Best Cash on Cash returns advice needed

[Danielle D.]

I have a good amount of equity in a primary residence and want to pull it out to invest in one or two commercial, multi-family buildings. The trouble is that I can't find anything out there with a cash-on-cash return that approaches my 10% threshold. This is because of the 5% I'd have to pay to pull the equity out of my home.

I've been looking at commercial multi-family for a couple of reasons. A. I want a passive investment (not interested in managing multiple homes myself) and B. Value added to a multi-family through rent increases, cap ex, better management, etc. nets value add immediately (versus SFH which follow the neighborhood appreciation rates).

I would like to build an income portfolio over the next 10 years at which point I'll retire and live on the income.

I'm not married to the idea of multi-family, so any advice on where to seek higher cash-on-cash rtns is appreciated.

Danielle

[David Beard]

OK, I'll play devil's advocate to Jon's advice on extracting equity from your personal residence. I was, like you I take it, house rich and liquid asset poor. I refinaced my house at 80% LTV at 4.25% for 30 years. I have now used the proceeds to purchase properties with several times the cash flow needed to service the loan on my residence, with ROIs of 40%+ w/ prop mgmt in place. The home loan interest is tax deductible, and the properties you're purchasing wtih fixed rate financing will provide a nice inflation hedge.

And buying at these beaten down levels should return 3-5% in annual cap app over time, as well as modest rent increases over time, but that will be gravy.

You'll want to keep very comfortable liquid reserves to absorb a confluence of adverse events occurring in a short period of time, perhaps one year worth of payments on your primary and 6 mths on your investment properties. Use a property manager if you have a demanding and well paying job. You will not be able to do both, and the "ROI" on your job is the best investment you have at this time. The W2 wages are also your ticket to getting the best possible financing on your property portfolio.

If you're going to use prop mgmt anyway due to your job, you'll probably want to take a look at better cash flowing areas of the country, such as about anywhere in the mid west and mid south. You'll need to visit a few of these areas, maybe on a vacation swing, and make contacts with seasoned investors/wholesalers on the ground there. Well known areas are Indianapolis, KC, Memphis, Cleveland, Cincinnati, countless more.

I just view the primary as another property to be judiciously managed.

David