If you had $160k in cash, how would you enter the market?

[Account Closed]

Hey guys - my first post on BP, and absolutely thrilled to be here seeing how everyone seems pretty knowledgeable about building wealth. Was wondering your opinions...

Right now I have roughly $160,000 in expendable cash sitting in my bank account - all tax clear money I earned through my online businesses. I'm still pretty young at 25, so there's no reason not to take risk with my money since I have a lifetime ahead of me to recover.

My goal is ambitious. I want residual monthly income, and a ton of it. I want to be free of the matrix forever.

If you were in my position (I have absolutely no experience with real estate at all - I know what you guys are thinking right now haha!) how would you dive into the market given the available cash leverage I have?

My business still does a solid $250k a year in profit, so I have additional sources of income that might appeal to investors.

I think the problem will be credit history: I've never taken out a car loan or house mortgage, but have had credit cards since 18 and have been paying them on time with no outstanding debt.

Now guys, believe me, I know this is not just a cash and grab over-night riches thing. I realize like any business opportunity, you have to treat it as that: a business. I do all my due diligence before I enter into ANY business.

With that said, I think you can see here I don't want to move slow. I want to get into this market while prices are low now - and build enough leverage early on - without biting off more than I can chew.

From what I've learned so far, here's what I think might work well for me:

Start out in my local Baltimore market, tackling one market at a time to keep my business streamlined and organized.

1) Put down 30% on one complex priced at $300k.
2) Run that complex for a month or two on my own until I get a general idea of what the hell I'm getting myself into.
3) Hire property management company to take over my management responsibility of the property.
4) Replicate, rinse-repeat?

After you have say 3-4 properties, how does the overall workload of the business owner increase if it's all being handled through property management companies?

What do you guys think? I guess what I'm asking is how do you think I can take advantage of the advantage I have, without getting myself into too much too fast?

Thanks guys!
Dan

[J Scott]

Originally posted by Dan B.:

@Dennis Fassett & J Scott

I was thinking of going that route, SFH, however, one experience I've had with my online business makes me think this is not the route I want to go.

Basically, in my online business I create "internet real estate". You have two routes you can go: make a crap ton of small websites vs. making 2-3 bigger websites. The advantage of going the "crap ton of small websites" route is a lower entry barrier, less risk, you get to learn the ropes, etc.

The disadvantage of going that route is when you try to scale it up. Once you have 10 or so websites, the burden of managing and caring for those websites gets greater and greater. Eventually you plateau because of this.

I want to be in a situation where scalability is not an issue.

What are your thoughts on that?

Unfortunately, I don't think comparing online "properties" to real estate is a good analogy (and I have experience with both -- I used to be in management at Microsoft and eBay and I now rehab houses and do some other investing).

The big difference is that it's common to make near infinite returns online. The cost of starting a site is often minimal, and every dollar of incremental income is a large fraction of your start-up costs. It's easy to bootstrap large sites by starting small and rolling your profits into infrastructure, inventory and employees.

In physical real estate, there is a large startup cost -- either you're paying cash for property (in which case you're spending a lot of money), leveraging heavily (in which case you're servicing a large debt) or somewhere in between. The returns on real estate are rarely close to infinite, and in the cases where they are, you're either exposing yourself to a good bit of risk (high amounts of leverage) or you're spending an exorbitant amount of time working (no-money down deals).

Sure, there are economies of scale in larger buildings and commercial, but you need to be able to afford entry into those deals, and $160K -- and more importantly, little experience -- is probably not enough to enter that market. Remember, if you're planning to be a passive investor, the larger the property, the less it will (generally) generate in ROI. Typically, larger commercial properties are generating between 6-10%, which is much less than a single family landlord can produce.

Now, if you want to become an active investor and make LOTS of money, that's certainly possible. But, that's going to require a lot of experience. Investors making 8- and 9-figures are developers who:

1. Have lots of vision
2. Have access to lots of capital (debt, equity or both)
3. Have the ability to execute (this is needed for #2)

It takes a good bit of time in this industry to gain any/all of those things. So, if you really want to build a business that large, you need to start smaller, build up your experience and learn the industry. You don't necessarily need to do that with SFH, but you will need to do that with smaller projects than what you seem to want to tackle.

The other option -- if you want to put your business skills to use -- is to use real estate as inventory as opposed to investment, and to create a business around buying, selling, and financing real estate without much focus on the development or investment side of things. For example, there are guys on here doing turn-key rental properties, buying/selling notes, lending, etc, who are probably making 7-figures, but they probably wouldn't call themselves "investors" first-and-foremost, they'd consider themselves entrepreneurs who use real estate as their choice of product.

Just my $.02...