What would you do with $200k?

Question

I have about $200k to invest in RE. I'm currently househacking in a cashflowing duplex and lean toward a buy and hold strategy.

I'd like to stay within about 2 hours from home (closer is better). I live in Portland Oregon, a hot competitive seller's retail market with a median SFR price of $340k.

I'm looking for 1% rents of sale price + CapEx and generally focus on multifamily.

My question is, would you try to somehow find an amazingly cheap duplex (I prefer B to C+ class neighborhoods) for all cash, or use the $200k as a DP on a commercial multifamily of $700k or less? 1040 shows very little Schedule C income from the duplex and low income in general. Credit is excellent. Lots of student loan debt.

I lean toward getting a small commercial multifamily to greater leverage the cash and also because my personal income would not be as much of a factor as it would were I to finance a 4plex.

What would you do? I don't know whether I should be on the courthouse steps to get a light flip and raise more capital, look for a reputable wholesaler for a good deal I can hold or flip, or leverage the cash with a bank (or other) loan.

I'm also open to another househack if it's the right 3 or 4-plex, but that doesn't require all that cash.

Thanks in advance for your insight!

Evan Bellingar · Answer

Hi Dani,

Good problem to have, and kudos to you for house hacking, I love the strategy.

If you use the $200k, how long will it take you to replenish? I call the money you have available for a deal an "elephant gun", and if you plan on using all $200K, you only get one shot with it. If you buy a smaller property, and use say, $70-$100K for the down payment, you have two shots, and you can stay in the hunt for another property as you build more reserves. It is no fun to invest all of your capital and then two months later see an even better deal come across your door.

Good luck,

Evan

Sterling White · Answer

Agree with the above statement on seeking a $800,000 property. Go 4 units+ if you can.

Account Closed · Answer

Thanks for that perspective, @Evan Bellingar.  It would likely take a long time to replenish, unless I sell something.  And right now, I only have my one duplex that's producing good cashflow, even with me living in it.

BUT if a 5+ plex can produce good cashflow, then I may not worry about having cash right away, and I'd do things to force equity in the new plex until I can refi.

You're nearby in Newberg; do you see great deals come across your desk very often, and if so, do you have any advice on what you do to find them?

Account Closed · Answer

Thank you to everyone who replied, including @Walter Key and @Justin Spaulding . (Yes @Wilson Churchill schedule E is what I meant, thanks.)

Thanks for the reminder about redemption rights, @Jessica S.  I've even heard of sellers selling redemption rights to multiple potential buyers for the same house (illegally). Crazy!

Yes I don't know the best way to proceed, it's true. And since bank investor financing on a residential MF (vs commercial MF) could be difficult because of my current income, I want to make the best decision with the cash I have. I could pay cash on a great deal, but it would probably become a flip (or a cash-out refi/HELOC if the COCR as a hold were really good).

I like the idea of staying close to home because of expected population growth over the next 30 years here, plus holding gives me more opportunity to add value/rehab/develop those properties. That would provide good experience for when I eventually develop a site from scratch.

Account Closed · Answer

Thanks for this feedback. I hear this from a lot of investors. If I'm willing to accept lower returns for the sake of being able to check up on my properties now and then (without the headache of trying to find and manage a reliable PM from afar), why then do you think this? My concern is that since I don't have a bunch of properties, one bad property manager that continues being bad, unchecked, can really hit me hard.

Justin Spaulding · Answer

Dani Z., awesome!!! Don't even think about anything less than a 4 unit. With $200,000 I would be looking for an $800,000 property. But reason why not to start with anything less than 4 units is because it is no harder to deal with 4 tenants as it is with 1 but the reward is SO MUCH greater! Be great in 2016!

Joe Villeneuve · Answer

One bad property takes away from all the others and will cause a domino effect on all of the other properties.  You are correct in your statement of what can happen with a bad property manager...so you pick your poison if you want.  Me, my choice is no poison either way.  I find my good property manager (not nearly as hard as you think), and I find the correct market to invest in...so I have no poison to pick from.

Walter Key · Answer

Dani Z. This is a good problem to have! LOL. You've got a great amount of working capital and multiple options. Traditionally a 4-plex is still considered residential but I'm sure you could find a commercial lender if that's the way you want to go. How much would a 6-10 unit apartment cost in your area? What's are ultimate goal? Do you want to build up more capital for larger deals in the future or are you more interested in building up your passive income through solid cash flow? Once you can firmly answer that question for yourself, I think you'll have a better idea of the way ahead. Sounds like 2016 is going to be a great year for you!

Evan Bellingar · Answer

Dani,

In retrospect, we had a very similar situation to yours a few years ago: we had a brand new HELOC with a $180,000 limit. Newberg is less expensive that Portland, thank goodness, but still a fairly pricey market. We bought a single family house, then another, then two duplexes and a four plex over the course of about 2.5 years. We never maxed out the HELOC, so we always felt we had plenty of reserves (on top of our reserves) and tried to whittle down the HELOC while we were between deals.

We didn't close any deals in 2015 except 1 cash out refinance of our first purchase, which worked great, and several attempts of a cash out refinance of our second purchase, without success. We are pending now on a duplex here in Newberg, which should meet the 1% rule (our goal as well). All of our deals have been MLS listings that we had our offer in within 24-48 hours of listing.

So I suppose my advice would be to try for several small deals rather than one big one that took all your cash.

Good luck and let us know what you decide,

Evan

What would you do with $200k?

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