Here's my question. I'd appreciate some advice. I have about 100,000-150,000 to invest. I don't want to personally manage a property. Thinking small multi- family. Would be my first property other than my home. And I understand that the answer is "it depends ", but could I beat what my money would do in a fund tracking the S&P 500?
I have beat the S&P with my real estate investments by almost double since I started in 2005. The market returned 10-11% annualized over that period. It is definitely possible, but it's not easy, and luck and timing both come into play. You can create fantastic returns in real estate, if you develop a competitive advantage. If you're just trying to buy one off properties without putting in the work to get good, then you'll get mediocre returns at best.
@John Lane there are several things going on here.
None of us know what the S&P will do tomorrow, let alone over the next 3-5-10 yrs. As Joseph mentioned, historically S&P grows at 10% per year. Over last 3 yrs it is 23% per year. So, you can take that as the S&P is destined for a major collapse "soon" in order to average back to 10%, or you could say, we are in a new norm of strong stock growth.
As for rental properties, you need to factor in a few things. First, how much you want to be in control. Hiring a property manager, for me, was more work than when I self managed my portfolio. Some of it was learning curve of the new relationship. Some of it was my desire to know what was going on. But ultimately, I decided to self manage and save the 10% + marked up repairs. Managing a handful of units is really not that hard, but it does take some work. Then ago, so does overseeing a property manager who is ultimately controlling how your $100k+ of equity is being managed and maintained.
Second, are you actually underwriting correctly? Every roof, whether new or 20 yrs old will need replaced. In today's dollars, that is probably an $8k replacement. If roof is new, assuming $15k in 25yrs to handle inflation, that is $50/mo to cover that cost. $50/mo is true whether your gross rent is $500 or $5,000. Same with water heaters, kitchen appliances, HVAC, flooring, cabinets, etc. Beyond reserves, lower end areas, in my experience, have more frequent turn over with heavier wear and tear. Again, if you figure $2,000/turn every 2 yrs, that is $83/mo per unit, regardless of whether your rent is $500/mo or $5000/mo.
All that being said, I am a real estate guy. I studied real estate in college and have worked in real estate professionally for a majority of my career. I do not view it is a great investment at today's prices and rents. I still do flips (which are not passive). I continue to look at commercial properties to buy. I think it is a great diversification strategy. And I think there can be some decent deals out there, but when I look around at 4-8 unit properties in my area, the prices simply don't leave any room for mistakes, and they certainly are not likely to be creating 13%+ returns, especially when accounting for 10% of gross coming off the top.
If you have a solid team with YOUR best interests in mind who invest in the current market, and you have enough patience to ride out the stabilization, and you leverage as much DEBT as possible - you will crush the S&P.
comparing real estate returns directly to a stock fund like the s&p 500 isn't really apples to apples because of leverage.
with $100k-$150k down, you're not just buying a property; you're buying a much larger asset with a loan. that loan's principal is paid down by your tenants, you get cash flow, and often some tax write-offs for depreciation that stocks don't offer.
for small multifamily, i'd start by looking at a few zip codes and calculating what a 1% or 2% down payment would actually buy there – factoring in professional property management costs right upfront. you need to build in all those costs, plus a vacancy buffer, to see if the net cash flow plus the principal paydown looks better than a fund after expenses.
have you run those full pro forma numbers yet for a specific duplex or triplex?
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