How would you invest $1 Mi in current market?

Question

Looking for strategies in this current market that I haven't thought about - WHAT WOULD YOU DO? Here is the case: still have my W2 job and the goal is to replace it with passive income from real estate. My residence has about 83% equity, so I want to put that "dead equity" to work, so I am considering selling the house, go live in a rental and take out the equity to invest in cash-flowing properties. Hypothetically, let's use these numbers:  Value of the house $1.2Mi on 10y mortgage with 2.25% rate, let's say net equity is $1.0Mi ==> Planning to sell it, go rent a smaller house and invest that $1Mi. My though process (using rough numbers) let's buy 10 properties with $100k down each (25% of $400k) and assume $500 average free cash-flow/each, $5k month and $60k/year vs $1mi principal invested = 6% Cash-on-Cash return. Slightly above inflation, and let's say in 2 years rates will go down 200-300 basis points, I refinance and increase cash-flow, while is building equity over time.

What strategy would you have? What advice you would give me?

Account Closed · Answer

That plan sounds good for a long term investment, although in that position you might want to start with buying one or two properties to see how it goes instead of rushing to buy ten. Having $3,000,000 in loans with little cash reserves left after buying ten buildings is also more risk than you may want for a 6% return.

Josh Young · Answer

@Anderson Bigate Nogueira

I think you are going to have a hard time finding that cash flow with just 25% down at today's interest rates; after you factor in Vacancy, Maintenance, Repairs, Capital Expenditures, and Property Management you will be lucky to have positive cash flow, but you will be able to refinance in a couple years and they should be cash flowing well at that point.

If I was you, I wouldn't rent a place to live in, buying a primary residence is the best way to buy real estate, low down payment and lower interest rate than investment property.  I would consider taking out a HELOC on current home and then use that money to buy a smaller primary residence at 5% down, rent out the current home ($6k per month if it's worth $1.2M), and then keep using the HELOC to buy a couple other investment properties, next year buy another primary residence at 5% down, rent out the other one, and buy a couple more investment properties. Or I might consider buying shares in an Open Door Capital (Brandon Turner OG BP Podcast) syndication instead of investment properties, but definitely buy a primary residence, don't rent.

Jason Sung · Answer

@Anderson Bigate Nogueira, I would agree on @Josh Young's point. In this market, it would be very hard to find any cash flowing property, especially if you are buying in DFW. You may find cash flowing properties in C or D neighborhoods but it would potentially come with lots of property management headaches.

Bonnie Low · Answer

Are you determined to buy long term rentals or are you looking at properties to use as MTRs or STRs? Personally, I like the diversity in my portfolio - I have all 3. We started out with long term buy and holds, but as the market has shifted dramatically between prices going up and interest rates going up, it's hard to make decent cash flow and COC focusing on LTRs. STRs are much more work and higher risk but if bought well, can yield much higher returns. You haven't said how involved you want to be but it appears you're trying to get to a cash flow number so I'd definitely look at spreading it around between different niches. Find a really good STR broker in a strong market and start running numbers on some properties so you can compare the potential. And, you might pick up some multi-family units in the coming 12-15 months at fire sale prices. It remains to be seen what happens with multi-family, but there are a LOT of people who bought poorly, ballon payments or refis are coming due and banks are already starting foreclosure. With the kind of capital you're talking about, you might be positioned to take advantage of this.

Jake Andronico · Answer

@Anderson Bigate Nogueira

Great place to be in no matter what you decide to do.

If it were me, I would sell the primary and pay cash for 2-3 properties in a similar area. Cash is extremely strong right now (at least here in Reno, NV, and we've been hearing a similar story across a lot of markets nationally as well).

Would still likely net about $5k per month with a lot less hassle, and no mortgage payment. And, you could likely get some really solid deals by flashing an all cash offer. But, it completely depends on your goals.

Curious to hear what you decide to do!!

Dylan Speer · Answer

I'd probably invest in a syndication that pays 10% cash flow with some appreciation on the back end. Or gas and mineral rights royalty fund at 10-15% annualized cash flow and just always have $100k passive income and no headache or phone calls.

Jennifer Volek · Answer

Hi! Local investor/agent here! My husband and I use a HELOC to utilize our equity. We do flips with it, not necessarily passive but better than working a 9-5 in my opinion. Let me know if i can help in any other way, best of luck to you in your adventures!

Colton Hahn · Answer

If you have net worth of 1m+ not including your home (if you sell) then you would be an accredited investor likely and some very lucrative investing doors open to you. Things like syndication for example become available to invest in and the kind of return for the work you would be doing (none) are pretty exciting. Good luck in whatever you end up doing!

Ricardo Hidalgo · Answer

I would start renovating properties and making them into MTR or STR.

Another avenue Is building new construction to sell for profits.

You could go longer with building a bigger beach house or multi family for tax benefits and appreciation.

How soon are you wanting to achieve this and what is your risk tolerance?

Anderson Bigate Nogueira · Answer

I appreciate your perspective here Josh! I want to better understand your point on HELOC: current rates are high, so taking a HELOC for buy a property (long-term hold) sounds like a risky move (hence the idea to sell the residence and use that capital to purchase investment properties)... I'm probably missing something here, appreciate if you can elaborate.

How would you invest $1 Mi in current market?

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