Strategy: Portfolio approach to investment and not a yield chaser

Real estate is similar to funds, seeking growth (capital appreciation), rental yield or a balanced investor. Investors mix their assets according to their goals and asset allocation strategy.

We specialize in helping investors in creating their portfolios in U.S. assets – our approach mixes assets, and balance the risk. I have several investors who are yield chasers – and I had told them that they should not just focus on yield. Before I became a realtor, I was a REIT analyst, and I was helping clients building their portfolio through REITs. High yield REITs are often associated with higher risk such as vacancy, tenant portfolio and lease terms.

Let’s exam on Pros & Cons of a yield investor, and let me using an example to illustrate my points.

My client runs a syndicate – and they want to achieve high yield through real estate portfolio.

The strategy was to mix assets in low income neighborhoods, which produce 14% to 18% gross yield – which sounds good, but here is a list of problems they had encountered:

Problems in low-quality areas / high yield properties

  1. Attracting low quality tenants – After holding property for 3 years – 3 tenants were evicted
  2. Overcrowding – low quality tenants tend to sub-let or invite others to stay, and a 2 bedroom property ended up with 8 people living inside – and it was a mess when they moved out / evicted.
  3. Bad neighborhood – high crime rate, HVAC was stolen, cars were smashed.
  4. No home owners – this is an issue a lot of investors have neglected. You could end up in an area where it is 100% owned by investors, tenants are changing all the time, and then the area would deteriorate further and further.

My client invested in a duplex once – the whole entire neighborhood had 20 to 30 duplexes, they are completely owned by investors, and this area had a lot of issues in finding good tenants, and worst, keeping good tenants.

The neighborhood across this particular area is a mixed area – with around 50% of home owners and 50% as investment properties. They were able to charge much higher rent, and also appreciate much more.

What should investors find?

Similar to stockmarket – investors should mix with Blue Chips and “Green Chips”. I use the same analogy when I was a fund manager – you go for a stock that has dividend appreciation, but not necessary the higher yield, but in time, dividend will continue to increase, and when you hold it for term, you get much better return than high yield stock.

High Yield Range (Under $100K to $140K) – Type of Tenants

This is an interesting range – I have personally own properties in this price range. I was lucky that my tenants had been good tenants, but you can see the difference when you are listing for new tenant. You tend to get lots of inquiries, but you will get a very large volume of Section 8 tenants, and many tenants that have credit issues and who want to “work out a deal” with you. This is what they will often say “Can I call you and discuss my situation”?

Last month, I listed out a property, market price for that property is $110,000, and I listed it at $1200 for rent, I received over 30 inquiries in first 2 weeks. It sounds good, but more than 50% have credit issues or “want to work out a deal with me”, it was a very time consuming exercise – and majority of them refuse to pay application fee for me to run their tenant screen.

We ended up leasing to a young couple, who are self employed, and honest and upfront, the lesson here is “More is not really better” when comes to tenant inquiry – you want quality prospects than lots of useless inquiries.

Best Price Range (Balanced Approach).

In Dallas market – I see properties around $160,000 to $240,000 that match with these criteria. You get average from $1500 to $1,900 a month in this price range, and able to increase rent each year, and more importantly, you find much better quality tenants who have stable jobs, or just relocate here, and able to pay rent on time. These tenants also have “pride and responsibility” that they tend to keep their properties clean.

A good example is when I listed a property just purchased by my client, he paid $190,000 for the property and I leased it out at $1750 a month. I had about 10 inquiries, and 2 of them really liked the property – one proposed more security deposit, one proposed to pay rent upfront (as they just sold their home). You will hardly see this kind of prospects when you deal with tenants in lower-side of rent. In the end, my client chose the full year rent upfront client.

Higher Price Range ($1,900 to $2,200 rent range) (Also good to consider)

This is an interesting range to choose from. One example was I bought a property for my client, she paid $230,000 and put in $5000 in renovation. At $2,000 range, it was uncertain if she can attract many interests as it is Thanksgiving time.

What kind of tenants did we attract at this price range? We received 10 inquiries as well – and about 50% of them just sold their homes, and not sure where to move to next, so they have decided to rent, some had sold their homes and decided to downsize, and we also had several families to Dallas.

There is no shortage of tenants looking for properties at this price range in Dallas, most of them are very used to living in big space, majority of them had lived in homes above 3,000 sqft in the past, so they are not going to compromise their lifestyle into the 2nd category we mentioned above ($1700 to $1900 range).

One advantage in investing in this type of property is these homes tend to be larger in size (2000 to 2500 sqft), which gives them more potential to appreciate, they are often 4 bedrooms, many also come with study, and they are often located in really nice subdivisions in good school districts and neighborhoods – these homes are easier for resale in future because of location and layout.

Upper End of Market ($2500+ rent range)

The difference in rent between $250,000 and $350,000 home are not much different. Properties priced above $300,000 are more for appreciation rather than rental yield. We sold several homes around $300,000 range to investors last year, and they were able to achieve $2200 to $2400 in rent, the yield dropped to around 7% gross, however, these properties do appreciate well, on average, they appreciate at 2% more per year than smaller properties. These properties are what we consider as blue chip properties, these properties are often situated in highly desirable neighborhoods with large percentage of households home owners. I didn’t have too much trouble finding good tenants even though inquiry level was much lower, with many inquiries seeking for 6 months short term leases.