Author Topic: $350K to invest in RE  (Read 3028 times)

Stephaniekb

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$350K to invest in RE
« on: September 04, 2014, 11:30:58 AM »
My husband and I are in a similar situation to MMM -- we just sold our former primary residence and stand to have about $350K in cash when the deal closes (thank you to the tenants who caused a fire, resulting in a total remodel at the insurance company's expense!) We'd like to purchase additional rental units to generate 40K or so in revenue.

Husband is interested in a big multi-unit building (10 units or so) with a cost of $1 - 1.4M. That makes me nervous, and I'm leaning more towards 1 or two duplex/triplex/fourplex where we put down a bigger % of cost. (Actually, I'd be just as happy putting this money into a vanguard total market fund, but hubby thinks we've got too much money in the market and property provides better cash flow.) 

We're just starting to look at properties so I thought I'd get some input on the pros/cons of a multi-unit building vs. smaller properties (we already have experience owning small properties.) If we owned a smaller property we'd probably manage it ourselves, vs. having a property manager for the bigger property. 

Appreciate any advice or just helping us think about what issues we need to consider.

sammybiker

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Re: $350K to invest in RE
« Reply #1 on: September 04, 2014, 11:46:44 AM »
You're looking for about 12% annual cash on cash return.  Awesome, this is achievable.

1)  Are you & the hubby looking to take on additional debt?  Or would you opt for an all cash deal with no note to pay.

2)  Are you & the hubby restricting yourselves to local markets only?


Northerly

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Re: $350K to invest in RE
« Reply #2 on: September 04, 2014, 11:50:21 AM »
Going through a similar decision making process myself (though with less money!). Perhaps the main thing I try to remind myself is that while generalities are important, each property must be analyzed on its own merits. If a 7-unit building shows up for the price of a triplex (just happened to my friend), snap it up, even if you are looking "very small". As others have pointed out, real estate markets are not necessarily efficient.

Big Property Pros
-Better ROI in the long run...maybe
-Leverage is your friend
-Management economies of scale

Big Property Cons
-Leverage is your enemy
-Management is a pain in the ass, even when efficient

Small Property Pros
-Easier Management
-Low leverage (psych and risk benefits, sleeping like a baby)

Small Property Cons
-Lower ROI in the long run...maybe
-No economies of scale
-Nagging sense that you could have done better/bigger, no bragging rights, doesn't feel very fancy

If you want to own your time, there is only so much management you can do. And it's not generally cost-efficient to hire a manager until you are at 20+ units (rule of thumbish). So a sort of "in for a penny, in for a pound" concept applies. If you are going to hire management, you really want to have enough units to make it pay, so you buy more units, with more leverage... That's been pretty tempting to me in the past, but I've kind of circled back to low leverage, few units, self-management, and not feeding the monster. Tough decision, though!
« Last Edit: September 04, 2014, 12:01:48 PM by Northerly »

Bobberth

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Re: $350K to invest in RE
« Reply #3 on: September 04, 2014, 02:13:46 PM »
Traditional financing will go up to 4 units.  More than 4 and you will have to go commercial financing.  With this being your first real estate deal, I would imagine that being a first timer would be a negative attribute for somebody going in front of a loan committee looking to borrow $1 million.  I think your best bet would be to start with traditional financing.  Don't discount the possibility of renting out SFHs if you are thinking of self managing.  They have a reduced headache factor as there isn't a neighbor on the other side of a wall or floor/ceiling. 

Also, what do you mean by "$40k in revenue"?  Are you looking at $40k gross rents?  $40k after rent-PITI?  $40k with the 50% rule?  Do you know the difference?  I point this out as there is a BIG difference between the three as to how you should go about this-a gross monthly rent difference of $3,300 up to $10,000 or more depending on financing and returns.  If you are looking at self managing smaller properties, you will need to find out what your market is and what kind of returns are possible.  Is this what you want for this $350k to accomplish or is that the goal you want to work up to over the years?

Stephaniekb

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Re: $350K to invest in RE
« Reply #4 on: September 04, 2014, 02:46:35 PM »
We don't mind taking on additional debt. I should have described that we currently own half of a duplex with a mortgage of $1100/month that rents for $1700/mo in our current market, leaving us with $600/mo over our costs  or $7,200/year (is that what you mean by PITI?). We also owned a SFH that was our former residence that was generating similar profit (that's the one we are selling.) We're looking to have about $35-50K in revenue over our expenses, including the duplex we currently own. We live in Denver and so would be most comfortable with self-managing a small property somewhere in this area.

sammybiker

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Re: $350K to invest in RE
« Reply #5 on: September 04, 2014, 03:04:43 PM »
I would get familiar with the 50% rule and really read up before applying those funds.  Your duplex is a break even asset by my standards (after including taxes, insur, maintenance, repairs, management) but I imagine you have solid appreciation there in Denver.

My Denver friends have opted to purchase out of state in pursuit of cash flow.

Best of luck!

arebelspy

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Re: $350K to invest in RE
« Reply #6 on: September 04, 2014, 04:23:24 PM »
In order, here's the steps I think you should take:
1) Identify your goals.  Be specific.
2) Identify what real estate market you're interested in, and why, and how it can help you meet those goals.
3) Identify ideal property types within that market.
4) Drill down to the neighborhood level.
5) Find a property.

(Then you have all the steps after that - due diligence, financing, etc.)

Most people start with step 5, but by ignoring 1-4 they end up with something that doesn't get them to their goals as quickly/efficiently, or even is a hindrance, or they end up with a subpar property market/location.  Start with steps 1-4, not step 5.
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If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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hardworkingpenguin

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Re: $350K to invest in RE
« Reply #7 on: September 06, 2014, 04:38:18 PM »
I'd say the biggest concerns are how much risk tolerance you have and how much management do you want to take? $350k is a nice number for anyone, especially for MMMs. If you are older, I'd say you'd probably want to have a lower risk tolerance and take on less management, in which case you might want to buy single family homes in a nice neighborhood. If you are younger, you can aspire to have a bigger goal and take a bit more risk.

waltworks

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Re: $350K to invest in RE
« Reply #8 on: September 06, 2014, 11:36:12 PM »
Facepunch time: if you have to ask, "is that what you mean by PITI?" you should no way, no how be thinking about buying RE yet, because you don't even have a basic understanding of how RE investing works or the costs/pitfalls might be. Nor do you have any chance in hell of getting a million dollar loan to buy an apartment building.

But there's a silver lining here: you came and asked and were curious enough to start doing research before you just went and bought another property like your (mediocre at best) duplex. Read the stickies, read some random threads (the sell vs. rent ones are always good for background on the 1%/50% rules) here, and maybe find a local RE investor's group in Denver and start attending meetings. Then you can build up the knowledge base to make intelligent decisions about RE investing.

If that sounds like a lot of freaking work, just buy index funds and forget about it, you'll do fine with much less effort.

-W