How to invest $275K in cash?! Newbies need help thinking it out

Question

My sister and I are new to REI, but we're stoked as hell to jump in, and we happen to be lucky enough to have access to ~$275K in cash. We're trying to think through what is the best approach for investing this cash in order to get the most out of it, as fast as we can (in the sense that we want to really grow our investments quickly). We're interested in the BRRRR / buy and hold approaches, but, it seems generally that the BRRRR strategy is for folks with little to no cash?

We're currently looking in the Nashville market as we're from there, and believe it has lots of opportunity yet still. Initially we've been looking at single family homes, excluding new construction (not really our vibe), as multi-family units are almost nonexistent in the inventory in our budget. But how to spend this cash has been of the biggest concern, because without really having a strategy, we're not "crystal clear" on what we want, and so we can't successfully narrow down our field of opportunity and hone in on the right deals.

Would ya'll:

Buy a single property in cash and just have pure rental profit? Our fear is that with this option we don't really gain the ability to access capital in the shorter term in order to grow and purchase additional properties.
Use the cash in a traditional financing situation on more than one property, (OR maybe a bigger more luxury property) which give us a lower rental income return but longer term ability to do more? Or so this is our thinking if we can refi, etc.
Something else entirely that we haven't thought of..?!

We welcome any thoughts / suggestions. Thank you!

Chris Levarek · Answer

@Chloe Mayer You have options! And that's a great place to be. The nice thing in real estate, is you are only limited by your creativity here. I will suggest a few other options however, regarding the first few you listed.Option 1 - I am not a big proponent of this. All Cash purchases to hold don't make sense to me. If you make say 2000 in rent minus let's say 500 in expenses (utilities, garbage, taxes, insurance, yard maintenance, vacancy, money set aside for future issues, vacancy, etc) That's 18000(1500*12) annual profit or cashflow!18000/275000 = 6.5% , might as well just save the effort and invest into Mutual or Index Funds (same return)Option 2 - Much better, you are using "leverage" to buy 100% of an asset. So for 20% cash or 3.5% or whatever down, you are buying 100% of value and getting a return on it. Same example above but with a 1000 mortgage on a 80% loan of 275k (220000) for simple math. This equates to 500 in cashflow per month (2000 - 500(expenses) - 1000(mortgage)) . So annual profit of 6000. 6000/55000(275000*20%) = 10.9% return. Ok but why would Option 2 be better. Well because you still have 220000 in cash to go invest into other properties to do the same. So hypothetically you could get another 4-5 property giving 10.9% returns instead of the 6.5% you would get from one property.Other options(Option 3) of course:Invest into other passive investments that are achieving a great return. Apartments, Mobile Home Parks, Self-storage, etc. Less work on your part but also a good way to learn, diversify risk and leverage other people's experience.Invest or acquire short term rentals or airbnb in vacation destinations - Higher profits and dual purpose use for your vacation but varying degrees of mgmt/riskLend the cash to other investors for a return. They provide a Deed of Trust(ownership of the property), you get interest for the duration of a flip or project. After project, capital returned and ownership released. Think Hard Money Lender.Joint-Venture with other investors on a variety of projects. Bring the Capital for a portion of the equity. House-Hack or live in a house and use your cash to fix it up, then sell it after two years.Invest in a mentorship or yourself to learn in an area you want to learn in real estate. Can accelerate your journey or goals.Plenty of options. The key is, what do you want to get good at? What is your end goal? Once you figure that out, choose a strategy that aligns or builds the skills in that area. Invest in yourself and the direction you want to move towards. The more you practice a strategy the easier it gets, the more money you make and the better investor you become. But first it takes clarifying that end vision, then defining the strategy.Hope that helps!

Brian G. · Answer

@Chloe Mayer I don’t mean to be a Debbie Downer but you need to study up. Get the REI book written by Brandon Turner and Josh Dorkin on beginning in RE. This will expose you to a variety of possible strategies. Binge listen to podcasts and consume forum information. Most of us have an opinion on what WE would do which is often a reflection of our current goals, skills, experience, knowledge, etc but it’s not possible to know what YOU should do since it’s very personal and must take so many factors into account. Congrats on having working capital. That has the potential to change the financial trajectory of the rest of your life. Remember the most important principal in investing: Protect thy Capital!

Account Closed · Answer

Hi @Chloe Mayer! Personal experience/opinion here... I would absolutely look into Large Multifamily Syndications (apartments). We originally started with 6 units in Chicago and quickly realized it's very difficult to scale (and uses up a lot of your cash quickly) - so we transitioned into large multifamily. A lot of people think that you have to slowly scale up (6 units --> 20 units --> 50 units...etc), but you don't! We went straight from from 6 units to 173 units under the guidance of a successful mentor. You can take down large deals like this (100+ units) because you do it with a team of people. The returns are extremely lucrative as an "active investor" - and they are great as a passive investor as well - just depends on what your ROI goals are. Sometimes it's easier to explain via phone - feel free to shoot me a message...I love talking real estate. Best of luck on your RE investing journey!

Henry Lazerow · Answer

Congrats on access to $275k that's huge. Find a class A or B (rents over $1400 a unit minimum) 2-4 unit these tend to cashflow the best in real life. Don't fall for the $80k duplex with $600 a unit rents trap. You end up spending so much on cap/ex and management fees it destroys the cash flow. You also can do a BRRR. I have lots of clients do these in Chicago class A/B neighborhoods as it's really easy to get the ARV high due to our property price points. I would recomend a BRRR for the second deal and for the first just do some basic cosmetic updates and maybe refi a few years down the line. You definitely want to use financing. Buying in cash your returns won't be high enough to really warrant the work real estate takes up vs just index stocks. With financing you get mortgage paydown+appreciation, tax write offs, etc.

Richard Hayes · Answer

@Chris Levarek you have some really great insight for each option. Thank you for sharing!

Don Spafford · Answer

@Chloe Mayer Your understanding of BRRRR is incorrect. it is not something for people with little cash. It is the best way to preserve your cash. You could do a few at a time with $275k, get the cash back, and keep doing it and have a large portfolio pretty quickly. Or even better, do it on some small multi-family properties. Consider this, you can invest it into maybe a medium size multi-family for $1M, it may give you some good cash flow, but then that money is gone and you'll have to wait to save up more to buy another one. If you have a high income and can easily save that up again, good for you, then you can choose to do anything with the money. But if your BRRRR, if it all works out well, your money never runs out and would over time increase the amount you have available to invest to be able to do more, or larger ones. If you haven't done so yet, read the BRRRR book.

Joe Schmitt · Answer

@Adam Eckhoff#3 buy vacant land, but just flip it or sell it in terms. Rentals are a long game and BRRR takes a LOT of skill. It’s anything about passive.

Marlen Weber · Answer

Hi @Chloe Mayer. While multifamily could be tough to get into with your budget, you can still consider passive investing in multifamily. It's a great way to produce income month over month, without being married to a property or an area. Best of luck to you and your sister :)

Whitney Hutten · Answer

@Chloe Mayer BRRRR is for someone who wants to use the same pot of money over and over again without seeking out new sources of capital. So don't rule it out!1. Make sure your personal financial position is rock solid with plenty of emergency reserves. What COVID has brought to light is that most people are poorly capitalized.2. Define your end goals and vision. What do you want most? Money is just a tool to help you get what you want. Do you want work to be optional (then you need cashflow)? Do you want to build generational wealth (they you need cashflow and appreciation)? Cast this vision and then work backwards.3. Make a list of all of the investment strategies that match this vision. But don't pick on yet! Ask yourself how you want to spend your time as you build your business. Do want to be hands off? Or do you want to be super involved? Or somewhere in the middle? Knowing how much time you have to execute will help weed out those investment strategies that aren't a good fit. For example: You want to own multifamily buildings but work 60+ hours and have a family at home. You could still do this, but perhaps you have someone do all of the acquisition and management on your behalf. OR you invest in someone else's buildng through a syndication.4. Then start researching those strategies and pick one first to follow. $275K is a good chunk of change to get started with. If not invested wisely though, it will run out. PM me if you have Qs!

Casey Christensen · Answer

@Chloe Mayer I think the beautiful thing about your situation is that you have some really great options. I like the BRRRR strategy and am in the early stages of my first BRRRR and would be happy to share what I learn through the process with you. I dont see it as a low money down strategy, really can be the exact opposite. You have great leveraging power being able to come in and buy with cash and get something at a great price by helping an owner out of a tough situation with a quick close or just a more appealing offer with a quick close and then have the money to do the rehab and get your money back out quickly. If that is your goal it is a valid strategy. For me I am using this as a time to get experience and cut my teeth on managing a rehab and building a strong team that way as I try to scale up. I like the idea of going bigger and getting the economies of scale. With the amount of money you have it might be good to invest in some education on whatever strategy you choose or even getting a coach if its around the syndication model. You could even take like $50K and do what @Marlen Weber suggested and invest passively in a large apartment syndication and learn that model from the passive investor side while earning a solid return. Ashcroft Capital seems like a really solid company and is one that Joe Fairless is a part of, so that could be a good place to look as well. You could then look to BRRRR a smaller deal with the other $225K and compare the differences of what you liked and what you didnt and get more defined in what direction you want to focus on.Good luck in whatever direction you go.