Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
For people who are non-accredited investors, that want passive investments, what have you found to be the very best return for a passive (or nearly passive) investing opportunity?
@Shiloh Lundahl This is an awesome question. I ask this literally every time I am looking at a property for sale here. I still like to look for undervalued stocks while saving up for my next rental. If the market returns 8% on average per year over what now feels like a 10+ year timeframe, then why would I buy a property that returns that? The property is so much more work, risk, etc. since I am shopping in C- neighborhoods. Also, there are some solid stock choices out there that are not at all at risk of declining steeply but also sport a 5-6% dividend alone.
Unless a property returns an estimated 15% or so on paper I do not make an offer. That’s just me being really conservative. Around here that is what I believe to be a really great return provided you can have your offer accepted in this competitive climate. Some other cities I know have much better returns, but I don’t live there and I don’t invest long distance. I have a family and work full time, but also manage my one property so far myself. I have been spoiled by being able to invest from my cell phone for free in the securities market so it really shapes how I look at the risk and responsibility of buying rentals. Great question.
Many investors and their money partners feel it's a win/win in the 8-10% range ("beats the market, secured by a hard asset"). Many of these money partners are not familiar with other opportunities (or how to perform proper diligence on the investor or the property).
@Shiloh Lundahl This is an awesome question. I ask this literally every time I am looking at a property for sale here. I still like to look for undervalued stocks while saving up for my next rental. If the market returns 8% on average per year over what now feels like a 10+ year timeframe, then why would I buy a property that returns that? The property is so much more work, risk, etc. since I am shopping in C- neighborhoods. Also, there are some solid stock choices out there that are not at all at risk of declining steeply but also sport a 5-6% dividend alone.
Unless a property returns an estimated 15% or so on paper I do not make an offer. That’s just me being really conservative. Around here that is what I believe to be a really great return provided you can have your offer accepted in this competitive climate. Some other cities I know have much better returns, but I don’t live there and I don’t invest long distance. I have a family and work full time, but also manage my one property so far myself. I have been spoiled by being able to invest from my cell phone for free in the securities market so it really shapes how I look at the risk and responsibility of buying rentals. Great question.
@Shiloh Lundahl 10-12% on average, 12-15% on the high end, through value/small-mid cap tilting of an ETF portfolio.
After an initial amount of research and setup all this strategy requires is to keep investing one's savings into the selected funds in the appropriate proportions.
@Bill F. when you say “on average” do you mean that when you add up all the interest/dividend income created over a period of time and then divide it by that period of time in years that the average is 10-12%? I ask this because in my experience, there are stated returns and there are real returns and my real returns from investing in paper assets have always been much less than their stated return.
I am also not familiar with “value/small-mid cap tilting of an ETF portfolio.” How does that work?
Return is multi-causal, but what I was referring to with the average vs high end is timing and size of investments.
A simple example is that you and I both have $100 saved and can invest $10/month into some total market EFT that has a 3% dividend. I buy 20 shares on Tuesday for $5/share. You are on a vacation with your family to LegoLand and can’t buy until Thursday. On Wednesday say Kim Jong Un gets antsy and decides he needs to torpedo another S. Korean ship. The markets tank and the EFT trades at $4/share. The next day you buy 25 shares. Next Monday the price goes back up to $5/share and stays there for 12 months. At the end of month 12 the price moves up to $6/share. I have a yearly return of 23% (20% from appreciation and 3% from dividend) you have one of 36.6%.
That example illustrates that the size of an investment when paired with correct (or wrong timing) can have an out-sized impact on the returns of the same investing idea. With any strategy when you start can play a role. As time goes on, its impact decreases, but needless to say some people got very lucky and their success has a lot to with luck vis-à-vis when they entered the market. That’s particularly prevalent in stocks since there is a lot more visible price volatility.
This article describes tilting better than I could, but let me know if anyhting doesn’t make sense.
This past weekend at Deal Maker Live in Dallas, Ryan McKenna put it best:
"as a passive investor, lets just say I decided to sit on the sideline. Where am I putting my money? Is it going to be in the stock market? I could lose 20%-30% in the next recession, that's not going to feel good. I could have it in savings and over time, I'll lose money with inflation...
If projections are 15%-20%, lets just say worst case scenario: I tried and invested in many deals to spread it out. I'm looking for a blended return with all my investments of around of around 20%. But if there is a deal that somehow misses. If it misses I'm hoping it misses in the 8%-12% range. Which again, is still really good compared to the stock market and you throw in the tax benefits. So even at the height (state of the market), I still look at and compare what else is out there and I haven't found something as compelling as what we are seeing right now (with multifamily investing)."
I would like to add that you also don't get the fee structure as you would with the stock market.
@John Fortes This is a good point. But this also depends on whether you can find a passive investment that generates 20% (what a dream!). If you can’t find this magic passive investment that generates that kind of return and you need to invest locally than it entirely depends on your market. Returns are sub-optimal in my market now, and once a good deal comes along it is gone in minutes because of this. At best you’re hoping for 10-12% unless you are a commercial developer. But to me that is still a better long-term bet for all of the reasons you mentioned.
Can you give an example of a location and type of property that nets 10-12%? I'm generally seeing 5% at best where I am. I see listing for 10% in bad neighborhoods but I imagine they would go down a lot once I factored in the new tax rate, realistic expenses, repairs, cost of evictions, ect.
@John Fortes This is a good point. But this also depends on whether you can find a passive investment that generates 20% (what a dream!). If you can’t find this magic passive investment that generates that kind of return and you need to invest locally than it entirely depends on your market. Returns are sub-optimal in my market now, and once a good deal comes along it is gone in minutes because of this. At best you’re hoping for 10-12% unless you are a commercial developer. But to me that is still a better long-term bet for all of the reasons you mentioned.
@Ray S. This is something I have found totally depends on the market. I am looking at 10% in my market, but that is with a fair purchase price (no bidding war, over speculation, etc.) and self-management. In other markets, it is slimmer. However, I am reading posts on here lately where people are generating 20-30% in the Midwest and Ohio. I don't mean to spread misinformation; this is just what I've been seeing here lately. So it all definitely depends.
What are you using to analyze any potential deals?
@Ray S. This is something I have found totally depends on the market. I am looking at 10% in my market, but that is with a fair purchase price (no bidding war, over speculation, etc.) and self-management. In other markets, it is slimmer. However, I am reading posts on here lately where people are generating 20-30% in the Midwest and Ohio. I don't mean to spread misinformation; this is just what I've been seeing here lately. So it all definitely depends.
What are you using to analyze any potential deals?
I'm just using MLS and looking mostly in my state at multi families, most have their income statements in the description. 8-10% caps are the most I'm seeing and they are in really bad neighborhoods. And I also don't believe they would stay 8-10% caps after transferring ownership. So I'm looking for ideas where 10+ cap rates are more common.
Truly passive investing (i.e. buy, keep, collect profits) would probably best come from a carefully chosen mixture of small and mid cap mutual funds. According to every reputable source I have read, the S&P 500 index has an annualized return of at least 10.8% over any 25 year period since they started keeping track. That's "mail box" money: wake up, go to the mailbox, grab the check, cash it...that's it.
Keep in mind annualized means that's an AVERAGE. It's not compounded interest that grows logarithmally like you see in some charts from investment sellers. Some years you lose money on paper and get nothing in the mail box, but other years you get 30%. It all evens out over time, so as long as you have other income coming in to eat and keep the lights on you never really suffer a loss because you don't sell when its down. Just hang on and wait for the big years to recover and get back to the average.
Real estate can be somewhat passive, especially in a partnership. Today yields are between 6 - 10%. Maybe some 11-12%, but that's on the ultra high end. Money is too cheap and easy to come by today to get massive returns. Why would someone pay 12% for money they can borrow for less? FNMA is offering apartment loans at 4 - 5% Fixed and Fully Amortizing Non Recourse over 30 years. Why pay more? It would have to be an unusual situation that makes the cheaper method of acquiring the money unfeasible.
So for real estate where I am active, I want no less than 14%, and that's ON TOP OF the management fee (10%) that I pay myself. Otherwise, I'll let someone else take the 2 AM toilet call and take my mail box money.
@Shiloh Lundahl I am speaking of active investments in my market. The property management firms here charge a standard 10% of gross rental income. Since 10% is the target rate of return I am hoping to expect right now (plus all of the added benefits of real estate investing of course) it is usually out of the question to go with property management for me at the scale I'm pursuing.
@Erik W. I have also seen the charts and heard the reported returns being in the 10- 12% range, however every time I was invested in the market their reported return was always much higher then my actual return. Whether that is because of fees or the way they calculate returns, I don’t know. All I know is it was less. I’ve seen it quoted more that the actual real rate of return over time is more like 7% in the market.
@Michael A. thanks for your input. How much would you say is reasonable for a passive investor. Once the money is placed there is no more work to be done and the money just keeps rolling in?
@Shiloh Lundahl I would say that entirely depends on the location and market. A good thing to do would be to run the numbers on a simple spreadsheet for a property you're interested in (if you dont have one they are all over the internet). See if adding in a 10%/mo. expense for property management makes you any money. If I do that for any of the properties I am analyzing right now then it puts me at a whopping 0-1% return. Not an option!
I was interested at some point in investing out of state purely passively, but I didn't feel comfortable. If I wanted truly passive income I'd just buy a high-yield dividend stock. For instance, if you found a property that was a gold mine and produced 15% return (!) and you had to have property management for it because it was truly passive, then you'll net a 5% return after their fees are paid. That would be a pretty decent scenario because you'll also have amortization. But I have not found anything like this yet. And I'd probably just buy a stock with a 5% dividend instead. But hey, just my personal preferences.
@Shiloh Lundahl, can't say for sure. 10.8% is before fees supposedly, but if you're in a low-cost index fund like Vanguard then the fees should be only a tiny fraction of a percent. Also, various funds may perform slightly better or worse since they don't always have the exact same composition, but 7% is quite a hit for sure. Dunno. I'd have to dig into your books for the past 25 years, taking cost on purchase dates into account to be sure, and probably neither you nor I are in the mood to make/have that happen.
I've back tested all my funds, and to date, they're hitting 9-12% annualized, depending on the fund. Seems like a reasonable spread.
The point being there's easy mailbox money that is truly passive, or you will get your hands dirty to some extent with tenants, contractors, city authorities, etc. So for that effort and hassle, I would expect a significantly better return. I don't get too excited about a 10 CAP when I can (and do!) make 9-12% on the stock market. Different resources and different goals available to different folks, I suppose.