To Hold or not to Hold Low performing Properties?
Mr. Lee has been living in Silicon Valley for more than 25 years. He has been working hard, saving with discipline and now owns two houses, free and clear. He lives in one house in San Jose and rents out the other in Saratoga. His children have graduated from college and the monthly expenses for him and his wife are low. He will retire in 3 to 5 years and wants to pursue his passion. As a landlord, even with excellent property manager help, Mr. Lee still has considerable liability and worry from his rental property. In addition, after he retires and travels with his wife, he doesn’t want to get phone calls from his property manager to approve expenses or hear about any tedious things related to the houses.
Furthermore, with the real estate downturn in the US, he knows that his properties will not appreciate much or even stand a good possibility of losing equity in the next 5 years. He understands that if he does nothing now, the following scenario can occur in the next 5 years.
In the above table, his only income is from the 2nd house. After taxes, insurance, property management fees, he only gets around $27,300 per year. This is a mere 1.1% return on $2.4M in equity or 1.82% on $1.5M in equity. In fact, he knows some of his friends are in the same situation: Equity Rich, Cash Poor. Also, the equity can depreciate or not appreciate in the next 5 years, further reducing his 1.1% return.
Is he willing to stay put, do nothing and wait 5 to 10 years until the house prices starts to trend upward or can something else can be done now? Could it be possible that he can double his existing equities in the next 5 years by smartly managing his current properties? Therefore, he constantly asks himself this question: how can I get more cash flow and continue to increase my equity value?
SJC Realty Solutions
Then he heard about SJC Realty through a referral. The realtors and the people in SJC Realty put together a one-stop solution for him. They have an execution plan to help home owners convert low performing properties to cash flow properties. What's unique about SJC Realty is that they are experts in finding properties "under the radar” that are often ignored, but high-performing. Through SJC Realty, the following scenario becomes possible.
1. Partnering with Pro: You make decisions. We do all the work.
SJC Realty, a one stop shop, will take care of selling his existing properties so that Mr. and Mrs. Lee are not involved with the hassles and details of staging, fixing up, or selling of the properties. Nor do Mr. and Mrs. Lee have to worry about spending the next 3 months looking through hundreds of listings to find, negotiate, what they want to exchange into another property.
2. Convert from 1 to 30
After participating in SJC Realty’s real estate seminar and learning about SJC Realty's deal flow, Mr. Lee experienced a breakthrough moment - breaking through his limiting belief. It is now obvious to him, what the missing components are. Why limit his million dollar single-family house (SFH) to receive a mere $3,500 per month gross rental income from one family?
With SJC Realty's help, Mr. Lee now has access to better opportunities which otherwise are not accessible elsewhere. He can convert this 1 SFH into a 30-unit apartment building. 30 families can make rental payments of approximately $18,000 per month, increasing his cashflow. This is a five times increase in gross rental income minus all the management efforts. It is equivalent to having thirty employees working for him rather than one employee.
3. Convert 1.82% ROE into 8% ROE
By working with SJC Realty, he can now realistically achieve 8% return on equity (ROE) from 30 unit apartment building versus 1.82% ROE from his 2nd SFH.
The significance of turning low performing equity into a cash flow generating machine is:
- Annual income now increases from $27,300 to $120,000. This is a more than four fold increase. He can use this $120,000 for retirement comfortably.
- The annual return on $1.5M equity is now 8% rather than 1.82%.
- Mr. Lee can apply the same strategy to converting his $900K equity into another apartment building.
- With the same investment philosophy, he can find similar investment opportunities with 9% or 15% annual return. With a 15% annual compounded return he will double his equity in 5 years.
Again, to Hold or Not to Hold
The house prices in the bay area may go down a bit or flatten out in the next 5 to 7 years. If Mr. Lee chooses to do nothing, he misses out on an opportunity to increase his cash flow per year by at least 4 times. Not to mention he risks losing equity on his Californian real estate. However, with SJC Realty’s help, he can now convert low performing properties to cash flow properties with 8% consistent return per year. At this rate, he can double his total asset value in seven years.
Which situation would you prefer to be in after 5 to 7 years?
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The information contained in this article is for illustrative purposes only. Actual transactions will vary depending on the nature of the transaction. This is not an offer or solicitation.