I do apologize for the long post here, but there’s a lot to get out here.

I’m posting in hopes of getting real data and information from folks before making the plunge into my first RE deal. I need a mental adjustment and I need someone to tell me how it really is. I will say up front, I have seen so much conflicting information on this space and where the market is at currently, I’ve been airing on the side of caution and waiting for a market pullback on valuations. This may be the wrong play but it’s what has caused a serious mental battle going on in my head.

By way of situation, I’m 27, have $225k in liquid cash, and make $300k cash comp per year in a high finance role (~75 hours per week, so very little free time). I have worked in investment banking, private debt, commercial banking, and private equity all at “prestigious” firms and closed $30bn+ worth of deals. I only mention this for background info as I have a very deep knowledge base in finance and in all business sizes. I have been for several years looking at real estate as a way to generate passive free cash flow and hopefully find a process where I can pour my bonus money each year into new deals. I feel like I’m very blessed and lucky to be in my current situation and that I could be better utilizing my financial situation to build real wealth instead of clawing away at it annually via W2 wage income only (and saving only ~$70k/year).

Unfortunately when I model out deals, with today’s cap rate environment, I can’t find anything that generates meaningful levered free cash flow. It’s looking to me that a lot of the success in real estate comes from capital appreciation, which in my opinion is luck derived from speculation (maybe I’m wrong? But the prices in one area should reflect the current market price, even if expectations of growth in the area are projected to continue, this should all be factored into the price right?). But then we have all of these guys online (marketing), or Rich Dad Poor Dad, talking about how real estate is a ticket to passive income, etc etc. I’m running the numbers and thinking the whole traditional method of buying a rental asset and it requiring very little active work, generating significant sustainable free cash flow over a long period of time, does not exist. Sure there are buy and build strategies (I.e. renovating, fixing up, flipping, etc) but that is active work and frankly I haven’t build an eye for that yet and think there’s more risk.

I can take an example of a triplex property in Bridgeport CT I was looking at (and I have many many more) Purchase price of $225k. It threw off $15k in unlevered FCF a year, was roughly a 7 cap (which is really low for low income class C, right?). After my P&I of $10k a year I was left with $5k in FCF. Now this does NOT include capex spend, so if it needs a new roof or if something material broke, there's the whole two years of FCF gone. Furthermore, as we all know the first few years of mortgage payments are mostly all interest expense and less principal, so my outstanding balance on the debt is remaining roughly the same. Sure, after 25 years it'd pay down, and my FCF could be higher. But that's a very long time and looking at that IRR, it's really like 6-7%. If things don't go wrong and I'm not buying at the top of the market. Market falls 15-20% and that property trades for $200k going forward, that's $25k in unrealized capital loss, or roughly 5 years of FCF. At that point, why wouldn't you just buy a REIT? Diversified and 7-9% dividend yield with actually no direct active management.

What am I missing here?

I feel like there has to be a ton of bad deals out there you just never hear about. It’s just like the stock market, go on YouTube and there’s a ton of guys talking about their trading strategies and how you can beat the market. I won’t get into too many details here, but the reality is hedge funds spend millions per year buying algorithms that exploit a market inefficiency that only exists for a couple of weeks and then it’s gone. How is it that a guy at home, with retail level information flow and a retail brokerage, is consistently beating the market at home competing against teams of hedge funds that have guys working 70 hours a week on a few names and industries? I think it’s luck or it’s simply not happening (and they’re just generating their cash from their YouTube channel and affiliate marketing)

Can people post their actual deal metrics for properties they own today? Purchase price and purchase year, estimate of current market price, gross rent, last 2-3 years of rent increase, NOI, and levered FCF after P&I. I just want to see real numbers here. How much are people actually making?

Is it possible to actually generate attractive IRR without reliance of property price capital appreciation? Similar to other markets, is it still possible to find real inefficiencies and geographic areas that will be going up in price? Nashville is a good example. We all know it's growing and it's been great. But don't the prices now reflect this? And when prices were lower, was there not a large uncertainty as to how big Nashville would get and how fast it would grow? So therefore if you bought you still had a level of speculation (or luck) and it just happened to work out. How many other areas were there that had high growth projections and ended up not working out?

Then there’s the current market environment. Are prices high? If so, would it be smart to wait and buy lower? Interest rates going up. I posted something like last year on this, and I was surprised how much people were not aware of or were not concerned with this fact.

Apologize for the information and question overload but this is something I seriously struggle to understand.