? 

    If you are looking for a conservative and safe investment, I think you've done a very good job. 

     If you're looking to increase returns, you could take out some debt and buy additional houses  with it.  

     If you were looking for passive investments, real estate crowdfunding is another legitimate source. The downside is a lack of control. Right now you can make sure that everything is managed properly. If you do crowdfunding, you will have to give up control to a manager. So you have to feel comfortable doing that as well as vetting them. But if that's okay then it's a good option. If you have any questions, just let me know.

    Also, do be aware that the person who replied to you above about one particular crowdfunding site is not actually a neutral investor but a shill/promoter of that site. I would recommend getting a wider overview of all of your options before committing to any one particular site.

    The Real Estate Crowdfunding Review
    View Page
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  • Joe Jackson
    OP
    Arlington Heights, IL · Member since 2016 · 5 posts · 0 votes
    9y

    @Larry Fried: I'm on a mobile device and that doesn't happen when typing it in.. :/

    After reading more comments here, I'm looking into possibly putting some properties into a mortgage, that I know have appreciated, and wait for more opportunities. 

    I Googled crowd funding real estate for fun, and fundrise.com came up first.. which has been apparently mentioned by tech crunch and wired. Anyone have experience with them? 13% sounds too good to be true,  but I assume there are other risks I haven't considered yet. Kinda feel most comfortable in the market I know best and living off 6-7%. :)

    Has anyone pulled equity lines? I guess my mom was saying bank of America has one at 2.2% with no setup costs and it's fixed? 

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  • Ruth Bayang
    Investor · Kent, WA · Member since 2015 · 624 posts · 274 votes
    9y

    @Joe Jackson, big MF means big multi family.
    If what you're doing works, and you're satisfied, why mess with that?
    Especially if a 13% return sounds too good to be true to you.

    Everybody has a different risk tolerance. Figure out what's best for you. 

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  • Charles Worth
    Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    9y

    @Joe Jackson  

    You are confusing levered returns with unleveraged returns (i.e. all cash to mortgaged). The fundrise investment has or will use leverage as far as I know . Also the returns typically sound better on paper. Either way though, your unlevered (all cash) vs. their levered is apples and oranges. You are above that 13% now. On the other hand their return is diversified into various areas, projects and property types plus its truly passive so that is something to consider. 

    I have an equity line, biggest risk is if you lose the money it is recourse against your own property so you can lose it that and interest rate risk since they are varaible rate not fixed so if rates go up so does your payment. 

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  • Jim Groves
    Lender · Chicago, IL · Member since 2015 · 191 posts · 86 votes
    9y
    Originally posted by @Joe Jackson:

    @Larry Fried: I'm on a mobile device and that doesn't happen when typing it in.. :/

    After reading more comments here, I'm looking into possibly putting some properties into a mortgage, that I know have appreciated, and wait for more opportunities. 

    I Googled crowd funding real estate for fun, and fundrise.com came up first.. which has been apparently mentioned by tech crunch and wired. Anyone have experience with them? 13% sounds too good to be true,  but I assume there are other risks I haven't considered yet. Kinda feel most comfortable in the market I know best and living off 6-7%. :)

    Has anyone pulled equity lines? I guess my mom was saying bank of America has one at 2.2% with no setup costs and it's fixed? 

    Fundrise came up first in Google because they're arguably the #1 player in real estate crowdfunding, or at least in the Top 5. They are also exiting the crowdfunding space to concentrate solely on their eREITs. There have been a couple of threads already that discuss them. If crowdfunding is a passive play, a REIT is even more so because you're investing in the manager more than the assets. If you choose to go that route, I believe the public mortgage REITs provide better value.

    If you're more into selecting the project on your own there are plenty of those available. Just know that most equity deals offered on platforms like Realty Mogul, RealCrowd, etc have minimum investment sizes of at least $10K-$25K so it makes it kind of hard to diversify. The loan sites like Peer Street or Patch of Land have lower buy-ins, but you'll have to pay taxes on your interest. That's why I buy into those deals through a self directed IRA that I manage.

    If you want diversification, another option is AlphaFlow.  Think of it as a fund of funds.  They do the due diligence and invest through a pooled fund, so you get exposure in multiple deals for a lower size.  In exchange, you're paying about 1% off of your return so it can be expensive but seems like a reasonable option for somebody that wants passive income with diversification.

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  • Adam Bontrager
    Investor Relations Manager · Cleveland, OH · Member since 2015 · 117 posts · 50 votes
    9y

    @Joe Jackson

    Since crowdfunding has been mentioned, I'll chime in here.  I work with a RE crowdfunding platform in the midwest and we've successfully deployed several million in capital over the last year and a half that is now paying returns back to the investors

    The basic concept behind crowdfunding is that real estate developers often need quick access to capital and traditional lending institutions (like banks) aren't able to provide the capital with the speed required.  Crowdfunding allows these developers to raise capital quickly and easily and they're willing to pay more for that speed and ease.  I've seen preferred returns as high as 18-20% annually although the market is starting to adjust and bring those rates down.  

    One of the most important things you want to look at when evaluating these deals is the developer's previous experience.  Investing with a developer that has an established track record protects your investment in a number of ways because A) the developer is going to do their own research and they aren't going to go for a bad deal and B) the developer has an incentive to pay you back in order to protect their reputation.  

    Feel free to reach out to me with any questions.  

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