When I started trading forex in 2008, I learned quickly that many of the institutional traders and gurus out there either explicitly stated, or implied that if an investor made more than say a 5-7% consistent annual return, then they were over leveraged and simply being reckless. 

I don’t know where the “safe” return threshold really is for trading stocks or currencies.  I have friends who are pretty good and weren’t able to beat the market last year (last year was a little exceptional though).   From a real estate perspective however, I know that if you’re actually working very hard for less than about a 5-7% return, you’re doing something wrong.  Let’s look at what kinds of returns you can get in the real estate rental business.

Starting at the bottom of the return bucket—my family sold an apartment building in Coronado last year on 4.5% as is cap rate.  That means if the buyers paid cash for the place, they would expect a 4.5% net return if they continued to operate the property as is.  And, an asset like that is very appealing to a low risk investor who wants a very stable safe return.  There was almost no vacancy and the value of that building isn’t likely to go down.  (Actually, now that building is 100% vacant and in the prep stages of becoming condos.)

If I had bought a rental house in Southern California (San Diego) a few years ago, I could have easily cash flowed it at a 5-8% cash on cash return.  This potential house would be a 3/2 in a respectable middle class neighborhood.  In 2010, my brother bought a house in a way less desirable neighborhood that cash flowed a lot better than this, but the tenants were a pain, so we evicted them, fixed the place last year and sold it.  This was still a pretty safe return.  Now, the same 3/2 would probably return about a 5-6% cash on cash return.  Still respectable in the long run.

I bought a rental property in Riverside (that I’ve seen like three times) that returns me a very nice 20% a year leveraged return a few years back.  This one would be hard to replicate in southern California today but there are still some 9-10% deals out there if you look for them. 

Today, if I wanted to buy rental houses in Dallas for example, I could make a pretty easy 10% cash on cash return and could make a leveraged return of 15% or more.  Or, I could stick my money in some managed portfolio with a fancy name where the industry thinks anything above a 7% return is reckless and historically the Dow outperforms.

FINANCIAL INDEPENDENCE

The downside is, managing real estate is work.  And a lot of people don’t like to work.  A lot of people like a paycheck and they’re willing to work for it. But taking control of your finances and future is a different issue.  It’s easier to have a “corporate” do all that stuff.  Financial independence isn’t an overnight game or even necessarily a secure guaranteed future.  But, it’s obtainable for people who put in the effort.  Personally, I think it beats the heck out of working.  But it is a lot of work. 

Now, there are a lot of downsides to rental properties and having owned several hundred apartment units, I’ve hopefully seen most of them by now.  But, when dealing with a house at a time, if you treat a small rental portfolio as a business rather than a family hobby, you can slowly build up a pretty respectable portfolio with relatively safe secure returns.