Looking to invest $1M-$1.5M, are my expectations of return too high?

[Matt E.]

My wife and I are looking to do a 1031 exchange on a property we have in escrow. We stand to net approximately $1.5M in profit, and we are looking to roll it into a long term investment. Ideally, we would like to pull $75K annually as income for ourselves.

Is it sensible to put $1.5M down on a $3 million or $4 million Multi-family building and expect that kind of return? We live in California and plan on staying in California. We are both just under 30 and would like to use the $$ as a source of income, then reap the benefits once the mortgage on this new investment is paid off.

Based on what I see for sale, it seems possible. What am I missing? Is my logic flawed? I would appreciate if some of the veterans could point out the holes in my plan.

Also, I would ask for alternative scenarios on how we could invest the $$ to maximize our return. Due to the 1031 provision, it will have to be in real property to defer tax liability.

Thanks,

Matt Evans

[Joel Owens]

Hi Matt,

First let me say that is AWESOME that you are getting that windfall.

How you invest it depends on your goals and risk tolerance. I deal with many clients from California. Whether you invest out of state really is about the returns you are happy with and cash flow versus a spec play.

If you are happy with a 5 cap then I am sure you can locate properties in your home area. Things to consider is if you have a pro-tenant or pro-landlord state and a business friendly state. Some states charge income taxes on investment property and others are tax free.

In regards to leverage you can go as high as 90% in commercial. Typical is a seller 10 to 15% carryback and then you put 10 to 15% down and the bank does a 75% ltv first. Loans typically are 5 to 10 years fixed with a 25 year amort. around a 5 fixed rate. With the loan you have to look at early pre-penalties and if a buyer can assume the loan which is helpful to sell down the road and what assumption fee if any is charged by the lender to do so.

Triple net leasing you can land a 9 to 10 cap in some cases where for example on a 20 year lease there is only 7 years left on the primary term lease and then options kick in. When you pay cash you keep the return but unless you put a bunch down when you finance the lender only gives at best a double am schedule for the length of the primary term left. So a 7 year term remaining maybe a 15 year amort. When the loan comes due before the option period kicks in the lender wants the loan balance to be below the dark value.

Matt I would encourage you to talk to different people and gain information so it will help you in ideas of ways to 1031. This forum is a good place to ask questions.

Put your questions out here for us to answer. I could write a book about all the commercial options so I will stop now.