I have $250K to invest..... This or That?

Question

I am currently in the military for 17 years, have 2 elementary school aged kids and I have been dabbling in RE investing for over 15 years and still have a lot to learn, but have a 'this or that' question for you guys.  Today is my first day on BP and here is my situation:

-Have 250K in bank ready to invest from previous real estate transactions (house hacking mostly)

-I own a duplex in San Diego w mortgage and insurance: $2,850 and dual rental incomes are: $3550 with cash flow of: $700.  Equity: $300K

-I currently live in a 2/1 condo a block from the beach with $40K in equity worth $505K

-I plan to sell my condo (mortgage: $2,600 + $350 HOA = $2,950) I currently live in to cash in on $40K  and release my VA loan (military) so ...…………….

SHOULD I

1 - Use my 250K for a down payment to buy a state of the art /new home 3/3/2 larger property; kitchen island, smart house, 2 car garage and extremely large rooftop deck, a block from the beach with a HOT HOT market for a house for $875K that will significantly increase in cost as they are building new restaurants and breweries in the area making it extremely desirable and pay 4K monthly (already pre-approved)

or

2 - Buy a 2-4 unit plex somewhere inland that is not as nice as the market in San Diego is high for 2-4 units and live in one unit and rent the others.

Please advise as I want to have the most cash flow, but also want to have a bigger place for my 2 kids that is near the beach that is atleast 3 bedroom.

Is there anything else I should be looking at for now?

Thanks so much guys,

Shaun

Justin R. · Answer

Live first, invest second.  Selling the condo and buying the house you want to live in makes sense - your current housing expense is $3k and your new one would be $4k.  Spend the extra $1000 per month and live where it makes sense with your kids.

On the investing side, that duplex is a problem.  Gross cash flow of $700/m means zero free cash flow - while you've probably got a ton of unearned equity there (good for you - that's what you get for buying when you did in this market!), it doesn't sound like there's any current income there.  You said you want the most cash flow (I'll take that to mean "free cash flow") - I would look at taking that $300k in equity and putting it to better use.  Doing so locally or doing so elsewhere isn't so important ... but at this point in the cycle it needs to be earning current free cash flow whatever it's doing.

I totally get that's easier said than done - taxes, headache, risk, and everything else.  But, on paper, I think that's the ideal approach.

Shaun S. · Answer

@Justin R.

Thanks for taking the time to write with your insight.  I will most likely follow that advice and get something for the kids to grow in and take out equity from the duplex and buy another investment property!

Cheers brother!

Shaun

Shaun S. · Answer

@Theresa Harris

This is true Theresa - I would basically be banking on the price going up which is a "what if" type situation.

Thank you!

Shaun

Justin R. · Answer

Ahh. That's looking a little better, then.

At $700/m, that's driving a 3.3% current return on invested capital.  Add in $300/m in loan amortization this year and that's bumped to 4.8%.  so, that's the floor.

Of course the potential returns you got because of the market crush that.  Which is great, but also a problem in terms of money working efficiently.  The return on equity is something like 2.6% at the moment.

This is fine so long as prices continue jumping 10% per year (they won't) or rent rates continue jumping 8% per year (they won't) because the current income doesn't matter.  But if annual appreciation reverts to inflation (2.5% annual appreciation rate) it will give something like an 11% total return.  That's not so attractive relative to other investments, including market-priced MFRs in non-coastal cities from both a risk and return perspective.

I'm not saying it makes sense to go and sell the duplex at this moment, but if you keep it you should acknowledge that you've got a lot of equity there that's doing zilch for you ... And it could be used to drive the cash flow you're looking for even more effecitvely than the cash you've got lying around right now.

It's a blessed position to be in!!

Nick Foster · Answer

@Shaun Shiraishi, based on what you presented you can either get a nice place for you and your kids, or live inland and share your surroundings with three strangers (if you purchased a four-plex, lived in one and rented out three units).

Putting family first I would do option 1. Personally, I would rather have a comfortable place for my kids in a nice, safe area, with good schools, more than dollars coming in the door (family > money).

Jonathan Bombaci · Answer

If go with option 2 or look at investing in other areas out of state. I invest for cashflow and never assume appreciation in the deal. Option 1 is just gambling on appreciation and sounds like it doesn’t fit with your long term goals.

Theresa Harris · Answer

Run the numbers, but I'd go for option 2.  The state of the art new home won't be state of the art in 5 years.

Marquez Griffin · Answer

If you go with your 1st option it would be an ideal location for you and your kids, but money wise you can only hope that the value keeps going up in the area that you are looking at. The market has been going up for 10 years, it's bound to drop again in the near future. You would be losing 4k (according to what you've provided) a month which would take away from your goal of "having the most cash flow". Maybe consider not selling your condo, renting it out like you are doing with the duplex for more than the mortgage (I'm assuming if it's a block from the beach you can pull in some good cash flow), then just use the 250k for a down payment on the larger property you are considering getting with your kids. The 2 properties you have could at least mitigate some of the costs of the larger property. If possible, maybe even rent out a room in the larger property, giving you even more cash on hand. I hope it works out for you!

Greg Scott · Answer

I think you left off a major option.

3) Sell the duplex and buy something in a market where cash flow is better.  With $300K in equity you can easily pull in cash flow of $30K to $45K per year, which is a huge step up from the $8,400 you are getting now.  That one change will cover MOST of your mortgage payments on your new house. Plus, you get the benefit of diversifying geographically.  Get your money out of a state that is hostile towards landlords and put it somewhere you can get higher returns.

Justin R. · Answer

I still say get the home that you want to raise your kids in.  You'll have plenty of time to make more money investing, but they'll only grow up once.

If you can find a way to grab some of the equity from the duplex, I would do so without delay... assuming you're ok with little to no free cash flow on the duplex (fine, if you have other income streams).  Personally, and depending on the tax situation, I'd look at either investing that into a high quality syndication or local project with a partner or, if you're set on owning real estate yourself, look for a nice 8-12ish unit property in a location you believe in outside the coastal cities.  Normally I'd look first to stay local, but I haven't recently seen anything attractive that could be purchased with $200k cash or $800k leveraged with a conforming loan.

I have $250K to invest..... This or That?

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