@Becca F. - sorry to hear of your challenges & frustrations with managing & growing your portfolio. A lot of great points have already been raised in this thread. As someone in a similar position (trying to eventually leave W2, starting with a few properties, family responsibilities, etc.), a few things jump out to me…
- as you’ve alluded to the significant stress of owning real estate, it’s worth reiterating that there are definitely other paths to achieving financial freedom. On a related note, it seems likely that we are entering a period where RE returns are less of a sure thing and may be comparable to returns from other investments (despite the added headaches). No one really knows, but it seems like we’re in for a period of stagnation or slow/moderate growth in the RE market broadly.
- it may be helpful to step back and assess where you are in the process. Chad Carson’s book, the Small and Mighty RE Investor, talks about the stages a RE investor moves through. Paula Pant also has a good perspective on the topic and touches on it occasionally in her podcast, Afford Anything. The bottom line is that you should have a different strategy depending whether you’re in the growth stage, stabilizing, retiring, etc. It sounds like you’re in the growth stage, but getting clear about what that means could be helpful, including establishing metrics that align with your goals. The challenge that I have (being in the growth stage) is that I need the cash flow, but I also want appreciation. This combo is difficult to find in the current economic climate, but I think it’s important to be conservative here and only pursue deals that move me in both of these directions, to the extent possible.
- Do you have a clear sense for how to evaluate the performance of your portfolio against your goals? e.g., how does each individual property contribute to your goal of retiring early? To what extent does each property support or impede that goal? Are there opportunities to optimize your portfolio to better support your goals (selling existing properties, value adds, etc.)?
- The current reality is that investing in RE may require a couple years of negative cash flow before things start to make sense on paper. This should be expected and accounted for in underwriting. Similarly, I would expect any new purchase to require some level of capital expenses (though hopefully not due to theft!).
- If at all possible, you really should be raising rent on an annual basis, at least keeping up with inflation & tax increases (despite what your PM may advise). The idea that you should reward good tenants by keeping the rent at the current level is outdated IMO and leads to weird landlord/tenant dynamics. While a turnover and vacancy are definitely a hassle for a property owner, they’re also a major hassle for tenants. There’s a middle ground for reasonable rent increases.
- Having run the numbers on several Class C properties in the Midwest (and as someone who grew up in Indiana, but is not currently investing there), I find the negligible cash flow under current conditions is not worth the risk (eviction, major capex, vacancy, etc.). Further, does rent or property value appreciation keep up with inflation? If cash flow and appreciation are both marginal, it’s hard to see where the value is. I’m sure some people are making it work, but as an outsider, I’m not sure it’s easy to put the pieces together.
- Do you actually need a property manager for your OOS investment? I get the comfort aspect, but are they bringing the value that offsets their cost, given the availability of tools to enable remote property management?
- Have you calculated your return on equity for each of your properties? I feel like this is an underutilized metric for RE investors and is the best way to compare performance of RE assets vs. other potential investments.
- To your broader question about investing in RE vs. other strategies, while investing in index funds is easy, returns there are not guaranteed and are not under your control. You could suffer double digit losses and find yourself questioning that strategy in the same way that you question RE. I think the answer is always diversification, but there's no magic formula for what is the correct balance. Comparing your real estate return on equity (not CoC return) vs. historical stock market returns would be a great start. Personally, I aim for > 15% return on equity from real estate, which exceeds long-term stock market returns by a healthy margin, but does require active portfolio management (mainly by not keeping too much equity in a given property). If return on equity approaches typical stock market returns, I would lean toward investing in the stock market, as there is less effort involved (though not necessarily less risk).
Hope this helps!
