Need guidance on how to invest seven plus figures in current mark

[Steve A.]

Hey everyone,

I bought a lot of property in the Indianapolis area in 2013/14. Since then my main, unrelated business tied up funds for years. It was worth it, as now substantial cash is releasing. The industry is volatile and unpredictable, I count myself lucky to have made it this far, and don’t want to rely on this income in the future. I would like to have a portfolio of rentals netting >$200k annually and then I can rest easier. 

However I find that the market is in a much different place than it was back then. Whereas before finding 12-cap properties was easy, the same properties are now 7-8 cap. I’ve heard (this may or may not be true) to never buy under 8 cap. Some properties I am considering are  in decent areas and renovated, but they are mid-7s, so I am considering those despite my better judgment. The 8-9 cap range seems to be in questionable areas and somewhat dumpy properties. Note that I only look at properties that are virtually turnkey—clean carpet or vinyl “wood” floors, reasonable interior condition etc. 

I then considered going to a different market, even though I was hoping to greatly expand my indianapolis portfolio as I have trusted property management in place. I took a look at memphisinvest.com, which has access to several markets and is turnkey, but was disheartened. Their "ROI" figures are low at 5-7% even for the lesser cities, and on closer inspection these ROI numbers do not represent a reasonable cap rate, which would be even lower. Now they might argue their tenants stay for many years so vacancy is almost nonexistent, but I am skeptical of this kind of thing.

Is there any major metro in the country that is not a Detroit or Chicago where 10+ cap on a C level duplex or something is achievable?

I am also unsure if I should even be piddling around with buying duplexes and SFRs. I have substantial cash to invest...7 figures...and have heard several times in this forum that buying an apartment building/complex is far superior to buying SFRs. However I fail to see how this is true at the scale at which I would be capable of buying...in my price range the properties would not be large enough to merit their own on-site Management, unless maybe I just bought one and bet my entire future on it. I would be looking at small to medium sized multi family, which seem to behave very similarly to the duplexes that I like to buy. 

I am nervous that I am going to squander all this cash I worked so hard to make, by buying the wrong property type or buying at the wrong time.

Without guidance, the current strategy is to comb the listings in Indy lookng for turnkey 8+ caps. If I dumped all my cash into this (I also have stocks and crypto etc, so I am diversified) I could in theory generate enough income to reach my goal, however I am nervous that buying in a different metro may have been a much better option, or buying C grade SFRs and duplexes in a peaky market will comeback to ruin me, or buying apartment buildings / complexes would have been a much better option.

Also if I want to buy apartments, how do I accomplish that? It’s  not as easy as loading up Zillow and combing through. Loopnet seems to be garbage. A commercial broker seems like maybe an option but I believe they are limited to the state in which they operate? So if I want to cast a wide net and search in several metros, I would need to have like five different brokers searching for me? Is that correct? I see some commercial properties on here but most seem to be either 1) gigantic and out of my range or 2) quirky. I prefer simple, uniform properties, not ones that require tons of work, creativity, or time investment. I Ann just too busy running my main businesses for now.

Can anyone give me some guidance?

If it was still 2013 I could just dump all the money in Indy SFRs/duplexes and fall it a day, easily.

[Ian Ippolito]

Unfortunately you're considering purchasing very late in the cycle, and cap rate compression is an inevitable consequence of that. Indianapolis and Memphis are already tertiary markets, which people flooded into after the primary and secondary markets got too expensive. And this has now because those to become too expensive also.

Some would say to wait for the next recession to pick up bargains. However, the reality is actually not that simple. If you look at real estate pricing over the last six recessions, in three of them prices continue to rise and in three of them they dropped. So basically there's a 50/50 chance that the price today that seems expensive may actually seem cheap after the next recession. So in reality, there's no easy way to judge if prices are too expensive today or not.

In my opinion the only way around this is to invest in "vintages". Don't put all your money into real estate in a single year, because you might be guessing wrong. Instead, spread it out over many years, and then you will spread out your risk.

Personally I have found that the economics of purchasing C grade single-family rentals and multifamily is not sustainable or feasible. The increased crime leads to increased costs with maintenance as well as increased turnover (from lesser quality tenants as well as higher quality tenants that will move out). And many times they are cheaper houses, where one big capital expenditure easily wipes out most of the income. So my advice would be to make sure to catalog every single capital expenditure based on the lifetime of the items of the property, budget for their replacement, and then still see if it looks like a great return or not. In my experience, the numbers have never worked out.

Also, you mentioned the fact that you are really busy running our main businesses. You are actually a better match for a passive investment strategy, using syndication/crowdfunding. I own properties directly as well as invest passively, and both have pluses and minuses. For you, the lack of time will make it difficult to own properties directly. The other advantage for you of syndication/crowdfunding is that you could diversify into a lot more asset classes than just single-family houses or multifamily. You can also diversify much easier and cheaper over geography so you are less exposed to the risk of a single metro area experiencing the loss of a major employer or other unique problem and messing up your returns.