Ask The Guys – Returns, Reserves and Passive Investing

It’s another episode of Ask The Guys … where you ask and we answer!

The year 2020 has been a great one for questions. You may have felt like all you have is questions … and no answers. 

We can’t promise to solve your pervasive problems today … but we can deliver an educational episode. 

We’re talking cash-on-cash target returns, how to determine and manage liquid reserves, when and how to focus on passive investing, and MUCH more!

Remember … we DON’T give advice. We DO share ideas and information. Always sit down with tax and legal professionals to find answers for your specific situation. 

In this episode of The Real Estate Guys™ show, hear from:

  • Your know-it-all host, Robert Helms
  • His know-nothing co-host, Russell Gray

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Weighing cash-on-cash returns

Our first question comes from Joe in Tabernacle, New Jersey. 

Joe’s question focuses on single family rentals in the United States. He wants to know what we would consider a good cash-on-cash return. 

For example … if you purchase a single family home with conventional financing … 20% down … after expenses you may see a cash-on-cash return of around 10%. 

Joe says he never likes to go lower than 8% … a risk for negative cash flow in his eyes … and never higher than 15% … a risk that the home may not be in a great neighborhood or may have hidden costs. 

We’ll start by saying that there is no magic formula number. There isn’t a cutoff for a good deal or a bad deal. 

Everything depends on the market … how well you’ve done your research. 

It’s not just about the percentage of return. It’s about the whole picture. 

You need to take into account your net operating income, your taxes, amortization to pay down the loan, and appreciation.

In the end … a good return is something that is positive relative to the amount of money you spent to get the capital.

Buying your next property

Melissa in California City, California, just purchased her first rental property … and she is already considering buying another. 

She wants to know what she should be thinking about before taking that next step. 

Should she wait to have a certain amount of money saved? Or should she wait for the current down payment loan to finish?

Congratulations to all you first-time property investors out there. It’s an amazing thing!

If you’re looking to buy your next property … there is a lot to think about. 

First … do the math. Figure out what the cost of capital is and what the asset will return to you. Decide if that makes sense. 

Second … think about different methods of investing.

One way you can get going faster when you may not have as many funds at your disposal is … you guessed it … syndication. We love this strategy for investing. 

Third … keep educating yourself. There is always more to learn in this business … and everything you learn will help you make your next deal better. 

Getting started in active and passive investing

Our next question comes from Chase in Houston, Texas. Like many of you, Chase is interested in both active and passive real estate investments. 

The question is … what are the requirements and qualifications for both?

When you boil it down … there are TWO ways to invest in real estate. 

One is active. You do the work. You’re out in the marketplace, meeting the broker, talking to the lender, and picking out the paint. 

The other is passive. You hand your money to a professional fund manager and don’t worry about it anymore. 

The thing is … there is a lot of in-between and overlap. There is no one-size-fits-all way to invest. 

Generally, active investment requires money. You also need decent credit. 

Then, you need to have an education and know what you are looking for. Know your personal investment philosophy, and build a team to help you accomplish your goals. 

Passive investing … depending on how you approach … can have SOME requirements, but it doesn’t have to. 

If you invest in something like a real estate investment trust, it’s completely passive. You put your money into someone else’s hands.

But, that’s different from real estate syndication … putting your money together with others to do a deal. 

Depending on the deal, there may be requirements … like a certain amount of funds, a particular credit score, and the like. 

Precious metals as reserves

Lynn in Longmont, Texas, is thinking about the need to have some precious metals in his portfolio. 

What do we think about holding some reserves for properties in cash for emergency needs and having the rest in metals? 

If you’re going to buy precious metals … you take currency risk. You’re moving out of the dollar … and the dollar and precious metals move in different directions from time to time. 

Sometimes … that’s in your favor. Sometimes … it’s not. 

So, the question you have to ask yourself is whether or not you believe that the dollar will fall relative to precious metals in the long term. 

A lot of people today are bullish on gold … they expect the dollar to fall and the price of precious metals to go up. 

We say … just like the old adage in stock investing … a balanced portfolio of 60/40 can help you hedge against inflation. 

A simple strategy could be that … if you already own real estate property … when the rent check comes in every month, you set aside a little bit for precious metals reserves. 

More Ask The Guys

Listen to the full episode for more questions and answers. 

Have a real estate investing question? Let us know! Your question could be featured in our next Ask The Guys episode. 


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