All Forum Posts by: Lane Kawaoka

Return on Equity (ROE) in real estate gauges the profit from a property investment in relation to the equity you have in it. Simply put, it's calculated by taking the profit (or cash flow) and dividing it by the Total Deployable Equity—remember to account for selling commissions if the property is sold.

A lot of people don't often consider ROE.

To put it succinctly: ROE helps investors decide which assets to sell, refinance, or draw a HELOC on. The goal is to weed out stagnant or "lazy" equity.

Pro Tip: While the principle of "buy and never sell" has its merits, adopting a "buy, then regularly review your ROE" approach can lead to superior returns and better preservation of capital.

Among many metrics used by investors to evaluate the quality of their assets, a few stand out:

Cash on Cash (COC)

Return on Investment (ROI)

Return on Equity (ROE)

Wise investors will often recalibrate their strategies if their ROE begins to decline. I personally think 10-15% is a good range to put something on the selling table.

Cash on Cash Return (COC):

COC determines the pre-tax cash flow at the year's end divided by the initial investment amount. It's a useful tool to contrast your property venture with other investments, especially since it disregards factors like mortgage leverage, taxation, appreciation, and mortgage reduction over time. As your investment matures—with tenants paying rent and the property appreciating—COC becomes less of a focal point AFTER the purchase.

Example: If you invested $30,000 into a property (comprising a $22,500 down payment, $5,000 in closing fees, and $2,500 for renovations) and you earned a net profit of $10,000 after all expenses in the first year, your COC return is 33%.

Savvy investors use COC alongside other metrics, such as ROE, to gain comprehensive insights. Typically, non-real estate ventures like mutual funds and stocks hover around 8-10% in COC returns.

Annualized Return – Measuring Performance Over Time: Annualized return offers a longitudinal view of an investment's performance. In real estate, it's not about quick wins. Some investments, especially those needing rehabilitation, can take years to fully realize. This metric combines cash flow during the property's tenure and the profit from its sale or refinance.

Example: On a $100,000 investment with an 8% COC return over 5 years (equating to $40,000), coupled with a $60,000 profit at the end of the term due to property appreciation, the annualized return is 20% per annum.

One bad thing about of real estate is its illiquidity, barring selling or refinancing the property. As you retain investments, your equity position increases via: Paying down the mortgage, Market-driven appreciation, Value addition through property improvements.

Let's illustrate this with a scenario: An initial investment on a $100,000 property generates a 20% COC return annually. A few years later, the same property, now valued at $160,000, fetches a profit of $5,000 per annum. This brings the ROE down to a mere 6.25%. Considering the challenges of property management, such an ROE may not seem appealing. Many experts believe that when ROE slips below 10-15%, it's time for a strategic overhaul—either through refinancing, property exchange, or outright sale.

Cons of Investing in Real Estate Syndications:

Limited Control: Passive investors have less control over the decision-making process, akin to passengers on an airplane. The general partnership team manages the deal, and investors must relinquish control.

Investment Illiquidity: Real estate investments are less liquid compared to stocks and bonds. Investors may have to wait several years for their investment to pay off, affecting short-term liquidity.

High Minimums: Many syndication deals require substantial minimum investments, often tens of thousands of dollars, due to the scale of the properties being acquired.

Diversification: While syndications offer diversification, it might be limited to the types of properties chosen by the syndicators, potentially leading to less customization for individual investors.

Risk of Misaligned Interests: Crowdfunding platforms might not have the same alignment of interests as direct relationships with syndicators. Investors must conduct thorough due diligence to ensure alignment.

Different from Rental Properties: Syndication investing requires a shift in mindset from actively managing rental properties to trusting syndicators' expertise and building relationships within the syndication community.

Lack of Operational Control: Passive investors don't have control over operational decisions, such as whether to invest more money into a project nearing completion.

Prerequisites for Participation: Contrary to common misconceptions, not all syndications require accredited investor status. Some deals are accessible to sophisticated investors with experience in real estate.

Pros of Investing in Real Estate Syndications:

Scalable Cash Flow: Syndications can offer better scalability of cash flow compared to managing individual rental properties, providing potential for higher passive income.

Tax Efficiency: Syndications offer opportunities for cost segregation, allowing passive investors to accelerate depreciation and offset passive income. This strategy can lead to substantial tax savings.

No Active Management: Unlike owning and managing rental properties, syndication investors can benefit from professional management without the responsibilities of day-to-day operations.

Diversification: Syndications allow investors to diversify across multiple properties and markets, potentially reducing risk exposure.

Access to Larger Deals: Syndications provide access to larger, more complex deals that might be difficult for individual investors to handle alone.

Networking Opportunities: Joining a syndication community offers networking opportunities with like-minded accredited and sophisticated investors, allowing for shared insights and collaboration.

Aligned Interests: Both general partners and limited partners share risks and rewards in syndication deals, fostering alignment of interests and commitment to success.

@Andrés Aguilar 

I was in a similar spot back in 2010. I remember getting my first rental property in Seattle, Washington - kind of did the whole house-hacking thing for a short while. But hey, if you're not really up for living alongside your tenant like I did, that's totally your call. 

Right now, it sounds like you're in that phase - You're hustling to build up your net worth, and hitting that quarter-million milestone. Once you've hit that mark, you might wanna start looking at more scalable options - like commercial real estate and syndications. 

Speaking from my own journey, from 2010 to 2015, I shifted my focus away from Seattle and headed towards some of these flyover states you're checking out. I got 11 properties in Birmingham, Atlanta, Indianapolis - and that move really played a part in getting me to that accredited investor status. It's a bit of a slow burn, I won't lie.

Feel free to hit me up.

@Adam Eckhoff 

Back in 2011, I was in your shoes – bought a similar place in Seattle around the same price tag. Later on, I even snagged a duplex nearby. 

You are probably figuring out rent-to-value ratios and that can lead you to places that aren't exactly the talk of the town, like Ohio.

Between 2014 and 2016, I kinda went on a spree, grabbing those turnkey rentals ended up with 11 by 2016. 

So, fast forward to becoming an accredited investor, and that's when the real shift happened for me. The world of syndications and private placements opened up and I started to dump those rentals.

@Tiffany Roberts 

Congrats on snagging those five rental properties. What comes next really hinges on where you're at financially - your income and net worth specifically. If you're already in the accredited investor club, well, then I'd say it might be time to consider moving away from those individual rentals and leaning more into syndications and private placements.

Anyway, if your net worth is north of half a mil, or even a million, then you might want to hop on the LP train sooner rather than later. Personally, back in 2015 and 2016, I was juggling 11 turnkey rentals. Let me tell you, tenants can be a handful. And I reckon you're feeling that too.

You're not alone – even with professional property management, I had my fair share of eviction dances and other major hiccups. It just sorta pulled me away from what I was best at, especially when I was clocking in at my engineering gig trying to progress my career.

A bunch of folks on these forums cover the whole spectrum, from newbies to 1m net worth plus investors. For those just starting out, diving into rental properties makes sense. But if you've hit a point where you're kinda tipping the scales, that's when it's worth considering a shift and step into that passive investor zone.

My perspective shifted when I started mingling with other accredited investors. Surprisingly, a bunch of them were saying goodbye to their rentals too. Maybe I'm just nudging you in that direction, like those folks did for me. But hey, just don't repeat my "buy 11 of them" move.

@Fred Gonzalo When you're sitting on around 10 properties, it's likely your net worth has cruised past a million bucks. At that juncture, it might just be time to wave goodbye to the whole landlord gig due to the sky-high legal liability and the never-ending headaches. Still, the idea is to milk that leverage while you're still notching up to like three, four, or even five million in net worth because you are still in growth mode.

Trying to juggle individual properties or even those portfolio loans, which by the way, are like Christmas bonuses for lending brokers, it's not exactly the kind of scalable approach you want. Back in 2015, I had a bunch of rental properties - like around 11 most of which were turnkey deals people often chat here - which don't get me wrong are a great way to start investing.

As I became more of an accredited investor, I shifted gears towards more scalable options like syndications and private placements. No need to deal with a pile of 1031 exchanges, the smart play is to stack up those passive activity losses from the syndicated deals and use them to wipe out your gains from selling stuff off. 

Back in 2016 and 2017, I let go of seven rentals. Made a cool $200,000 on the sales. Those suspended passive losses that I accumulated the years prior had me covered entirely on the taxes side.

It seems like there's been quite a bit of drama surrounding the Nightingale situation where they ended up taking off with the funds. CrowdStreet or any other Crowd funding site they are just a broker dealer, acting as a middleman. It's clear they should've had better oversight on keeping the money in escrow and releasing it properly. But in the end, it was a shady move by Nightingale.

This situation really highlights the false sense of security some of these crowdfunding platforms can give. They market themselves as doing thorough due diligence, but let's be real, they're not the ones in charge. They're just the middlemen, with no real stake in the game. It makes me lean more towards working directly with operators, sponsors, and general partners.

Why? Well, for one, it cuts out the unnecessary middlemen who just end up inflating fees, eating into the pockets of passive investors like us. Plus, when you work directly with the folks running the show, you have a clearer picture of what's happening on the ground.

We have been in the area since 2018 and due to this I don't think there will be a huge impact. Its not like the stock market where everyone speculates and its built into the price.

There is still Langley (CIA) 2 and all the other high tech support industry there.

It's pretty amusing how I fell for that type of deal back in 2013 during my first investment. They were offering around nine or 10% dividends, and there was also some 50-50 split on the backend. Again looked really similar.. who knows what the outcome will be. But, looking back, I've learned to be extremely cautious about such opportunities. There are so many scammers out there, especially dealing with single-family home investments.

By the way, I doubt you'll get much response on this platform because there are countless capital groups promoting similar deals. The one I was involved with in the past eventually disappeared, just like hundreds of others doing the same thing. 

I'd strongly recommend seeking out other purely passive accredited investors and focus on building real relationships. Put effort into getting to know people beyond online forms – that's the key to successful investments is finding other LPs.

I personally would not do anything but have your 3rd party deal with this for legality reasons and to provide some distance in a difficult situation.

I used to own turnkeys oos back in 2012-2017 and can connect you with my old PM Anthony gioia who owns All County is I think his PM brand.