Investor goals and desired returns?

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While I don't hold many rentals, I personally want to see a cash-on-cash return of at least 15%, with 20% being possible, and also some expectation of price appreciation over the next couple years (for example, homes in a recent freak flooding area that are selling under market due to retail buyer concerns that will likely fade in another year or two). That said, I'm sure those who have a lot more rentals than I do will chime in, and they probably have different ROI goals. As for the San Francisco property you mentioned, a couple things: - Prices and cap rates in the Bay Area are tremendously skewed for various reasons -- small land-locked area, great climate, world technology center, very high average income, etc. So, it's hard to look at any Bay Area investments from a pure cash flow perspective and have them make any sense; - While 7% isn't great, when interest rates start to rise, it's likely that rental rates will rise as well. A 10% increase in rents could easily equate to a 15-20% increase in NOI at that scale, which equates to a 15-20% increase in value (at a constant cap rate); - It's difficult to park tens of millions of dollars someplace that will earn much greater than 7% passive returns, and it's REALLY difficult to park tens of millions of dollars someplace that will return 7% with a very real chance at appreciation. This may be the best option for these investors; - A 7% cap rate complex in the Bay Area is probably pretty decent in terms of location and tenant-base, so it's probably pretty easy to manage the property and generate passive returns vs. a higher cap rate option in other areas where management will be much more difficult. Just some thoughts...perhaps those investors have different reasons for choosing that investment, but those would be my reasons...

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We're seeing annual returns on the entire real estate portfolio at about 60-80%. Even if we kept our money working full-time, we probably wouldn't see 200% returns on the portfolio, as our average project return is less than that. I like to see about 75% of our money working at any given time, and we also have the benefit of receiving some income from activities that don't require any cash outlay -- like staging for other investors, credit partner, etc. These are essentially infinite return investments that boost our overall returns in the portfolio; without those, we're probably look at 40-50% return year-over-year.

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Yeah...the projects I am seeing in east Austin deliver 30%ish unleveraged in about 6 months. With a streamlined operation and constant identification of good projects I could see the projects being narrowed to 3 or 4 month windows, but you still have to sell them. I think 6 months is pretty reasonable given that I like to be conservative. So if you annualize things you can roughly double that. With some private and/or construction financing I think doubling the ROE again is doable. So I could see 120%ish levered returns on these projects being reasonable. For buy-and-holds to deliver in excess of 20% ROE you need to force appreciation and exit or buy something with primo yields like some of the projects I am seeing advertised on BP in the midwest. There are tons of other ways to make money in real estate though. I know of some guys that are doing subject-to purchases with wrap sales in Austin that make hundreds of percent ROEs and use extremely high leverage ratios. With all of the fluid private money looking to be parked in these deals from their network and the army of folks they have marketing them it is really a pretty safe business model IMO IF banks don't suddenly decide to call the notes! That is why I steer clear of it.

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Maybe Vikram can, but 30% return on unleveraged rehab projects is about where I max out as well. Of course, this is in 3 months, so annualized, it's over 100%, if in practice I could keep my money constantly moving, which I can't. For leveraged rehab projects, I'm seeing much greater than that (up to 100% or 400% annualized). Leverage is a wonderful thing when used appropriately.

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The MFD deals you are talking about are from large institutional investors with a WACC in the 5% range or so I am guessing. Those deals still make sense for those players. I do mostly buy-and-hold in my personal portfolio and we require at least 20% ROE using conservative pro forma modeling assumptions from a custom model we use in Excel. For build or fix-and-flip projects I have seen recently you can get unlevered 30% returns and at least double that with prudent leverage ratios. If you are a pro like Vikram or JScott you can do much better ;-)

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Most of the returns referenced I assume are from development, rehabbing, or flipping. What about for buy and hold cash flow properties? What is your hurdle rate before you even consider an investment? I recently saw an article on a multi-family acquisition in San Francisco with several hundred units. It was a large national investor. Their leveraged ROE was projected to be 7% after acquisition. This transaction was in the tens of millions of dollars. To some people this seems foolish to have millions in debt to earn a 7% return. What if cd rates ever climb back to 5-6%, would these real estate deals still be wise? Keep in mind we are no longer guaranteed steady price appreciation. Ryan

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It may just be that I have a relatively small amount of cash allocated to real estate (a few hundred thousand), so generating these returns aren't too difficult. As you pointed out above, the larger your portfolio grows, the more difficult it becomes to maintain these types of returns, and I certainly don't expect it to last more than a couple more years before we have to figure out additional strategies and allocations.

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That is still freaking fantastic J....we need to chat soon about some projects I have in Austin that I hope to emulate your success on!

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Yes, it is a challenge to keep your money fully invested without significant periods of sitting in the bank earning very little. We work pretty hard to ensure that does not happen. I do believe that one has to look at overall portfolio return, including "down" times, when evaluating a fix-and-flip strategy.

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J and Vikram....do you guys end up realizing 200% annually on your portfolio? I would assume that the money sits idly waiting for new projects at times so the end return actually is lower. This is becoming less of a problem for me now that we get to see more opportunities with the fund, but it seems like it would be hard to keep the money working in primo projects all of the time.