New Member Santa Clara, CA - Low RE return: What did I do wrong?

Question

Hi folks,

My name is George and I am a part-time real estate investor from silicon valley with two years experience. I am a NOI driven investor, cash flow is all I am after and I only take home value appreciation as a gift. I have made three deals in the last two years, two SFHs in Seattle and one SFH in Las Vegas. Despite of labeling myself as a cash flow orientated investor, ironically all my past deals have pathetic NOI (4 - 5%) but appreciate like nuts (30 - 40%). I was lucky enough to catch up with the now ending hype in Seattle and I know such opportunity is very rare.

My current RE investment plan focus entirely on cash flow and NOI but after browsing through at least a hundred properties (SFH, MFH) in multiple markets all over the country (Seattle, Denver, Las Vegas, Austin, Dallas and Houston), I realize my final NOI will still probably remain under 6% at most 7%. Yes, I do plan to leverage but I found it will do little with rate being high. Taking my Las Vegas SFH property for an example, the sale price is $260,000 and can be rented for $1450/month. With $100,000 down and 5.125% 30-year mortgage, after property tax, insurance and property management cost, it generates around $400 cash flow a month, leaving a cash on cash return of ~4.8%. A MFH may give a better yield but it will still not exceed 7% according to my calculation.

I have seen plenty of people on this forum claiming their 10%+ cash on cash return but I simply found it is hard to achieve. Is such a high return only exist in lower-end properties (<$200k) in cheaper markets? I am located in one of the most infamous real estate market in the country and it is impossible to find properties with high gross rent multiplier in local markets. I prefer to invest out-of-state due to countless cash-for-key horror stories in California and rely heavily on professional property management companies.

I wonder is there anything wrong with my targets/methodology/goal or it is just a norm under current high-interest fed-up environment?  How do you guys achieve higher returns? Any suggestions? Should I just turn to REIT with promising 8%+ yield instead? I have also looked into NNN Commercial real estate but only find its return not so appealing, not to mention its risk and low liquidity. Or maybe I just demand too much?

Bill S. · Answer

All of the markets you mentioned I would classify as high cost markets. Generally high cost means low returns. To get the 10% NOI you need to pick markets that historically don't appreciate. In general they are not coastal markets nor large metro areas. When someone brags about a high NOI look at where they are doing the deals and it's usually in the rust belt.

To get higher ROI put less cash into the deal. Less cash in the deal means lower returns which means lower margins. It's a game of give and take. High down payments means lousy returns. Refi your Seattle deals with all the appreciation and take your cash back out. Once you do that, your returns are infinite.

Do some more reading and learning. The search feature can bring up some other posts where this issue is discussed with greater details and in more depth.

Neguiel Hicks · Answer

@George Li . You might consider revising your income goal for quitting your day job down a little bit...actually, a lot. Not an attempt to flame, but encourage you!

Once you start acquiring properties in a corporate structure your tax benefits go through the roof. And if you think about your corporation as a person working for you that allows you to shift some of the expenses you cover with your pay check over to the corporation.

For example, add up your car payment, insurance, registration, and gas. I have to venture a guess that runs around $600/month. Paying that out of your paycheck comes after you have income paid taxes. Once paid you have to ask for that money back from the government. And that is like taking a steak away from my mastiff, I might get 10% back. Paying it out of your corporation those expenses come BEFORE taxes. And can lower your tax liability when you add in the mileage deduction.

I experienced this when I started a legal consulting business and was amazed at how little money I actually needed to "make it". Instead of charging ahead though I used a two-pronged attack, went back to work for a year to fund a move and more importantly pay down debt. I worked evenings part-time at the consulting practice. Now my monthly "nut" is under $2k when a year ago it was over $5k.

Dawn Brenengen · Answer

@George Li  You are looking in appreciating markets where cash flow is typically lower.  Yes, to get the better cash flow, you should look in low cost markets that don't typically appreciate very well.  Personally, I prefer the lower cash flow, higher appreciation, but I'm weird that way

George Blower · Answer

@George Li

Welcome to Bigger Pockets.

George Li · Answer

Hi Matt,

Thanks for your reply. I want to be as much involved as I could. However, as I mentioned, I am doing a full-time job and not consider the local market. It pretty much limits me unable to be as involved as the fix-and-flip type of investor. But I still invest a large chunk of my free time to self educate, investigate different markets, connect with brokers and etc. I have been looking into large MFH but only find it hard to achieve high NOI as well given the high-interest rate environment right now. Not to mention the difficulty to get a commercial loan and the low liquidity.

My 5-year goal is to have my passive income equal to my work salary ($120,000) and I wish I could quit the rat race at the 10-year mark (after tax passive income > $200,000). After that, I would feel pretty satisfied and probably start an NGO trying to do some good back to the community.  I am currently at 35% of my 5-year goal.

Matt M. · Answer

How involved do you want to be??? I'm starting to consider large scale multifamily or even the REITs as well.

What are your 5, 10, 15 year+ goals?

New Member Santa Clara, CA - Low RE return: What did I do wrong?

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