Help! What would you do?

Question

Hello Friends,I would appreciate some advice as I am new to real estate investing. I will be selling a commercial property and will have about $400k that I plan to put into a 1031 exchange. The property that I am selling is where I have had a business and have earned my income for 30 years. I will no longer be generating an income from that business and plan on starting something new which will take some time to generate income.My thoughts are to invest in single family properties. My questions are, 1. Should I purchase a few homes and pay cash or should I leverage the $400k and purchase multiple properties? 2. If I leverage and purchase multiple properties, how would I go about securing financing on these properties if I am knew to real estate investing and I will not have an income going forward? ( I will have a nest egg that will pay all my living expenses for at least 1 year). My concern is that I will not be able to get financing without having a regular income.What would you do and are there lending institutions that will provide mortgages if I am putting 30-40% down on each property?Thanks in advance for your suggestions,MK

Curtis Bidwell · Answer

@Mike Koebke If I were in your shoes I would be looking for an apartment building in the $1.2M range. I'm guessing you might get close to 20 units depending on class & quality. Lending will actually be easier because it will be based on the property, not your income. Your lender will require professional management (which you want anyway) which will cost between 5-10% of monthly rents. 30% down should create some decent cash flow, give you a solid investment, give you professional assistance as you get familiar operating in the industry, along with freedom to pursue your next business venture.

Elizabeth Colegrove · Answer

I think it really depends on your goals and ability to secure financing. I know I personally would buy as many single family units as possible to leverage myself with 25% down. So in my areas that 400k could be turned into 8 houses at 50k down.So what do you want to do ? Do you want to just own one house or own many? Are you looking for a large income or just a small passive one. On the other hand, right now real estate doesn't support us so small margins are okay. Since you don't have another income you will need to go talk to different credit unions, brokers, etc. Till you find a institution that either will work with you or help you figure out a plan.If you buy cash could you than do a cash out refinance once you have experience?Also don't forget to look up 1031 rules. It has been awhile since I have worked with them, but I believe you will need to buy a more expensive property than you currently have. If it was me, I would get started with these questions.1) What does the 1031 rules require me to do?2) What are my goals? How much income and I look for in comparison to how passive to active the requirements of the asset will cost.3) How much leverage am I comfortable with ? Do I want fully paid off or do I want to leverage as much as possible?4) Shop around and talk to different institutions. We personally had great luck with mortgage brokers as they helped us find the best deal.

John Arendsen · Answer

Big oops! I meant to say on this BP Platform not this thread. Does anyone know if BP has an edit after publishing option?

John Arendsen · Answer

I've bounced around all over the place with this same dilemma. I recently asked a similar question and got a very broad range of very astute answers from a lot of very smart and experienced folks on this thread. After a lot of thought and contemplation on the subject I finally came to realize that at 70 yrs old and having worked for 55 of those years I'm at a point in my life where I'm over busy work and hands on management. I want freedom to spend time with my 5 children and 14 grandchildren, globe-trot with my lovely wife of 41 years and surf, surf, surf when the surf's up. So after much thought and consideration of a variety of variables here's what I gonna do:Invest about 10-15% in some solid ETF's.Park about 25% with a well established HML.Invest about 25% in some 1st TD'sInvest about 25% in SFH's or 1-4 Unit MFP'sKeep the other 15% in $$$ for a rainy day emergency fund.It really depends on your appetite for risk vs. reward and your motivation to stay personally involved and hands on with being a landlord which I've been for decades and I'm over it.No more lighting pilot lights and fixing leaking pipes at 3am for this kid.

Dave Foster · Answer

@Mike Koebke, Congratulations on the upcoming sale. The 1031 portion of your strategy is certainly important but don't let it drive the train or muddy the waters ( sorry, I had to mix the metaphors :) The 1031 is about tax saving which is a different animal from what you're really asking. Your real concern is cash flow. That is a function of Net ROI which is in turn a function of leverage, asset allocation and location, operational aspects and risk tolerance. Stay laser focused on your end game. Then work the 1031 into a scenario that works for you - Don't shape the scenario based on the rules of 1031. It is a very flexible statute that can be used in a number of ways after you decide where you want to go.

Robert Hetsler · Answer

there are a lot of moving parts as you can accomplish what you would like but before I respond I would like to speak with you to get a better understanding of the situation so I provide proper direction. If you are fine with that, I will be happy to speak to you at no cost and then type out a detailed response so all viewers can benefit from the question. If you are ok with that, I will make myself available anytime Sunday as it should take less than15 min and then I can provide detailed response here so all investors can benefit as it a question, in some format, that every real estate investor will have at some point in their career. Let me know if this solution works for you as my only intent is for all investors to benefit and although I am an intermediary, I have no intention of soliciting your business. I am a realestate investor first and foremost.

John Thedford · Answer

Get in touch with a 1031 intermediary and learn the regulations. You will need to identify the replace property within 90 days and close within 180 days. There are exceptions due to the time of year you do the exchange. Also, you can identify up to 3 properties without any issues. When you identify 4 or more, the rules change. This is why you need to get guidance ASAP.

Elizabeth Colegrove · Answer

Good luck!

Mike Koebke · Answer

Thanks for your response Elizabeth!Doing a 1031 allows me to purchase multiple properties and they can be less than the 400k. So, I know I can do that.My goals are to create as large of a passive income as possible with these properties without terribly overextending myself.I will shop around with different institutions and brokers as you suggested.Thanks for your advice,MK