Where to begin with cash on hand

Question

I am a physician and hoping to get into the real estate game, just looking for recommendations to get started. I am finally starting to have some extra cash and have almost 6 figures sitting in the bank that I am looking to get involved with some property. What is the best way to network and find syndications? Not sure I want to buy an individual rental property right now as I'm in a very hot market and don't necessarily have the time. Not quite an accredited investor yet, just finished my training recently.

Zach Lemaster · Answer

@Trevor Fleck Thank you for the mention!

@Adam Berlinberg I worked as an Optometrist for many years, and was able to retire from the healthcare career field through RE investing over many years in the best markets throughout the US!  Others started coming to us to assist them in how to do the same thing, and that is where the birthplace of our company Rent To Retirement started!  I'm happy to assist however I can in answering questions.  We operate in the syndication and turnkey space across the country in multiple markets.  With inflation that we are seeing now, and especially in the future, it is definitely a great idea to put your capital to work earning income vs inflation chipping away at you in the bank!  Just depends on where the right starting point is for you!

Trevor Fleck · Answer

@Adam Berlinberg I was in somewhat of the same boat with a high paying, demanding job and young children. I'm in Raleigh so - like Denver - not an area where the 1% rule or anything close is easily achieved. When I thought through the spectrum of real estate options available from syndications on one end to self-sourced rehabs on the other I found myself looking at how much time I had, capital, and what was the most tax efficient investment. Sounds like you have non tax-sheltered funds available. You could invest in syndications, but you're interest gained will likely be taxed as ordinary income. I personally use my SDIRA to invest in syndication deals and lend funds but use my bank account for real estate investing using turnkey companies. With the turnkey route I'm able to leverage someone else's network/framework with minimal time relative to other options and take advantage of leverage of capital as well as expenses/depreciation write-offs. There are dozens and dozens of turnkey companies out there. I'd take some time to examine client reviews and speak with a few of them to find what works best for you.

I personally invest in the Cape Coral area of Florida on new construction with a turnkey company called Rent to Retirement. My rationale for new construction vs. continuing with more turnkey rehabs was less maintenance and tenant issues than older properties in lower class areas. Additionally, the sunbelt is one of the fastest growing areas of the nation. So a nice combination of instant equity, likelihood of appreciation, and cash flow. Happy to share more of my experiences in different markets if you're interested. Good luck!

Eric Fernwood · Answer

Hello @Adam Berlinberg,

I will assume that you are looking for a long-term passive income to supplement or eventually replace your current income. If this is the case, you need an investment strategy, not simple ratios and short-term objectives. In this post, I will discuss a process for selecting the right location/market, tenant pool, properties, and the importance of working with an investment team.

Passive income streams must meet three criteria.

• Reliable - You must receive all the rent, on schedule, every month, during good times and bad. And, rents must keep pace with inflation.
• Low Operating Cost - Operating costs are a direct hit to cash flow.
• Minimize - Time, money, and risk.

What are the drivers for these three criteria? See the table below.

Consolidating the drivers and ranking in order of importance:

• Location/Market
• Tenant Pool
• Investment Team
• Specific Property

I will not go into detail on each driver but I will mention some important considerations.

Location - the most important investment decision

The location determines long-term passive income reliability, inflation adaptability, operating cost, risk, and the total capital required to grow your portfolio. While there are several criteria for location selection, the most important is (pre-COVID) appreciation. I will demonstrate why.

Below is an oversimplified example comparing appreciation vs. cash flow. Property A has 7% appreciation and no cash flow (you would never do this). Property B has no appreciation but 7% cash flow. All other factors (inflation, etc.) are ignored. Look at the amount of cash you will have for investment after five years of ownership under these two situations.

As you can see, at the end of 5 years, you can do a cash-out refi and would have $120,000 to buy another investment property. You have substantially less if you purchased a property focusing on initial cash flow.

Reduced total capital required is only one benefit of selecting a high-appreciation location. In addition, prices and rents are linked. So, if prices are rising, rents will also increase. High appreciation locations have higher cash flow over time than locations with lower appreciation rates where rents fall behind inflation, reducing your buying power and standard of living.

Tenant Pool - the second most important investment decision

The only way to consistently make money is to keep the property continuously occupied by what I call a "good" tenant. A good tenant is someone who:

• Has stable employment in a market segment that is very likely to be stable or improve over time
• Has a credit history with which you can evaluate the likelihood that they will perform
• Pays all the rent on schedule
• Takes care of the property
• Does not cause problems with neighbors
• Does not engage in illegal activities while on the property
• Stays for many years

Once you select a tenant pool with the highest concentration of good tenants, you can determine what properties they are willing and able to rent.

Property Selection

You select properties that your target tenant pool is willing and able to rent. The characteristics of these properties are a reflection of the specific tenant pool. See the image below. On the left is the process prospective tenants follow to select a property. On the right is the property's physical description that matches the target tenant pool.

However, it is not just the physical property characteristics that matter. Each property must optimize the following 5 aspects:

Investment Team

If you needed surgery, you would not start medical school. Also, not just any doctor will do. You want a surgeon specializing in the kind of surgery you need, not a general practitioner. The same is true with real estate investing. Why re-invent the wheel? Work with an investment team that already has the skills and a proven track record of finding, qualifying, renovating, and managing properties. A good investment team costs you nothing and will minimize your time, risk, and money. If you try to do everything yourself, it will cost you more, require far more time, and the odds of success are much lower. (Note that turnkeys are not an investment team. Turnkeys sell packaged properties at a premium price to maximize their profits, not yours.) Also, an investor-friendly Realtor is not an investment Realtor. Investor-friendly Realtors do not have the resources and team you need. Below are the skills investment Realtors and their team provide. Do not spend the time, money, and effort to duplicate what an experienced investment team already provides. Instead, find a good investment Realtor who already has everything you need to succeed.

Note, when you work with an investment team, you are the CEO. You do need a basic understanding of real estate investing but not all the gritty details. Let your investment team do all this for you.

Summary

Real estate is the simplest and most reliable path to financial independence. If you buy good properties in good locations, real estate provides a reliable, inflation compensating, passive income stream you will not out live. Do not fall for short term returns and magic ratios. Work with an investment team to develop a long term strategy.

Pat Lulewicz · Answer

If you know and trust anyone in your closer circle who's an investor or flipping houses, see if they need private money. Don't charge them crazy terms, but in exchange, ask to be included on every email or decision point. If you're local enough, walk properties with them that they're working on, etc. You'll get paid plus get an education. It's priceless. Keep it relatively short-term (no more than 6 months). You might even find you prefer to be the bank.

Otherwise, a lot of people are right on these posts. Look out of market. With your income level, might want to focus on appreciating markets (Austin, Raleigh [where I'm at], and even in your backyard) where you cash flow enough for unknowns/unexpecteds. Take this opportunity as an educational period. The first one doesn't have to be a homerun; base hits win games too.

Paul Moore · Answer

Hi @Adam Berlinberg. I have spoken to well over 1000 investors, mostly through BP. Including a lot of physicians. I’ve concluded that anyone with high earning potential who wants to stay in their career should strongly consider passive investing. Actively owning real estate while having a demanding full-time job has huge hidden costs. It takes a toll on your family, your health, your free time, and even your earning ability.

In your situation I would certainly consider loaning money to house flippers or finding passive opportunities for non-accredited investors. You can learn a lot and when you’re accredited you will have many more options. Good luck!

Jim Pfeifer · Answer

The first question you need to ask yourself is do you want to invest actively or passively?  You hinted that you don't have time, so I would guess you would prefer to be passive.  If that's the case, the next thing to define is what is active or passive for you?  I actively invested while I had a W2 job and I did not do a great job at it because I thought it was passive and I tried to make it passive.  It wasn't.  If you own properties - whether turnkey or BRRR or however you do it, you are an asset manager.  Even if you hire a property manager, you still must manage the asset, including your PM.  From my experience, this is NOT a passive activity.  I was in multiple markets, with multiple property managers and it was anything but passive.  I switched property managers several times in an attempt to find someone who would take good care of my property.  It was a struggle.  I have since sold all of my active rentals.

I am now a full time passive investor - I hire asset managers (syndicators, sponsors, GP's) to do all of the work for me.  The active part of the process is finding and screening sponsors and evaluating deals.  After you wire the money, that's when the passive part starts - then you are just reading reports and following up with the sponsor if you have questions.

In my opinion, the key to being an effective passive investor in syndications is to have a network of quality people you can talk to - a Community.  There are many out there.  The reason I believe this is so critical is because syndications are highly illiquid, very long term investments.  You will know if you made a good investment decision three or five or ten years after you made the investment.  The best way to give yourself a good chance of picking the right operator is to use the experience of other people who have invested with that operator.  It took me a long time and I learned the hard way - but I now only invest with a new sponsor if someone I know, like and trust has already invested with them and recommends them to me.  The only way I became connected with people who could recommend these sponsors was through membership in a Community.

Drew Sygit · Answer

We think the Midwest is a GREAT place for OOS investors to consider!

YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods: https://www.biggerpockets.com/...

Your biggest question shouldn't be WHERE to invest, but HOW you will invest!

Many OOS investors set themselves up for failure because they don't truly take the time to understand:

1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.

2) The Class of the PROPERTY they are buying - which is relative to the overall area.

3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.

4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.

5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.

6) That OOS property Class rankings are usually vastly different than the local market they live in.

7) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.

8) Class A is relatively easy to manage, can even be DIY remote managed from another state.

9) Class B usually also okay, but needs more attention from owner and/or PMC

10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage.

11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.

https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799

Also, SERIOUSLY consider do you really have the time to be a DIY landlord or should you hire a PMC?

Good luck with whatever you decide😊

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PMC & AGENT

An agent and a PMC should work together to find you great rental properties.

We don't recommend relying solely on an agent as they're out of the picture after the closing.

No one has more "skin in the game" than a PMC as they have to deal with the property every day until an owner sells or fires them.

Also recommend finding your own Inspector and not one referred by an agent. You want an unbiased Inspector.

Then:

• Do a SWOT analysis of your resources
• Write down your real estate goals
• Pick an asset type: SFH, 2-4 units, 5+ units, or something else like MHP.
• Pick an asset class: Class A, B, C & D properties, research pros & cons, pick one to focus on
• Pick a real estate market that matches your resources & goals
• Contact local agents & PMC’s to start sending you listings to analyze
• Analyze a few deals weekly, get comfortable with the market and refine what you're looking for

Larry Fried · Answer

Hey Adam,

For unaccredited investors you will have to find syndicators that have 506(b) offerings which are open to up to 35 unaccredited investors.  These syndicators can't advertise to the offerings to the general public, you have to be part of their network.  I have been investing for some 6 years with one such company, and I have tracked my investments with them in a 4 part BP member blog starting with Have I Found the Holy Grail of Passive Real Estate Investing?

Part 4 is being updated quarterly. You might find it an interesting read.(Part 2)(Part 2)(Part 2)

Bill Mays · Answer

Hello Adam,

Written by a Dentist, for other physicians. Good read and a great place to start with proven knowledge prior to investing your money. I would spend a few days reading Own Your Freedom by Dr. David Phelps DDS.

Buddy Holmes · Answer

@Adam Berlinberg

Hello Adam. Comments depend on where you are living.  IMHO, best to start with a SFR in your local area if you can find a property with a rent ratio of 1% or above. (monthly rent/purchase price) First you need to find a RE agent who know rental property and if possible does property management.  They can look for property for you from the perspective of rent ratio.

Study the BP calculator to figure the cash flow potential of any deal you come up on.  Don't buy based of potential for appreciation, only on having positive cash flow with Property management, your mortgage, taxes, insurance and good reserves for rent vacancy, repairs and longer term capital expenses like roof and HVACs.  If you are in LA, NYC, Denver, Austin or such things could be much more difficult as you may need to look for a out of state deal in a better RE market.

Hope that helps a little.

Cheers, Buddy

Where to begin with cash on hand

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