Where to invest from 2014 to 2026

Question

I am living overseas and hope to setup an investment strategy that allows me to be away from it as much as possible while giving me reasonable returns of 18% to 20%. I realize you can't have one without the other but just trying to figure out that sweet spot. With 2.5 mil in capital in hand I am thinking multi family with a 70% LTV ratio and a 12 year loan, and 10% CAP. My question is, does this fit my strategy? Also what would be a a realistic expectation of my Net worth be in 12 years. And lastly is there a better way to achieve this?

Jame Moring · Answer

Hey mehran, Thanks for that.

I just read some topic of this book. @Brent c. This book is so helpful and informative it is helpful to you also and get some idea of your investment plan. Thanks a lot again.

Aaron Yates · Answer

@Brent C. , have you considered SFR's? I'm getting a net ROI average of 32% on my cash properties. No loans. Average of $24,000 invested into each property. NOT in Detroit. These are surrounding cities outside the Detroit line. Not warzones, murders, mass robberies either. Nice areas. Low income and working class neighborhoods.

Just a thought for you. PM me if you have any questions

Brent C. · Answer

I came across this book the other day thinking I'd give it a read. I'll order it. Cheers!

Brent

Mehran K. · Answer

@Brent C. One book that really helped me with all the terms was:

What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures by Frank Gallinelli

Definitely worth the investment :)

Brent C. · Answer

Hi Jon,

Thanks for that.

By going with a Cap rate of 10% after the 50% rule and a 25 year amortization at 6.5% I'm coming up with $56,712 a year in payments so I would actually be out of pocket $6,712, and assuming appreciation is equal to inflation there is no gain there, so why would anyone bother? Don't hard loans seem a whole lot better if this is the case? Where is the money being made then if it is only a 6% to 7% return with all the risk and hassle attached it seems crazy anyone would even bother. Interesting.

Brent

Jon Holdman · Answer

cap rate = noi / purchase price

So, that is after the 50% rule gets applied.  The 50% rule estimates NOI from rents as

noi = rent * (100% - 50%)

Its (100% - 50%) because that's what's left after expenses, vacancy and capital.

Cash flow is then what's left from the NOI after debt service:

Cash flow = NOI - debt service.

Cash on cash return is the cash flow divided by your investment.  In those factors, I'm assuming annual compounding, so that means you should be investing the cash flow in yet more properties.

You are correct that I am calculating purely the cash on cash return, not what's usually called "total return" in the commercial space.  Total return accounts for principle paydown.  Indeed, if you get 12 year fully amortized loans, after 12 years you have a million dollar asset free and clear.  In nominal dollars, its likely to be worth more than a million bucks.

Historically, property appreciation has more or less matched inflation.  So, in real dollars its still a million dollar asset.  That just means that if its worth $2 million, for instance, it would buy as much milk and bread 12 years from now as $1 million buys now.

Also not considered here is that presumably over the years rent will go up.  Not necessarily the experience many of us have actually had, but if you're speculating on appreciation, you might as well include rent spectulation, too.  Now, expenses will go up, too.  If they track each other and your debt service remains flat, your cash flow, in nominal dollars, improves.

Joel Owens · Answer

Hi Brent,

Multifamily right now most loans are 7 to 10 year terms with a 25 year amort.

With multifamily most of the deals on the larger buildings the optimal for my clients is 75% ltv and then have the seller carry a 10% second with favorable terms. This increases cash on cash and allows for investing in a larger project.

I have other clients that are overseas as well looking at multifamily. There are other things such as triple net leasing but you can't hit the leverage and high returns because you are essentially buying a return about double of what a bond is getting for  a credit tenant.

I could model some things out if you like. Basically I model out for my clients very conservative growth patterns so with an apartment complex you will have principal paydown, tax writedown, hopefully appreciation through increased annual rents, and also cap rate compression hopefully when you sell, and cash flow along the way.

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Hi Brent,

You can colleague request me on here or my information is in my signature link. I would be happy to send you a .pdf example to look at for multi family. The key with increased returns starting out is getting the seller to carry a second and getting a nice spread between the fixed debt and what your going in cap rate is for purchase.

Brent C. · Answer

Hi Joel,

I would love to see how you how you model your growth patterns. It would be great insight.

Thank you for your help.

Brent C. · Answer

Hi Jon,

Thanks for the insight. I think maybe a bit confused on the Cash on Cash part or when I mentioned returns of 18% to 20%. So on your $1,000,000 example Cap at 10% is $100,000 a year. $6,830.95 a year goes to loan.  It's paying of the principal in 12 years and will have an appreciating asset of a million in todays dollars pus some. Plus the difference between the loan and Cap leaves monthly income.

I'll try to put these numbers into excel and see if I can better understand. I need to get on top of what each term exactly means in real estate I think. This 50% rule isn't it included in the CAP, or that's after?

Thank you very much for taking the time.

Jon Holdman · Answer

An 18-20% return for an extended length of time would be truly astounding.  IMHO, that's essentially impossible.  Because if I knew how to achieve that I'd have my money there.  Hands off?  Impossible, IMHO.

10% may be achievable.  Even that is far about typical returns.

I wouldn't be publicly stating how much I have to invest.

10% for 12 years gives you a 3.1 multiplier on your starting bankroll.  18% is a 7.3 multiples, 20% 8.9.

Consider a hypothetical $1 million building, 30% down 12 year 6% loan.  To hit a 10 cap, you would need monthly rents of $16,667.  That building would give you annual cash flow of $18,028 and would have a 5.9% cash on cash return.

My analysis:

Price:  $1,000,000

Rent:  $16,667

Rehab:  $5,000

Down %:  30%

Rate:  6.00%

Term:  12

Down Pmt:  $300,000

Total cash:  $305,000

Loan:  $700,000

Payment:  $6,830.95

Expense %:  50%

Expense Amt:  $8,333

NOI:  $8,333.33

Cash flow, monthly:  $1,502.38

Cash flow, annual:  $18,028.58

Cash on cash:   5.9%

CAP rate  10.00%

Rents of $25,000 a month would give you a 15% cap rate and 22.5% cash on cash

Price:  $1,000,000

Rent:  $25,000

Rehab:  $5,000

Down %:  30%

Rate:  6.00%

Term:  12

Down Pmt:  $300,000

Total cash:  $305,000

Loan:  $700,000

Payment:  $6,830.95

Expense %:  50%

Expense Amt:  $12,500

NOI:  $12,500.00

Cash flow, monthly:  $5,669.05

Cash flow, annual:  $68,028.58

Cash on cash:   22.3%

CAP rate  15.00%

Where to invest from 2014 to 2026

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