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Updated about 1 year ago on . Most recent reply

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Sunny Karen
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15
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Slow scaling with cash or faster scaling with mortgages?

Sunny Karen
Posted

Hello BiggerPockets community,

I am a new Real Estate Investor and would love to get some feedback on our strategy.

Goal: Achieve sustainable income of net $10K/month, while the properties appreciate long term. I am a buy-and-hold investor and planning to hold long term (10+ years). 

Strategy: Buy SFR, multi-family (duplexes and 4-plex) OOS. Currently looking at Tulsa and OKC in Oklahoma. Plan to buy a combination of new construction and turnkey to avoid large capex expenses in the near term. We plan to have a property-manager and in 3+ years we will likely be living outside the US in Europe/Asia.

Financing: I have about $1.3M to deploy right now and will have additional ~$700K (sale of primary home) to deploy in 3 years (total $2M). 

Option 1: The more traditional approach with about 25 - 30% down can buy about $3-4M with leverage. With current interest rates around ~7% for investment properties the net cash flow initially with new construction or turnkey would be 1-2K/month (terrible CoC return). Hopefully when interest rates go down and rents go up in the next 2-10 years, we can refinance and have better cash-flow.

Option 2: Pay with cash right now (~1.3M) and with a ~7% cash-on-cash return we conservatively net ~7-8K/month and properties appreciate with inflation. After 3 years, deploying additional 700K cash should help us get over our 10K/month goal conservatively. This will also give us the option to refinance if the rates go down drastically. Our plan in the near term would be to use the cash-flow to buy additional properties every 1-2 years, increasing cash-flow so that we can live off that income after 10-15 years.

Given our modest goal of $10K/month, I am leaning towards Option 2 which is to use cash to buy properties and in a few years re-evaluate financing.

Here is one of the new construction duplex properties I am vetting right now:

Purchase price: $360K for a duplex.

Expected rents: $3300 monthly

Insurance + taxes: $500

Vacancy, Maintenance + Capex, Property Management (25%): $800

Net cashflow: ~2K/month (CoC ~7%)

Most Popular Reply

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18,257
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15,670
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Chris Seveney
  • Investor
  • Virginia
15,670
Votes |
18,257
Posts
Chris Seveney
  • Investor
  • Virginia
ModeratorReplied
Quote from @Sunny Karen:

@Chris Seveney - That's a good point. Given that our goal is stability with RE investments, we are leaning with paying cash.

@Bruce Woodruff - Good feedback, the workload and handling stress with RE investments is something we are not used to. Need to put processes in place even with property management. Are you referring to stress related to management (vacancy, turn-over, time commitment, ...)

@David M. - We plan to continue working for the next 10-15 years, so the income requirement is at that point in time. Having said that, my spouse and me work in high stress jobs and having some level of constant income coming from RE investments would be good psychologically if we want to take a break or lose our jobs. Our expenses today are about ~10K/month (with a large buffer) and when we relocate to Europe/Asia our expenses will come down to ~5K/month. Initially we plan to use the cash-flow to save up for more properties to purchase, which should increase the cash flow 10-15 years down the line, likely keeping up with inflation at least. I agree with not having a crystal ball, we are looking at current net cash-flow and not baking on appreciation or rent increase (which is likely to happen over the long-term). 

I haven't invested in notes before and don't have a process to vet those investments out. Thank you, will look into it.

How would you go about investing in real-estate if you were in our shoes?

We do have other investments in the market with our non-taxable assets (401K) which we plan to use post retirement age (60).


 Happy to chat about note investing with you, as that is our bread and butter. 

  • Chris Seveney
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7e investments
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