Strategy Advice Needed - What would you do in my position?

Question

Hi All! Long-time lurker, first-time poster. I've recently sold my home-improvement business in SoCal, and plan on moving my family to the Tampa/St. Pete area in the next 2 years to be closer to the in-laws. I've always been interested in investing into multifamily RE, but haven't pulled the trigger yet. I also own a rental condo in Los Angeles, which I plan on listing and selling in the next 60 days. When it's all said and done, I will have $500K in cash + another $400K in 1031 Exchange ($900K total) I would like to use to get into the mutlifamily rental business, and I could use some guidance on the strategy here. What would you do, if you were in my position?

I'm only looking into long-term MF rentals at this point with focus on Florida markets. I'd like to explore options that would provide a "healthy" cash flow, but also ability to invest in other properties in the near future. Does it make sense to go after multiple properties with a mortgage? Or pay cash? Any advice would be greatly appreciated!

Dave Foster · Answer

@Oleg Reut, I like @Konstantin Ginzburg's advice.  Cash flow here in Tampa Bay is better than out west.  But it's not great if you're looking to develop something full time very quickly.  The idea of using FHA primary financing and buy a 4 unit that you live in one unit of for a year is solid!  Low down, low interest.  And you can vacate in a year and keep the loan but turn it all into investment.

The one issue is that you'll only be able to count the investment units for your 1031 purchase.  You'll have $400K cash (but would need to know the net sale of your asset as well).  But let's say you're selling for $700K with a $300K mortgage.  You need to take title to at least $400K of real estate using all $400K of cash.  That could be a 4 plex that you purchase for $1 mil.  And live in one unit.  With the FHA down you'd be using around $100k of cash to purchase $750K (3 units worth) of the 4 plex.

This then leaves you with $300K of 1031 cash and your business sale cash to invest in more real estate.  Maybe that's a nice SF that you will move into in a year when you vacate the 4 plex.  Maybe it's several other assets.  Maybe it's one $800K asset that you pay cash for.  And keep that equity concentrated so you can tap it with a refi any time you find the next perfect acquisition.

Lot's of options for you.

Konstantin Ginzburg · Answer

My personal advice would be to use financing in order to purchase a property. This way you will get a foot in the door of the new market that you are moving too while also keeping a fair amount of cash in reserve if additional opportunities come up. If you plan on using a house-hack strategy, this will make it even easier since this would qualify you for using owner-occupied financing which generally have lower interest rate options. Options such as an FHA loan could keep your down payment requirement as low as 3.5%. I would look for a multifamily house (4 units) in an area of town that you like that would cash flow or at least meet your mortgage payments. One thing to be cautious of in the Florida market at the moment is the insurance rates. They have gone up a lot in the last two years due to the recent string of hurricanes that have occurred in the region over the last few years.

Jim Pfeifer · Answer

I think the first question to ask yourself is if you want to be active or passive.  After selling a business - are you excited to start another full time business or would you like to have someone else run it for you?

If you choose to go the passive route, you won't have to do a 1031 Exchange in order to defer taxes and you won't need to become an expert in MF or a particular market.  Passive investors in real estate syndications invest in other people's deals - effectively you are hiring an asset manager to manage the entire asset.  This allows you to diversify into different markets, different asset classes and different operators.  You hire experts to manage these assets for you.  In my experience, the returns are better than if you are an active investor - unless you have some sort of advantage or skill that allows you to beat the competition.

If you want to be an active real estate investor - go for it!  If you don't want a new job, consider passive investing.  Good luck!

Michelle Crochet · Answer

Hi Oleg!

It sounds like you have a good amount of cash and 1031 exchange funds to work with, which can provide a solid foundation for investing in multifamily real estate! When it comes to investing in multifamily properties, there are a few different strategies you could consider with your available funds. One option would be to pay cash for a single property, which would provide the benefit of no mortgage payments and potentially higher cash flow. However, this approach would also limit your ability to invest in other properties in the near future, as a significant amount of your capital would be tied up in the initial purchase. Another option would be to use your funds as a down payment on multiple properties, with the goal of using leverage to increase your overall returns. This approach would require taking out mortgages on each property, but could potentially allow you to acquire multiple properties and increase your overall cash flow. It's important to note that this strategy carries more risk, as multiple mortgages would increase your debt load and leave you more exposed to market fluctuations.

When considering either option, it's important to carefully research potential markets and properties to ensure they align with your investment goals and risk tolerance. It may also be helpful to work with a local agent or investment advisor who is familiar with the local multifamily market and can provide guidance on potential properties.

Overall, it's great that you're looking to invest your funds in multifamily real estate, as it can be a solid long-term investment strategy. Just be sure to carefully weigh the pros and cons of each approach and do your due diligence before making any investment decisions! Hope this helps :)

Farley Youman · Answer

Oleg:

A lot of people on this post have spent time giving you tips for your plan.  There were a variety of suggestions, so you will have to decide which ones to put into action.  Based on your comments, it appears that this will be your first deal.  Location/location/location is always the advice, but with you I would advise as a consultant-caution/caution/caution!  That means reducing your risk for losing money.  I would suggest following the tips below to set this up:

-especially if you are going to do more than 4 units, or if you will not be living in the property, I would strongly suggest having an equity partner that has ample experience with success...you will have to share your profit to some degree, but this will greatly increase your chance of success

-assuming the partner puts some cash in to set up the loan closing, you will put in less of your money

-less cash means less risk; get a loan (instead of paying all cash) to reduce your risk...also, financially, loans give you greater leverage to get multiple properties which generally will give you more profit than just having one property in cash

Please contact me at 770-817-0559 if you have any questions. Thanks.

Kristina Kuba · Answer

@Oleg Reut

Always leverage.  Buy some STRs and LTRs and keep a healthy balance.

I think the biggest hack since you're a FL resident is to use a 2nd home loan with only 10% down to buy something.  I just did this for an investor in NY for a 2.5 million dollar STR on Indian Rocks Beach and it grosses 400k per year.  In his situation, he only needed about 250K plus closing costs as his entry point and he will net more than his very first year.

Stephen David Smith Jr. · Answer

@Oleg Reut

Hello and welcome to BiggerPockets! It's great that you're looking to invest in multifamily real estate (MFRE) in Florida. With $900K available for investment, you have a solid starting point. Here are some tips and strategies to consider when diving into the MFRE market:

• Market research: Spend time researching different areas in Florida to identify neighborhoods with good growth potential and strong rental demand. Look for areas with low vacancy rates, upcoming infrastructure projects, and favorable demographics.
• Leverage: Since you have a substantial amount of cash and 1031 exchange funds, consider leveraging your capital through mortgages. This will allow you to acquire more properties, diversify your portfolio, and potentially generate higher returns. Ensure you maintain a comfortable debt-to-income ratio and have sufficient cash reserves for emergencies.
• Property size: Determine the ideal property size for your investment goals. Smaller multifamily properties (2-4 units) may be easier to manage and finance, while larger properties (5+ units) can offer economies of scale and better cash flow potential. Keep in mind that properties with more than four units typically require commercial financing.
• Value-add opportunities: Look for properties with value-add potential, such as those requiring renovations or having below-market rents. By improving the property and increasing rents, you can boost your cash flow and build equity.
• Property management: If you don't have experience in managing MFRE, consider hiring a property management company. They will handle tenant placement, rent collection, and maintenance, allowing you to focus on your investment strategy.
• Networking: Connect with local real estate agents, brokers, and investors who can provide valuable insights and opportunities. Attend local real estate investment meetings and join online forums to expand your network.
• Professional guidance: If you're new to MFRE investing, consider working with a mentor or investment consultant who can help you develop a strategic plan and navigate the complexities of the market.

In summary, leveraging your capital through mortgages may be a good strategy to acquire multiple properties and diversify your investment. Focus on market research, value-add opportunities, and networking to identify promising deals. Consider hiring professional help to manage your properties and guide you through the process. Good luck with your investments!

Dillon Cook · Answer

Anticipate interest rates dropping again.. Might just pay cash now and then finance it later when rates drop a point.  You'll see better cashflow in the meantime (obviously).

I assume you DONT want to househack a multifamily.

There's usually no cash flow on year one when financing even at 25% down.  If you want cash flow, you'll need to pay high % down on turnkey (30-40%), buy very distressed and renovate, or househack it and let the 3 units subsidize your monthly living expenses.

Ryan Halford · Answer

Hi Oleg,

Be sure you know your deadlines and have a target property lined up before you sell into a 1031 exchange and be sure to use a qualified intermediary (you can't just put the money in your bank account). Overall just be sure you know how to do a 1031 because there are rules that need to be followed or you will pay the capital gains tax, I ask because you say you are selling in 60 days and not moving here for 2 years. You must identify a replacement property in writing within 45 days and acquire the new property within 180 days. If you are investing here before you move great! I just want to make sure you are aware of the rule. What you invest in is going to depend on your goals. Are you retired, looking to get out of your W-2, or do you have no time for real estate and want something passive? Are you willing to house hack i.e. live in the building you buy, what is "healthy" cash flow to you? $100, $1,000? Greater cash flow usually indicates a C-D class area which comes with it's drawbacks. Rather than give some boilerplate advice I would be glad to have a conversation with you and discuss your goals and how you envision living your life once you move to FL so that we can figure out a plan to make it happen through real estate investing. Feel free to reach out, I'm here in Tampa ready to help.

Michael Haynes · Answer

Hello Oleg Reut from Southern California. You had a successful Home Improvement business? Does that mean you were into Flipping properties or you have a Contractors license? Why would you want to become a Landlord after you already know how to run your own Business? Did you know that the prices for properties in the Tampa Bay area are comming down, like most of the major Cities in the US? What happens if you Buy now, Single House, Duplex, Quadplex or go Commercial and in two years the value has dropped 40% or more? Tampa lost 60% in values in the 2008 Collapse of the Economy and I know three Builders who each lost 120 to 125 Rentals in those two years. You need to use your time to learn to do Searches with Zillow and Google Map and look at everything from Land to Houses to Multi-family etc. Look at the whole State of Florida. Do a Search each week until you get here and take your time to see how things shake out at a this time of Major Stress on our Economy.

Strategy Advice Needed - What would you do in my position?

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