Looking for high cap rate opportunity; Where/When

[David Harsh]

Mortgage lender has approved me for right around ~1M for another property. I am looking for the best option right now to maximize my passive monthly income (Less concerned about appreciation) and intrigued by a commercial real estate loan to do this for me. I have two questions:

Which cities are the hottest right now? I am just looking for a good starting place to begin researching specific neighborhoods/options/realtors. I understand that some of the highest options for cap rate might also be riskier, more time intensive. I plan to use a PM and would prefer less involvement but don’t mind a having a defined set of renovations. With this in mind, are there specific cities that come to mind that I should look at? Cleveland and Oklahoma City are two that come to mind.

Should I wait until I have large lump sum to put 20% down on 1M (in 1.5 years) or buy now? I am of the opinion that waiting for at least 20% down payment is advantageous for interest rates (even though they seem like they will only rise this year). Looking at what money I would have for down payment, I am:

• Open to buying 300k property that would close no sooner than June 1st, 2018 
• Open to buying 1M property that would close no sooner than next June, 2019

Part of me feels like it would be a good idea to buy now, take advantage of low interest rate, start smaller, and the other part of me is telling me to be patient. 

[Ian Ippolito]

Hi David, you invited me to answer your questions so here's my two cents:

1) best high cap rate cities: I'll let somebody else answer this one. I'm a conservative investor, so these high cap rate cities are not something that I've been looking at due to the increased risk if we have a serious downturn.

2) Wait or buy now? This is a very good question. It's a complicated situation with no 100% reliable way to know which of the two is better right now. We could have a downturn between then and now, which would force interest rates to drop back to today's level or lower. Or interest rates could go up much more sharply than people are predicting because the economy does fantastic. Cap rates could be much higher, or they could be much lower. No one really knows the answers to any of these questions, because they are impossible to predict in advance.

Now having said all that, here's what I would actually do if I were in your shoes. It's not  easy to find good deals in today's market, with so much capital chasing too few opportunities. So I would personally start looking now for the smaller property at $300k. You may not find anything, in which case the problem of your decision is solved. If not and you do find a good deal, (that would also hold up well in a downturn), then I would personally take it. That's because there's no guarantee that the fantastic one million-dollar deal (or the financial environment for it) is going to be waiting for you one half years later. And worst case scenario, if that's wrong and the financial situation is great then, there's nothing that stops you from investing the $700K in a second property.  That's not really a very horrible worst-case scenario.