All Forum Posts by: Rishi Ramlogan

I think we're starting to go in circles so I'll just post one last time.

First of all, Levi, thanks for posting the Buffett clip I was referring to, where he describes how great investing in SFH's is....and then says he doesn't do it because the management is problematic, which gets back to my very first post that a real estate business can be a great business, but that it is very different from passive investing. Sounds like you're definitely in the business and successful at it, so congratulations.

Second, I'll just say that between my family and immediate circle of friends, there are several of us earning $100,000-$500,000/year.  Additionally, the clients in my business are generally $1M-$10M net worth individuals.  The investment habits that I see in my personal group and that group are the furthest thing you could imagine from trying to get 30-40% returns.  If you are a $300,000/year lawyer in the office preparing a report until 1AM for a Fortune 500 client the next day, the last thing you need is to hear that your tenant in Iowa needs to be evicted - it's just not worth it.

Often times, they have large amounts in cash just because they haven't taken the time to figure out basic investing or haven't pulled the trigger. The main investments I see in my personal circle and professional life are a primary residence (usually with no mortgage), cash or cash equivalents, and assets related to their business (in the case of business owners). In the second position are usually 401(k)'s, IRA's, etc. I can't think of a client I've ever had that earned $50,000 but became a multimillionaire by earning 30% returns. Doesn't mean of course they're not out there, I just haven't come across them.

But I HAVE seen a lot of people get rich by just picking one thing and doing it really well.  If that one thing happens to be real estate, then so be it.  But for everyone that makes $10,000,000 in real estate, there's going to be someone who made $10,000,000 by becoming partner in a large law firm or owning a car dealership.  I don't think that changes the fact that the PASSIVE return on capital in real estate is on average going to be around 7%.

Best of luck and happy investing!

Levi, I actually think there is a big difference between passive stock investing and managing rental properties. Day trading is definitely not passive, but investing into the S&P 500 broadly, without picking stocks - or just "buying a slice of American business" as Warren Buffett calls it - is very passive. I'm actually a huge fan of Buffett, and re: his quote about purchasing SFH's, he specifically said the management of them was what was problematic to him, which is exactly the point I've been making. And apart from an investment he recently made in Sears' troubled real estate assets, I'm pretty sure he is not in real estate in any meaningful way.

And Joe, I actually don't think I'm missing the point, though we clearly have two different points of view.  Veering off course here, but it's an interesting point - when you are first getting rich, I believe your income and savings rate are more important than your rate of return.  As I mentioned, I majored in math so I understand compound interest (and Einstein's quote was a great one).

But let's say you have an engineer making $50,000/year and it costs them $40,000 to support their family, so they can save $10,000/year.  It's much safer and better for that person to try to increase their income to $100,000 instead of chasing outsized returns.  Maybe get an MBA to take your salary to $80,000 and have your spouse make $20,000 selling real estate part-time while the kids are in school.

If you keep your expenses at $40,000, ignoring taxes for a minute, then you can invest annually $60,000 = $100,000 - $40,000.  If you start at $0 and invest $60,000/year for 20 years at 7%, you'll have $2,632,000.

But if you keep your income at $50,000 and invest just $10,000 over 20 years, then to end up with the same $2,632,000, YOU NEED TO BE EARNING A RETURN OVER 21% (and just for comparison, Warren Buffett became the greatest investor of all-time by earning a 20% return over his 50-year career)!  So if you ask me, is it safer and more likely to try to be the Warren Buffett of real estate, or to just get an MBA and be frugal, I think the answer is pretty clear.

And that doesn't even take into account how leveraged you have to be to earn 21% over the long-haul.  Or what if you lose your job - having that higher income means you can accept a lower salary and still make things work out, instead of having to sell assets and potentially at a loss.  I'm sorry but for any number of reasons, I think earning a higher income and being frugal is the better path.

Now once you have the $2,500,000 in assets, then your investment returns really take over and you don't even have to work, so income and frugality are less important at that point.  At that point, you can be content 3% in dividends from stocks, giving you a $75,000 income.  Or I can get in touch with you for some killer 10% unleveraged deals and have a $250,000 income off of my $2,500,000.

Joe and Dave, your posts illustrate what I was talking about re: lack of passivity in real estate. If you are searching across the country for opportunities, dealing with banks, private money, etc., managing a property remotely (even managing the property manager), then that is in my opinion a business, albeit a part-time business.

That is not comparable to buying every month into a Vanguard ETF that tracks the S&P 500 and then just having the emotional intelligence not to sell when the market drops - doing that will earn you 7% long-term with no work. And as I've said before, there is nothing wrong with starting a real estate business - Andrew Carnegie once said that 90% of all millionaires became so by owning real estate - but what you are describing is not a passive investment.

Our (non-real-estate) business constantly has to be searching for the best sources of internet marketing across the country, have staff to handle the sales process, deal with some staff who are remote (and let me tell you, managing remotely is not always easy), deal with accounting, legal, etc. So we don't say our ROI on our internet marketing leads alone is super-high because that neglects the fact that a lot of brainpower and mental energy is required from smart people to make it work, brainpower that if applied elsewhere would also generate income. In other words, our labor, which is finite, is contributing in a meaningful way to the returns in a way that is not necessary in a passive investment like the stock market.

We do all that because it's a good business, but a lot of real estate investors get into trouble because they don't know that they are getting into a business, and when you subtract the value of your labor, I contend that the real return on capital is going to be around 7%, just like in the stock market.

Greg, understood about the opportunity cost of money and the cost of paying down a mortgage.  But at a certain point, aren't you going to want to deleverage, at least somewhat?  Maybe I'm just more risk averse than others, but I'm willing at a certain point to accept the lower returns of paying down mortgages if it means reducing my debt load.  And if so, then that has to be included in your calculation of overall return.

Joe, sorry you misunderstood my post.  As I mentioned, I like real estate - I just think people need to differentiate between a PASSIVE investment and a business.

Not sure if you've ever been in the position where you have over $10,000 in cash that you need to invest every month.  First of all, generating incomes in the $250,000+ level requires a lot of time and focus, hence my emphasis at this time on a PASSIVE investment.  I see articles about hunting down a $50,000 foreclosure and putting $10,000 down - I simply don't have time for that right now and would have to purchase a new one every few weeks, and even if I were to do so, the management of those properties would quickly overwhelm me.....unless I were to scale back at my job, and the financial tradeoff of doing so wouldn't be worth it.

That is why I chose to purchase a condo 5 minutes from my house and one where I could dump several hundred thousand dollars.  Of course I know it is possible to generate higher returns on capital than I currently am through my condo, if I enter the real estate BUSINESS.  My plan right now is to generate a few million dollars through income and PASSIVE investments, and then 1035 into higher-yielding properties once I am "retired".  Big cities like DC have jobs that pay high incomes but will also have lower cap rates on real estate, so I guess I could move to a less favorable area for jobs, but I'm interested in income right now so I make that trade-off.

If you are in the real estate business (even part-time) and you are successful, I applaud you and I'm not sure why the hostility.  All I was saying is that the PASSIVE return on capital is much lower than I see discussed here.

Hmmm, Russell, I hope this conversation isn't getting too specific or off-topic, but what condition are the properties in (renovations needed?), approximate purchase price range? Seems like 8-15% cash yields - if it's fairly passive - in a stable and likely-to-appreciate market like DC would make you rich fairly quickly.

Russell, you're local here in Rockville.  Care to share where and what type of properties are giving you 8-15% cash-on-cash yields with a 25% down payment?  I have not seen anything remotely approaching that, and if that is the case, I would purchase several properties through your agency.

Real estate is a good enough investment as is - why tell people fairy tales?

First off, I am talking about pure passive investing. If people want to get into the real estate BUSINESS, and do all the labor that is involved in any business, then that is fine and it can be a great business. But look at an ordinary passive rental property and it comes out no better than investing in the stock market.

And I say this as someone who owns a 2-bedroom condo in the Washington, DC area that rents furnished for $4,000/month long-term (currently on a 25-month lease, i.e. a $100,000 payment guaranteed by the Brazilian Embassy) or up to $8,000/month during peak months when on Airbnb. (Yes, I know most investors invest in the lower end and you can get greater returns there in exchange for more work.)

But in other words, I dumped a lot of money into this property because I like real estate. But when I see things like people saying you'll earn a 50-60% return on your money, that is frankly nonsense. The learning and effort needed to hunt down severely undervalued properties, sometimes out-of-state, the learning and effort of doing renovations and managing contractors, the learning and effort needed to list properties, screen tenants and perform property management - these are things that are needed in running a real estate BUSINESS. This is not a passive investment like making automatic monthly deposits into an index fund for long-term stock investing and then going to spend time with your family. If you own a restaurant and buy pasta for $1 and sell a plate for $10, you don't say pasta is a great investment with a 1000% return!

If you look at PASSIVE single-family investing, i.e. pick a random, well-maintained property at fair market value (and yes, obviously there will be large regional variations - I'm talking averages), you're probably going to need at least a 40% down payment to just not have negative cash flow. Let's say you put 50% down - that may give you the following:

1) a 2% cash-on-cash yield (and even to get that you'll probably need to list and manage the property yourself, which you probably can do since it's a local property not in need of extensive renovations)

2) 6% in leveraged appreciation, since you're leveraged 2-to-1 with a 50% down payment (and assuming 3% appreciation, which is about what Nobel winner Robert Schiller has noted is accurate long-term)

3) a 1.5% equity buildup from loan amortization.

That gives you a return of 2% + 6% + 1.5% = 9.5%. AT FIRST.

But eventually you're going to want to pay off that property. And whether you do that from cash flow or from new money you earn from your job, the return on the loan payoff is 4% (or whatever your mortgage rate happens to be). So if you get a 9.5% return on the first 50% of your money and a 4% return on the second 50%, your total return is going to be closer to 7% or somewhere thereabouts. Unless you plan on never paying off your loans and just taking out new 30-year mortgages into your 60's and 70's. (And yes, I know I am simplifying some things - I have a degree in math so I know how to run these numbers but am intentionally simplifying some things.)

Frankly, you'll probably get your 7% easier from the stock market - Microsoft is never going to call you to fix their toilet or force you to go to court in order to collect your dividend. Again, I like real estate fine now with the artificial stock prices caused by low interest rates, but let's just be honest about the return. Articles about getting 60% returns on your money are why so many investors find themselves desperate to unload their "money pits" despite their 30% down payment.

I think Warren Buffett might know what he's talking when he says that just a generic index fund, purchased over time, is the best way for most people to get rich - and that even for billions, his trustees will be instructed to follow that strategy after his death. And again, I like real estate - more people here just need to differentiate between passive investing and owning a real estate BUSINESS.

Hello all:

Great information and I appreciate the opportunity to learn from your experiences.

I am just finishing the renovation on my first property and have a couple of questions:

1) Could you describe your logistics and/or best practices for the actual process of renting out a property? I understand that screening for tenants is among the most important tasks and Bigger Pockets has an interesting and informative guide on that topic.

Another subject I am focusing closely on is drafting of the contract with an attorney, as I can be fairly ornery and/or litigious and want to avoid problems before they arise. I would be interested if there are any particular clauses beyond the standard language of contracts that you have found helpful in avoiding problems. For example, this is a condo so I am adding a clause that they must follow all HOA rules or pay corresponding penalties.

2) What is the actual process to rent? Sorry for the amateurish nature of this question but I don't plan to use a real estate agent.

- What marketing methods do you use (Craigslist, FRBO, MLS flat-fee listing, etc.)?

- Do you show via an open house or private showings?

- What is the follow-up after that? At what point do you give someone an application? If multiple people are interested, how do you ensure you get the best client while still abiding by Fair Housing laws? Do you process applications (and application fees) and credit checks for all before deciding or one at a time?

- Do you use a program such as Rentalutions or EasyRent to secure the application, perform background and credit checks, and collect rent? Any preferences?

3) Unrelated question but anyone have experience with furnishing their rentals? Based on the prices I got from Cort Furniture (a furniture rental company), the ROI on purchasing furniture and electronics and including them in your rentals would be far higher than even the ROI on the property itself. I understand not all tenants would be interested in that arrangement but the ROI makes it very appealing.

4) One more unrelated question: yields on high-end vs. mid-range rentals? I spent a year and over $250,000 (down payment, renovations, and furnishings) on this two-bedroom condo outside of Washington DC, so I'll report back if it turns out to be a mistake. But if you have a unique property that can command high rents and have doctors and lawyers as tenants, that seems like it would make the entire process much easier for someone who has another full-time job.

I am estimating cash-on-cash returns of 6% on this property and I have read about double-digit returns on some of these boards (I did not purchase below market value). I am sure the issue of exact cash-on-cash yields has been discussed elsewhere but basically my question is what level of renovations you have found to be most profitable.

Thank you!