Advice on different options for investing in real estate

[Tim Rector]

Hi. A bit of background first. I previously owned a SFH as a rental a fews years back which I did some renovation to before renting. Had a bad experience with renter and ended up selling the property. I purchased for $40k put in $25k and sold for $105k. I also owed a duplex with a partner which we did some renovation prior to renting. We rented for 3 years and recently sold. I made $20k on the sale. For both properties, we did not have a property management company.

I work full time.  I have the funds from both home sales sitting in a money market fund (~$150k).  Also, I have access to equity money from my primary residence.  For the funds I have in cash, I'm not really wanting to put into the stock market at this point due to volatility.  Additionally, I would like to put my home equity (>$200k) to work.  Currently my home mortgage rate is 2.99%.  My mortgage is my only debt at this point.

So, I have been looking at various options for investing.  I could go the route of private lending.  I am currently talking to someone about this arrangement and a 10% return.  There is another option which would pay 9%.  My concern here is that the interest paid would be taxed as normal income which would be around 30%.  But it seems this is a more conservative approach/more passive option which would be feasible while working full time.

Another option I have been looking into is getting back into rentals (Class B).  I like the tax advantages and the fact that the loan is being paid down by the tenants while (hopefully) the property is appreciating.  Of course there could be tenant difficulties and maintenance which would challenging while holding down a full time job, but I am considering going with a property management company to help with that.  I don't really want to get into major renovations after purchase due to my limited time available to work with contractors and managing their progress.

A third option I am looking into is a turn-key rental set-up like Midsouth home buyers. I like their model. Seems that they sell the property at retail prices so you are not getting any discount, however the property goes through an extensive renovation. The rents meet the 1% rule from what I can tell. The benefit here is that it seems more passive but I wouldn't be getting the house at a discount in term of the purchase price. I ran the numbers on one property. Purchase price is $82k. Monthly rent $860. Monthly cash flow $306 (includes 10% monthly PM fee). @ 20% down = $16,400. ROI is 22%. This is better than the 9 to 10% ROI I could make through private lending. Another benefit would be that I would be getting the tax benefits since the home will be in my name. I am leaning towards this option and would like others feedback on anything else I am missing which I should consider.

Thanks for your feedback.

[Rob Hakes]

@Tim Rector i think you are off on your Midsouth calculations.  I have run the calculations on their properties and i am stretching to get it over a 9% cash on cash.  Are you figuring in their lease up costs and tenanting costs?  This WILL be there every year.  Also, maybe you are not calculating in closing costs as part of you money in......

Im seeing 10% cash on cash in best case scenario with most turnkeys right now.