Author Topic: Need Advice on best RE investment of 225K  (Read 3765 times)

ckinch1

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Need Advice on best RE investment of 225K
« on: May 11, 2015, 07:10:47 PM »
Hello All,

Iím an avid reader of MMM however today marks my first ever forum post. Iím gearing up for my last big push before I endeavor into the FI life. At the end of this year Iíll be moving to the location I would like to retire, and Iíll be making the move with around 225k cash. I can easily find a home that will suit my familyís needs for under 200k in this area. My question is, should I buy a primary residence outright with this cash and finance more rental properties after the fact or should I try to get as many properties financed w/ this 225k as I can. I currently own three rental properties and have no debts aside from two rental property mortgages totaling $178k, I own the third property outright. I know this is my decision to make I would just like some insight as to how you would attack this same scenario (I plan to go FI sometime in late 2017/early 2018). If anyone needs more background info before taking a shot at this scenario just let me know. I can see pros/cons of going both ways and Iíve officially reached analysis paralysis w/ this one. Thanks much all.

MikeBear

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Re: Need Advice on best RE investment of 225K
« Reply #1 on: May 11, 2015, 07:20:27 PM »
How about using the money to buy a 4-plex, and basically living in one of the units free (other units cover all expenses, including your apartment). You can finance a 4-plex with a standard mortgage. No need to go commercial mortgage until you go over 4 units. Then you can stash up the money you would have spent towards a house, and do whatever you want to do at that point.

ckinch1

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Re: Need Advice on best RE investment of 225K
« Reply #2 on: May 11, 2015, 08:06:54 PM »
Mike,

I have considered it unfortunately multifamily properties are somewhat outside of my circle of confidence. That compounded with the fact that the area I'm going doesn't have many great options in my price range and it makes me a bit nervous. I know multifamily properties are ideal investments, I just don't know if I've got the stomach for them. I'll keep it in mind though if the right opportunity arises. Thanks Mike.

zephyr911

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Re: Need Advice on best RE investment of 225K
« Reply #3 on: May 15, 2015, 11:47:26 AM »
Mike,

I have considered it unfortunately multifamily properties are somewhat outside of my circle of confidence. That compounded with the fact that the area I'm going doesn't have many great options in my price range and it makes me a bit nervous. I know multifamily properties are ideal investments, I just don't know if I've got the stomach for them. I'll keep it in mind though if the right opportunity arises. Thanks Mike.
Have you run the numbers to really figure out your price range for a multifamily? Where I live, you can finance a 4-plex 100%, live in it, and cover all costs with 3 tenants. Your cash down should make up the difference if ratios are different where you're going, unless it's some obscenely unaffordable area. Your actual price limit could be up to 5x your cash down payment under this approach.
If I were moving today, this would almost *definitely* be my entry point into a new market. I'd live in that mofo till it's paid off and then build/buy a small but awesome forever home, with the tenants paying that one off for me.

arebelspy

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Re: Need Advice on best RE investment of 225K
« Reply #4 on: May 15, 2015, 03:25:44 PM »
My question is, should I buy a primary residence outright with this cash and finance more rental properties after the fact or should I try to get as many properties financed w/ this 225k as I can.

Not enough info for a meaningful answer, but I'll give a generic one.  :)

IMO:  Leverage up during early accumulation, deleverage when approaching or in FIRE.  If you're 2-3 years from FIRE, I wouldn't be financing as much as possible (i.e. 900k of RE, if you're putting down the 225k as a 25% downpayment).

Personally in that situation I'd likely do two moves to balance the options:
1) Finance your primary residence with a long-term (30 year) low rate fixed debt (i.e. not an ARM), with the idea of investing the rest and taking advantage of the today's owner-occupant rates, which will also act as a great inflation hedge for FIRE.
2) Put the rest into rentals in cash, or at least do hefty downpayments (i.e. don't leverage up as much as possible, but be more conservative on these ones).

Hope that helps!
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

waltworks

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Re: Need Advice on best RE investment of 225K
« Reply #5 on: May 15, 2015, 03:35:14 PM »
Assuming the rental properties available to invest in that you are considering are actually good deals, I'd first look at asset allocation. Do you want to be significantly exposed to RE at all? If so, how much? If you don't have some kind of investment philosophy and desired AA, come up with one.

Assuming you want to use this money for RE, I'd probably do something along the lines of what ARS suggests and not get too crazy with leverage. But it would depend on how much income you are trying to squeeze out of this $225k.

So yeah, not enough info here to give a useful answer, really.

-W

ckinch1

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Re: Need Advice on best RE investment of 225K
« Reply #6 on: May 15, 2015, 04:14:33 PM »
Sorry for the lack of info everyone. I will say real estate is my primary investment vehicle. I guess really I'm just soliciting ideas for how others would use the cash if they had similar intent of going FIRE in the next 30 months. Max leverage is definitely a route I want to avoid right now, but I do feel that I'd get the most from the 225k if I leveraged up a bit. I'm leaning now towards financing my personal residence 100% w/ my VA loan, and then buying as many rentals as I can w/ cash and/or minimal leverage. In the area I do most of my investing I can find quality rental homes in the 80k range. All of my current SFRs are in Baton Rouge and I'll be moving to Omaha in December. Omaha is where we're planning to settle down. Lastly, my monthly gross is only about $5,500 so that kind of puts a cap as well on how much I can finance even with the cash I have available. Thanks for everyone who has contributed so far the posts have been very helpful.

arebelspy

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Re: Need Advice on best RE investment of 225K
« Reply #7 on: May 15, 2015, 04:25:57 PM »
I'm leaning now towards financing my personal residence 100% w/ my VA loan, and then buying as many rentals as I can w/ cash and/or minimal leverage.

That's essentially what I was saying, and what I'd be doing, personally, but it obviously depends on your situation, goals, and risk tolerance.  But I think that's a good middle-ground between leverage and all cash (lower returns).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

johngoes45

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Re: Need Advice on best RE investment of 225K
« Reply #8 on: June 16, 2015, 06:18:30 AM »
I joined a group (at a cost) that creates multi-family syndicates of sophisticated and accredited investors to invest in class C (for the most part) apartment complexes in Texas. (They also support SF investors too.) Basically, the SEC defines three groups of investors, Accredited, Sophisticated, and the rest of the masses. In Texas, an accredited investor is defined as someone with >$1M net worth excluding own home or >$250k annual income. An accredited investor is considered to be smart enough to invest what they want where they want. A sophisticated investor is someone who is considered to have been educated how to evaluate investments but doesn't have the accredited level of assets/income. There are limits to how many sophisticated investors can join an investment syndicate.

I have invested $110k in two MF deals as a "passive partner". Returns start at 8-10% ROI and through operation improvements and rent bumps the ROI increases to 15-18% over 3 to 5 years.  The group I joined provides extensive education to learn how to evaluate MF offerings and the "lead partners" that actually find and run the properties using the group's investment model. The group, "Lifestyles Unlimited" (yes, it's a cheesy name) has been around for 20+ years and in each of the last 9 years one of its "Lead Partner" members has won the National Apartment Association's Independent Apartment Owner of the Year award. If you have the balls, becoming a lead investor is highly lucrative with many millionaires who own multiple apartment complexes in Houston, Dallas, San Antonio, and Austin (and expanding.) For those with lead aspirations, LU provides extensive education and operations support to get you up to speed in buying and operating your first (and subsequent) apartment complex.

That said, your investment is pretty illiquid once committed to a MF deal. So I don't expect to see the invested money back in my pocket unless the property sells or can be refinanced. But I LOVE the quarterly distribution checks (direct deposits actually) from said investments. Also, I would say this group really is for those who have a nice nest egg to work with. I will be generating my FIRE income with about 60/40 RE/dividend stocks asset allocation.

jnc

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Re: Need Advice on best RE investment of 225K
« Reply #9 on: June 16, 2015, 06:57:18 AM »
I joined a group (at a cost) that creates multi-family syndicates of sophisticated and accredited investors to invest in class C (for the most part) apartment complexes in Texas. (They also support SF investors too.) Basically, the SEC defines three groups of investors, Accredited, Sophisticated, and the rest of the masses. In Texas, an accredited investor is defined as someone with >$1M net worth excluding own home or >$250k annual income. An accredited investor is considered to be smart enough to invest what they want where they want. A sophisticated investor is someone who is considered to have been educated how to evaluate investments but doesn't have the accredited level of assets/income. There are limits to how many sophisticated investors can join an investment syndicate.

I have invested $110k in two MF deals as a "passive partner". Returns start at 8-10% ROI and through operation improvements and rent bumps the ROI increases to 15-18% over 3 to 5 years.  The group I joined provides extensive education to learn how to evaluate MF offerings and the "lead partners" that actually find and run the properties using the group's investment model. The group, "Lifestyles Unlimited" (yes, it's a cheesy name) has been around for 20+ years and in each of the last 9 years one of its "Lead Partner" members has won the National Apartment Association's Independent Apartment Owner of the Year award. If you have the balls, becoming a lead investor is highly lucrative with many millionaires who own multiple apartment complexes in Houston, Dallas, San Antonio, and Austin (and expanding.) For those with lead aspirations, LU provides extensive education and operations support to get you up to speed in buying and operating your first (and subsequent) apartment complex.

That said, your investment is pretty illiquid once committed to a MF deal. So I don't expect to see the invested money back in my pocket unless the property sells or can be refinanced. But I LOVE the quarterly distribution checks (direct deposits actually) from said investments. Also, I would say this group really is for those who have a nice nest egg to work with. I will be generating my FIRE income with about 60/40 RE/dividend stocks asset allocation.


I'd be curious to understand how that income is taxed? Is this considered real estate income, dividends, something else altogether?

johngoes45

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Re: Need Advice on best RE investment of 225K
« Reply #10 on: June 17, 2015, 07:58:36 AM »
I haven't been in long enough to understand all the tax implications but my understanding is that we're full partners in the deal which is an LLC business entity and receive a K-1 of the proceeds each year. Normally, the depreciation and operation expenses results in passive losses that accumulate until the property is sold. Some of the MF deals are so well run that they result in a small profit for the partners that is taxable, but I don't know on what basis. (And this answer implies I have a new topic to continue my research as a Sophisticated Investor.)
« Last Edit: June 17, 2015, 08:08:06 AM by johngoes45 »