250k into 1mil loan investment suggestions?

Question

I just sold a house bought in the 80s in South Florida and now have 250k that I need to 1031 exchange into something else in 45 days from August 31st.

I know the markets are tumultuous and ever-changing at this moment in history. So much so that historical data from last year's growth means little for what the market might be in the future. I can't make a big mistake with this money and need to put it into something. I have the flexibility to move wherever in the country to manage the properties anywhere, so distance is no object.

Does anyone have any suggestions on low maintenance options for 250k cash to leverage into a 1mil loan?

I've only ever managed a SFH, but am willing to do what it takes to learn how to manage something with many more tenants (or perhaps self-storage or warehouses?)

Thanks!

Henry Clark · Answer

@Chris Horton

Thanks for the PM.  I'm going to walk you through a couple scenarios so you can get a handle on this.  "Do not" buy any of the ones we discuss it is just for discussion purposes.  We will do this fast since your on the clock.  You have the benefit of everyone hear seeing what I am having you do, so you can get their opinions also.

Step:

1.  Finance- read my broader Finance discussion.  First lets narrow down the price range before we go looking.  Cash in hand $250,000.  SBA loan with 10% collateral means $2,500,000 project.  Commercial loan with 25% collateral means $1,000,000 project.  SBA loans can take a while.  Make sure of your 1031 timelines.  a.  Identify property dates; b. Close timeline; etc.

2.  Will they come?  Read my marketing post.  I'll give you the magic answer; But do not trust me.  You do what I note in the post and validate the next factor.  "6 units per 100 people".  When we look at some of these locations or towns, get the population example:  10,000 people / 100= 100 x 6= 600 unit market.  I developed this factor and have used it on all of our location decisions.  Key is are your people the same as my people?  Divorce, death, fire, flood, tornador, redo basements, parent die?  Same life events.  Same need for storage.

3.  Read my post "Storage Startup checklist 101".  Make this your own task list.  Use this to identify any hiccups.  Example:  Do you need a Storm retention pond.  Fire sprinkler.  Bathroom.  Etc.

Read the above and ask me questions.

Lets start.

There is a storage location near you in Tulsa for sale.  Lets develop an offer price, based on cost to build and then Revenue stream.  You need to decide what type of return you are looking for.  This will determine the price you are willing to pay.

Loopnet- Tulsa Asking $187,500

Cost to build:  Change this based on your local info.

$   50,000       2 acres

$115,000       36 "Equivalent 10 x 15/20" units; at $3,200 per constructed

$  25,000        2 acres fence with swing gates, not a $25,000 gate system

$           0        No electric set up that I see, just nightlights.  Need $10,000 invested.

$           0        No security that I see.  Need $10,000 invested, plus internet so you can watch.

$           0         Need rock for road $5,000

$190,000         New construction.  Again, change these figures based on your local knowledge.

Revenue Stream:  Again verify with real estate agent

$ 2,160        This location is off the track and old.  Assume $60 per unit; 36 unit average

x      12        Months

x  90%          Occupancy

$23,000        revenue per year

Expenses:

$   500        Mow grass

$   500        Clear snow

$1,000         Electric

$1,000         Other- internet, management software

$3,000         Total per year.

$20,000       Before Tax or Depreciation or interest

$15,000     After taxes.  Rough calc

Lets say these were our numbers. You refine them.

My target is a 20 year amortization bank loan, with an 8 to 12 year payback.  Thus we are always in a cash flow position.

Lets say 10 year payback;  with $15,000 cash;  my offer would be $150,000.

Deal thoughts:

1.  Doesn't meet my goal of $150,000 at their asking price of $187,500

2.  Validate 90% occupancy and average rental rate

3.  Check Sparefoot.  They don't use it, thus we can get marketing up really quick.

4.  I would offer them $150,000.  If they want more like their $187,500 number.  Then counter with $120,000 cash and the rest zero interest in 5 years.  Make sure your finance company if any is okay.  If your 1031 money wasn't enough.

5.  Realize you need to invest about $50,000 to get up to speed.  Auto gate, electric, security, road.  You need this to manage from afar.

6.  I don't like this property because it is off the beaten path.  Away from the major populations.

7.  I love the property because of the bare ground.  You can add more storage and RV/Boat storage.  This is cheaper since all of the land, fence, gate, etc is already done.

If I lived in the same town, I would make an offer of $125,000 and then walk away.

Look thru my posts.  Look at the logic.  Go see the site with the realtor- get your deal making jitters out of the way.

"DON'T make an Offer".

Henry Clark · Answer

What town are you in?  That will give me a reference point for my response.  My area of investment is Self Storage.

SBA 10% loan $250k = $2,500,000 property.  This gives you a lot of options.

Henry Clark · Answer

above  "hear" is "here".  Typing quick.

Location 2:  Chichaska, Ok  Loopnet   $1,000,000

Cost to build:  Change this based on your local info.

$180,000 6 acres  $30,000 per acre

$560,000  175 "Equivalent 10 x 15/20" units; at $3,200 per constructed

$   5,000   Very little fencing needs a $25,000 auto gate system; another $25,000 fence in back.

$ 10,000 electric

$           0        No security that I see.  Need $15,000 invested, plus internet so you can watch.

$150,000  Concrete roads

$905,000 New construction.  Again, change these figures based on your local knowledge.

Revenue Stream:  Again verify with real estate agent

$14,875  This location is off the track and old.  Assume $85 per unit; 175 unit average

x      12        Months

x 75%          Occupancy

$133,000 revenue per year

Expenses:

$   500        Mow grass

$   500        Clear snow

$2,000         Electric

$1,000         Other- internet, management software

$40,000   on site manager

$44,000         Total per year.

$89,000       Before Tax or Depreciation or interest

$67,000     After taxes.  Rough calc

Lets say these were our numbers. You refine them.

My target is a 20 year amortization bank loan, with an 8 to 12 year payback. Thus we are always in a cash flow position.

Lets say 10 year payback;  with $67,000 cash;  my offer would be $670,000.

Deal thoughts:

1.  Doesn't meet my goal of $670,000 at their asking price of $1,000,000

2.  Validate 75% occupancy and average rental rate I used one of their competitors on Sparefoot

3.  Check Sparefoot.  They don't use it, thus we can get marketing up really quick.  Haven't raised prices in 5 years, more revenue.

4. I would offer them $700,000. Been on the market since April.  If they want more like their $1,000,000 number. Then counter with $600,000 cash and the rest zero interest in 5 years. Make sure your finance company if any is okay. Since your 1031 money isn't enough.  You need to be lining up your banker.  Again look at my post on Broad Finance discussion to pick your banker.  Get your last three tax records copied and any of your loan documents and pay stubs.

5.  Realize you need to invest about $40,000 to get up to speed.  Auto gate, security.  You need this to manage from afar.

6. Its at the edge of town, but on a major thoroughfare.   Easy to find.  Next to the major populations.  From the West side.  Most of the competition will probably be to the east and south along the interstate.  Your closer to the population.

7.  I love the property because of the bare ground 4 acres.  You can add more storage and RV/Boat storage.  This is cheaper since all of the land, fence, gate, etc is already done.

This is bigger and closer to your $250,000 1031 number.  25% of $1,000,000 asking price.  Fits a commercial loan.

Like this one a lot.  Low occupancy, this can be increased quickly using sparefoot.  Good location next to population.  On major thorough fare.  Extra ground.  Population 16,352 = 980 unit market.  They have 175.  Get on Google earth and locate and count other units.  Make a list of all storage in that town.  Go take an inventory of the number and sizes of units.  Also the locations.  So you can look at them strategically on the map.

Your on a 1031 clock.  Jump in a car.  Get with the realtor.  Stop at every storage location in town and check them out.  Tell them your re-doing your house this fall and are planning for storage.  Get rates and check out their operations.

"Don't Make an Offer"

Look thru my posts.  Look at the logic.  Go see the site with the realtor- get your deal making jitters out of the way.

Michael Slockers · Answer

Great thread @Chris Horton!

I'm following this and interested to see how it goes for you!

This wouldn't qualify for the 1031 tax deferral but you could just turn this 250k into revolving credit to fund other investor's deals and turn that into 25-40k per year. Just an idea.

I do prefer your idea of leveraging this to fund a bigger deal. You don't have much time though to vet out a deal given you aren't sure of a strategy yet. Easiest option is turn this into 4 SFH houses in Tulsa area suburbs, 50k down on each house, and self manage. The apartment deals or self storage are great if you can secure a deal in such a short turnaround!

Chris K. · Answer

@Chris Horton

You are probably best off using the $250k as a down payment to buy a large enough property where you can have access to a good team including a good property manager. Could be commercial or residential. You can also reduce the risk by under leveraging the deal. 75% isn't too high but perhaps it's safer to be around 65% to 70%.

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

Chris Horton · Answer

Thank you for these responses – lots of good ideas!

@Henry Clark I am in the Tulsa, OK region. We've seen a lot of growth recently in the downtown area, but I imagine that will shift to the suburbs as many of our friends are moving out of the downtown area now. Is Self-Storage something that is viable as an absentee owner?

@Alex Olson The goal is to be able to manage the property when in town (currently Tulsa, but wouldn't mind moving if the deal was good too good to pass up) but still be able to leave for a month at a time to visit family and travel. We have other income from our day jobs, but not enough to float a 1 mil property for longer than a couple of months. Any suggestions on where I might find a good QI and or real estate CPA?

@Chris K.Great advice on keeping it safe. Thanks! I've found an 18 unit with an onsite handyman for 1200 /month. What other teammates should I be looking for? Thanks again!

@Caleb Brown Luckily I'm in Tulsa in the Midwest so I have a knowledge of the market here, but I can move if the deal is good enough. It's an oil town here, so while it's been growing a lot recently, it should have room to grow as oil starts to come back in the coming years for at least a couple of decades. Do you feel like someone could learn about a different strategy enough from bigger pockets resources to jump into a brand new market without any experience in mobile park or self-storage? Thanks again!

Alex Olson · Answer

What is your goal? Manage property yourself? Is this retirement? Do you have other income? Kansas City is a great market to 1031 exchange in to but need to know your goals. Also, you need a good QI (qualified intermediary) and or a great real estate CPA.

Henry Clark · Answer

@Chris Horton

Did some further research on the last location above.  Your going to have to move fast on a 1031 which is bad.  Normally I say if you have to make a quick decision, don't do it.  In your case you would take the tax impact and have less to invest.

Follow up notes:

1.  Didn't realize the same people have another location for sale.  Recommend you don't look at it.  Its further out of town and its on the same road or market as you.  If you do offer, only offer 1/3.

2.  This is an aerial google inventory.  You would need to do with boots on the ground.  Took an inventory of locations/units.

268/150/50/150/175/60= 853.  This includes the one we are looking at.

3.  Again rough market is  980 for a town of this size.  Rough count is 853.  Need 127 more units in town.  Of the other 4 large competitors they are all "built out" except for one and its remaining ground is more of a triangle and not as good to build.  The rest would need to buy more ground.  Thus they are not likely to expand.

4.  All the major competitors are South of I44, away from most of the homes.  Both the location above and if you got a location to the north or east, would out position them from the population.

5.  Notice Union Pacific runs through the town near the population side.  Please, Please read my post on "Zoning I-3 right?"  Even if it is not for sale, its for sale.  Look for 2 acres minimum.

6.  Look around the intersection of Highway 62 and 277.

7.  Since you have to move fast; if you were to do the deal, I would put all of your money into the unit for sale.  Due to  1031 time.

8.  With the same commercial bank and SBA, I would then use your first location to collateralize "building" a second location in the above areas.  Do a Construction loan which would need to be a SBA 7 versus 504.  You just don't have time to swing two deals or loans with your 1031 timing.

I know I said we would look at a third location, but with your short 45 day 1031 timing.  Could look at some more, but this looks great.  Don't pay their price though, its okay from a Cost to build standpoint, but they are not generating enough cash flow.

Recommend you look at other types of investment.  You always want to be able to Walk Away from a deal.

If you need more info let me know.

Action items;

1.  Look at all facilities in town.

2.  Tour with realtor the locaiton.

3.  Get zoning map

4.  Get Planned development map

5.  Get zoning rules.

6.  Talk with your banker and start your loan process, even though you don't have a property identified.  Start pulling your documents together.  Mention SBA 7 or 504.

Good luck.

Normally I say "Start small and make your Big Mistakes Early."  In your instance your on a 1031 timeline.  Also you already have the amount of money pre-defined.  Since these are Existing locations, you have less risk versus doing a build out.

Caleb Brown · Answer

Either multi, mobile home park or self storage. Start local market wise. Midwest has strong markets, like KC :) Out of state markets you need to identify the markets with migration, job growth, stabilized economy(if it's a linear market), etc. It's a hot market across the country so it'll be competitive. Make sure you are familiar with the strategy or asset you choose, don't blow 250K. If you are more familiar with SFH you can also leverage that too.

250k into 1mil loan investment suggestions?

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