Author Topic: How would you invest? 250K in cash, leaving my job, $1700 net rental income/mo?  (Read 2605 times)

Unstoppable

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Taking a crowdsourced approach to short and long term planning. How would you invest $250K in cash if you had no debt other than business debt, and had 100% control of your time. I live in a affordable Midwestern area and net $1700 from current leveraged rental houses.  How would you invest this for your current income and long term strong growth?

Would you put 1/3 down on a 725K building, self manage and keep your head down? Do the same and hire management out and look for other projects to work on to bring in income. Put 30% down on $800K worth of single families?

My current plan is to keep enough liquid to keep a rehab going at all times for cash, and to use the remaining amount for a downpayment on another rental. Then live simply off of rehab profits, putting all overage into the rental company to continue to grow.

I am at a crossroads, leaving my job, and am curious to see how others might think. I hope to color my decisions with insight from another's ideas.  I would appreciate any advice to me on my situation, but am curious to hear what others might do with a similar situation in their own lives.

I also hope that someone else might read this and get an idea or inspiration to choose a more deliberate path when they are young. If you are walking in the right direction, with enough time, you will get where you are going.
« Last Edit: November 03, 2016, 08:08:08 AM by Unstoppable »

Summerinparis

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I'm not exactly sure what you are asking but I'm in a somewhat similar situation.  I have a decent sized portfolio (including ample cash on hand) and a few rentals that provide a few thousand/month cashflow.  I've recently taken some time away from work because my workplace has become intolerable and am trying to maximize my investment/rental income in the interim. 

In the next few months, I'm planning on slowly dollar cost averaging into the market (especially if we have any post-election dips) and focusing on renovating my rentals.  I'm all about index funds so I don't have any specific investment tips to share. 

Unstoppable

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I updated the initial post to clarify it a bit. It looks like we are in a similar place at this time.

I am not planning on putting any of this into the equities market. All of my rentals have been renovated over the last 24 months, so I am clear to move forward. I already have some retirement money indexed into the market, and I don't want to tie any of my non-retirement money up in 8-10% annualized returns in the market.

Value add rehab to rent, or rehabs in general, can far outperform that strategy. If I want to survive and thrive full term on this, starting the business with this seed money essentially, I need to push this return higher.

If I only make 10% margin on a rehab (20K on 200K all in), and I only turn this three times per year (4 months close to close), I can generate 30% annualized on 200K, or 60K. This leaves 50K of original 250K money to put 10K in reserves and 40K for 30% downpayment on a rental starting out. I have living expenses saved up outside of these funds, so this is just planning out the business.

This is my current best idea. My wife just got her license, so that should reduce costs on all transactions as well.

I welcome people's thoughts.

Another Reader

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Real estate is like musical chairs.  Your plan will work as long as the music keeps playing.  If the market turns, you could be handing back properties to your lenders.

Good idea to reduce transaction costs by having an "in house" agent.

Unstoppable

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We went through the last downturn without a blip. With 30 year mortgages and required down payment levels, rentals cash flow fine. If values drop it doesn't matter a whole lot because they are not for sale.

If we are in the middle of a rehab when the market stalls quickly it can always just be rented out as we would be doing that property with cash.

I have been investing for about eleven years now and am very aware of the potential pitfalls, which is why I will buy nothing unless I find an acceptable deal.

Another Reader

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I agree with you about the cash flow.  I have been a landlord for over 20 years.  I have had as many as 30 houses.  Rents went UP and vacancy declined when people lost their houses in the last downturn.  I watched a lot of other people lose their rentals and I bought several in 2009 to early 2012.  Lots of flippers went under as well.

If you are doing serial flips with cash, you can handle a downturn.  Leverage is risky without reserves.  If you can finish the project and get a tenant in, you are probably ok. 

waltworks

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If you weathered the last dip, I take that to mean you've had multiple rentals for >10 years. And you are only netting $1700/mo?

I think a case study would be more helpful here than anything. What we have is pretty abstract.

-W

Unstoppable

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Yes, I have invested since 2006. Topped out at nine properties while working full time. Currently at four, netting $1700. That is after deducting 25% for vacancy, management (even though we do it), repairs and long term capex.

So my question was, how would you invest 250k to live modestly off of, while still growing. I am 35, and want to focus more on capital growth than cash flow. I am comfortable with max 70% leverage going forward, in the business. We have no personal debt and never will.

As things go on, I may always pick up project or consulting work, if I come across the right arrangement, to cover some living expenses.  Then the company can more completely reinvest its profits, without me siphoning off grocery money.

Johnny Aloha

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If I only make 10% margin on a rehab (20K on 200K all in), and I only turn this three times per year (4 months close to close), I can generate 30% annualized on 200K, or 60K.

I'm a buy and hold guy, not a flipper, and definitely not a CPA, but what about taxes?  As I understand it your $60k/year will be subject to short term gains and self employment tax (15% of gross).

I'm moving into commercial RE because I find single family home are too management intensive.  Believe it or not, there are still solid deals in commercial although they are very hard to find (took me a couple years).

Alternatively, there's a couple syndications I would consider investing in to generate 15-18% returns if you want to take that route. Sounds like you are probably accredited which opens a lot of doors.

Unstoppable

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I am not accredited, I have just built what I have through a lot of hard work and sacrifice.

Yes, rehabs will be subject to higher taxes than rentals, but this will also be a substitute for current w-2 income, so there isn't much of a change there. I may invest the proceeds in rentals, commercial, etc, but I want to keep a good amount of the initial sum turning over a conservative margin on an consistent basis until a better plan arises.

clarkfan1979

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If you enjoy managing, I prefer to manage single family homes as rentals instead of multi-plex. I have two single family home rentals and it's been very easy for me, even though I don't live locally.

If you want to be completely hands off, I would look at apartment complexes that are 40+ units. I have read in a few real estate books that once you get into an apartment complex of 40+ units, there is enough room to pay an on-site property manager.

My step-dad has owned a 45 unit apartment complex for the last 22 years and pays an on-site property manager. When it came time for financing, he got 3 partners. He is 85% owner and 3 other investors are at 5%. I think he needed their W-2 income to help qualify. However, I am not 100% sure. Most of the apartments are 2 bedrooms and rent for around $1200/month.

His small business did some engineering work for a church and they paid him with land, so he kind of got the land for free. I think it cost him around 1 million to build the apartment complex in 1994.


Unstoppable

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I don't mind managing our properties. At this point paying 10% of revenue to someone for the minimal amount of work (less than an hour per month averaged across 5) required is not worth considering.

I don't really want to lock all of this money up at a fixed return at this time in MF, as I will need something to produce returns that I can live off of, without killing future growth. I have about a year's worth of living expenses set aside outside of the investment amount. This is why I am looking at a value add project for cash, spinning off profits into rentals to offset the income tax and self employment tax from the rehabs.

There seems to be a lot of competition in the MF space in the last year, signs of an improving economy. In our area lots of mom and pops are buying up the small multis and there has been a lot of competition on the mid-range ones as well. Low interest rates will do that.

I may start direct marketing in order to find SFH for rehab, and possibly off market small multis as well. Anyone that calls without equity may be able to be converted to a retail listing through my wife.

Fantastic story about your father. I hope to create such a situation some day.  I don't expect this to be the type of situation that you can force, but one should arise on a long enough timeline.

escolegrove

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We own 8 single family homes in 3 different state, 4 cities all self managed. While my husband work full time, I left my job in April when he was transfered (active duty navy) and manage everything full time. On our 8 houses we make a little over $2100 when you take out the same expense number you mention. We have invested for long term growth not cash flow.

Now that I am not working one of the things I have done, is enter the vacation rental space with our current houses. While the numbers are AMAZING (almost tripling the top number) it is ALOT more work.

The husband and I are having this current debate about where we want to go. One of the things we are definitely discussing is management work load. The reality is 8 houses is more work than 4, 12 than 8, etc. In the beginning my goal was houses AND cash flow. Now its just cash flow with as little house as possible. For example I would rather have 10 houses producing 3k than 30 houses producing 1k.

Since we are about LONG TERM cash flow (hoping to early retire at 44 and 42 when the hubs is eligible of the military pension. I would look at investing the 250k into 3 single family that are making 3,000 a piece in rent. That would give me a potential take home of 9k when paid off. Basically that would double what I have now in almost 1/3 less properties. The leverage would be amazing even if the short term don't look as great. Plus it would give me tax benefits which we need.

Hope that helps ;)