How long do you ride the wave? ROE vs ROI

Question

After reading, researching, and adding information for ROE calculations I realized the % goes down every year. ROE is opposite to ROI, year over year. I based my calculations conservatively for a rental property we own using a 3% rental growth, and 4% appreciation (obviously it's higher) year over year. In a ideal world at year 7 of my spreadsheet the ROI is 15.3%, and ROE is 14.98%. It crosses. I've owned the property for 4 years... would you sell/1031 the property at year 7 to buy something else?

If I adjust the appreciation (closer to 9% last year) the ROE drops significantly leading me to believe "holding" this investment doesn't make sense. Any thoughts?

If I adjust the appreciation (closer to 9% last year) the ROE drops significantly leading me to believe "holding" this investment doesn't make sense. Any thoughts?

Bill B. · Answer

I sold a pair of cabins I had owned for 20 years in MN last year as I had been there about once a year and my parents stopped using them. I sold them for a 400% profit (5x purchase price). I probably could have gotten more but I sold them directly without a realtor or any selling costs. I don’t think younger people realize the properties they purchase today could easily be worth 4 or 5 x as much before they were ready to retire. If you’re forced to put down 25% then you’ll make 1600-2000% percent return, if you buy it as a primary for 5% down and move a year later you’re talking 8-10,000% return. All tax free while you earn it, and tax free cash if you do a cash out refi.

I sold my primary 3 years ago to move in to one of my rentals as that gain was tax free and it would lower future taxes when I sold the rental. (That was probably a $200k mistake as the primary continued to grow in value of course.)

20 years ago I sold my primary when I left MN for California and late Vegas, that property is probably up 4-500% as well

Those are the only 3 I’ve ever sold  and at least 2 of them were mistakes. :-)

I understand investors who get restless. Real estate investing is really really boring. With a dozen properties, during an average month:

I spend about 15 minutes on 4 emails to HOA's saying I'll correct tenant violations and telling tenants to correct them. About 15 minutes on accounting, maybe 30 if there is a turnover with a lot of make ready. Every other month or two I spend another 15 minutes researching/buying an appliance or making a flooring choice or a repair vs replace choice. So 30-60 minutes per month. I CONSTANTLY want to sell something and buy something bigger/better, or at least buy something else. I spend more time on my wife's two cats than real estate it truly runs itself and time is your friend, not your enemy. At least it is afte you buy something. GL.

Jaron Walling · Answer

@Bill Brandt Have you sold any properties in the last 12 months and why?

I'm always interested in other investors exit strategies. A long time ago I connected with another investor through a roofing contractor. He was selling a property around the corner from me. He had purchased it for $45K cash in 2012, rents were $700 (at the time), and when asked why sell he says "it's just an under performing asset and I don't like it".

I thought he was joking.

Jaron Walling · Answer

@Marcus Auerbach Thanks a lot man!

Marcus Auerbach · Answer

No, we don't engage in affordable housing; quite to the contrary; at this point (after 15 years I should mention) we have been going up further in size and price point. Our minimum criteria is now 2k in rent per unit, preferrably more. Of course the capital requirements are higher, but if you play the long game (and you are more interested in dollars than units) it is IMO still the better path.

I have a monthly coaching meeting with our local investor association AASEW in Milwaukee and my topic last month was how to make a million. It's basically investor game theory. You can show with a BP calculator that it is realtivley easy with very conservative assumptions you can generate a million in under 10 years, probably faster.

In the Q&A an older gentlemen told us he has been investing for over 20 years in low income housing and he was blown away by the numbers, he is nowhere near. The problem is he has been playing with very small chips, most of his cash flow gets eaten up by capex and the properties themselves are not worth much either. He walked us through the numbers and he was talking about how his small portfolio is basically a full time job. I felt sorry for him because he is at an age where he may not have another 20 years to try a different strategy.

You have one huge advantage - you have plenty of time! Make that work for you, be patient. We have all red the overnight success stories, but thats not how it goes for 99% of us. You don't have to buy top of the market, but I would suggest to buy the best quality you can with where you are right now in your journey! I believe your future self will thank you.

Jaron Walling · Answer

@Bill Brandt I love this! That's really amazing. I've been discouraged about not buying or selling anything lately but reading your response is encouraging. Investing wise I think we're on the right track. You have to watch out for those cats. We have two of them and each have completely different personalities. One cat is nice but the other one acts like a Sour Patch Kids Candy commercial.

Jaron Walling · Answer

@Bill Brandt  I think holding this property for the long term is the best play. Considering the amount of sweat equity and predicted future capex I don't see a ton of future headaches. The current ROI is 7.42% but we're below market rents by $75 per month.

What would we do if we sold?... nothing because you can't buy anything in our neighborhood that cash-flows. We have made offers on/off market with no success.  Cash parked in a bank account nets us zero so I'd rather not add to it.

Bill B. · Answer

I would never sell based on those percents. You could do a cash out refi and you’d have infinite ROI and a much higher ROE. But your net income would go down. Either it’s a good rental or not. If it is you keep it until it’s not. If it’s not you sell it now, you don’t wait 7 years.

Using those numbers, as guiding lights. You’d keep the property forever if the value and your equity kept going down. If the property’s value went down because of the neighborhood your ROE would go up, maybe a high ROE is a good reason to sell in that case.

Jaron Walling · Answer

@Marcus Auerbach Do you invest or rent to section 8 tenants?

Thus far we focused on quality SFR at higher price points. It's narrowed down the neighborhoods and buying criteria but at the same time limits my potential to buy more deals (it's nearly impossible). After working on other investors properties I'm starting to think I can handle section 8 or should make offers in other neighborhoods.

Marcus Auerbach · Answer

There is a short game and there is a long game - if you are playing the long game like @Bill Brandt the quality of your investment becomes much more imprtant. On the other hand, how much you paid exactly does not matter as much as you thought once the value has quadrupeled. What really matters is how many you bought!

How long do you ride the wave? ROE vs ROI

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