$500k cash, need $4k month cash flow... how to invest?

Question

Hey Guys, long time lurker, first time poster. :D

I think the title says it all, but I'll try to explain the situation further here...

I have a $500k settlement check coming to me this week. I need to figure out a way to make that turn into $4k a month cash flow so I can play more and work less... I already have a bit of cash in the stock market, so I don't want to put it there.

I have had an interest in real estate for some time, but have never owned anything other then a condo. And the numbers I have crunched tell me $4k would not be an issue at all. I just wonder if somebody here can tell me the reality of what I want to attempt. :)

So... I have spent the last month or so reading every 4plex and small apartment building investment book out there, I have found about a dozen 4plexes within 5 miles of my house that will cash flow 10% of the purchase price each year (whats the correct term for that number? NOI?)

I think I can buy two 4plexes in the $250k range that will spit out $25k in rent each year, after paint and updating, I think I can pull $30k out of each. What can I expect for actual cash flow based on the info provided? I do not want to manage the properties, I plan to travel quite a bit...

What about tax issues? I wont have a mortgage on the properties, my condo mortgage is only $700 a month... Do I get a break on depreciation at least?

My living expenses require about $2k a month, anything over that is going into a money market to buy more property in the future, all future deals will be traditional 20% down 30 year fixed long term rentals. I'm 30yrs old now, my goal is to buy a total of 10 4plexes in the next 10 years.

So.... Thoughts? :D

Account Closed · Answer

Seems to me (who knows NOTHING, BTW :crying: ) that if, as Mike says, you c/should do MUCH better with a little more work, and make decisions that will get you closer to your goal, while perhaps rejecting possible purchases that will not get you what you _really_ want, (which might also produce devestating results) that you would be wise to spend that time and work.

Michael Rossi · Answer

BreitlingUT,

The simple formula for cash flow is to subtract the mortgage payment from 1/2 of the gross rents.  If you have no mortgage payment, then the cash flow would be 1/2 of the gross rents (the other half goes to operating expenses).

If $500K is a lot of money to you, then I would do some SERIOUS STUDY of the rental property business before you buy anything.  The rental property business is VERY UNFORGIVING and the vast majority of new rental property owners fail in a short period of time.

If you buy a property that has gross rents of $25,000 per year and no mortgage, then your cash flow would be about $12,500 per year or $1,041 per month.  Buying two of these properties will only give you a monthly cash flow of $2,082, which is about half of what you want.

I think that you would be better off leveraging your $500K into downpayments and buying a lot more units.  Even with 20% down, you should be able to buy about $2,500,000 worth of property which could easily provide $4,000 per month if you buy correctly.

You've got a LOT more studying to do before you spend that $500K!  I would also suggest joining your local REIA.  Doing this right is going to require a LOT of effort on your part.

Good Luck,

Mike

Marc Augustine · Answer

my advise is to learn..i may not know much..but you should take the time...

N/A N/A · Answer

Some books I enjoyed include "The unofficial guide to real estate investing" (Kind of dry though) real estate riches by dolf de roos, and the ABC's of RE investing by ken mcelroy

I have an audio CD thing from Robert Shemin which in my opinion is absolutely fantastic - especially with negotiation skills. However, its about $1000 so it's kind of expensive, but definitely worth it. I split the cost with my brother when we got it so it wasn't too bad.

N/A N/A · Answer

Thanks for the link on that thread Ryan. Your right, its all about Risk, and right now, I don't want to risk to much.

I am going to crunch the numbers and talk to a few property managers and my CPA. Hopefully I can figure out what numbers work in my market. I have no problem keeping the $500k in a 5% money market fund and slowly buying property over the next 3 - 5 years. That may make the most sense and have the least amount of risk.

The last thing I want to do is jump into something I don't know enough about and lose my shirt. :)

Michael Rossi · Answer

I think you're right.  Putting the money in a money market at 5% might be the smartest thing to do until you have time to do more research and studying.  By my calculation, 5% is exactly the same cash on cash return that you would get with those $250K apartment buildings.  Your risk would be much higher with the rentals than the money market and I don't think the risk is justified without any big increase in return.

Make no mistake, you could get a MUCH higher return with rentals, but not without doing a lot more work, buying at a bigger discount, and taking on some risk.

Good Luck,

Mike

N/A N/A · Answer

Any books in specific?

N/A N/A · Answer

Mike, thanks for the reply, I was under estimating the operating expenses, but even if I just get half of my original numbers, thinks seem to look like they would work out.

I'm looking at this $500k as bonus money to grow in the future. I have a 2nd source of income that pays all my monthly bills. Even if I only pull $15k a year from the first two units, thats $30k a year cash that can be used to leverage future properties.

I don't have the risk tollerence to have 2.5M in debt, I would much rather start small and grow as I learn more. I think it would be almost hard for me to mess up if I buy all cash and have a property management co deal with the day to day stuff. If my risk levels change in the future, I may take on more debt. But for now, cash flow to re-invest in the future is what I'm after.

I know this is not the traditional way, or what you read in books (use other peoples money, less down the higher the return etc...). But it seems to make the most sense for my current situation. I'm trying to figure out how I can retire and live off my real estate investments

$500k is a lot of money to me, but I have another $100k in cash for living expenses / emergency fund and another $150k in non-liquid assets.

I'm hoping I can let my real estate holdings grow on there own for the next 5 years or so. So by the time I'm ready to retire and live off my investments, I should have two 4plexes paid off, and 3 more that are financed on 80/20 30yr fixed loans.

Does that change your answer any? Or am I still way off base in my projections? :)

Ryan Webber · Answer

I think either way you will be okay IF you buy them right.  The difference between leverage and paying cash is your risk tolerance.  If you would prefer to be safer and you are okay with growing slower, then paying cash is the way for you.

You might want to check out a similar discussion we had at http://forums.biggerpockets.com/viewtopic.php?p=18623.  You might also want to look through some of Allcash's other posts.  He obviously is a proponent of paying cash for properties and makes some excellent points about it.

The key for you seems to be to understand what is and what is not a good investment for your investment goals.  In my opinion and especially in my market a $250K property that generates $25K in rents or possibly $30K is not a good investment for my rental portfolio unless there is some very strong appreciation.

On a side note, I might be willing to give you a straight 12% on your money.  That puts you at $60K a year passively.

N/A N/A · Answer

I think the best situation you could do is this..

Buy a few audio CD's and books about apartment buildings and landlording. Spend a month or 2 just learning

Buy 1-2 properties and spend 6 months managing them so you get a feel for it. I'd say use 10-15% down payment on each, but make sure you're going to have a good cash flow before buying

Once you're comfortable...buy more at 10% down payment until all you're money is gone!

If you buy right and manage properly, I think you would be able to get more than $4,000 cash flow by then..depending on the current market in your area

edit- You can always just give me the $500k. I'll give you 50% of the profits and you won't even have to do anything :)