How would you put $100K to work now?

Question

If you opened your mailbox today and you received a windfall check for $100K (no tax due), how would you invest it?

Criteria:
Must be invested in real estate (or related)
Must be invested by 1/31/09
Should have a way to get back to cash by end of 2010

Ah, so many options, but here's one:  Buy an empty 4-plex (or 1-2 units rented) that needs light-moderate rehab.  Spend $70K for the RE and $20K-$25K on the rehab. Lease it up for $2500/mo.  Collect the rent for most of the next 2 years and then sell to an investor at the end of 2009.  Hopefully it sells for a cap rate of 10, bringing in $150K as well as the income in the interim.

No, I didn't finance this deal but you can finance yours.

What's your $100K deal?

Jon Holdman · Answer

Yes hard money loans are being the bank.  Finding investors to lend to is easy.  Go to a REIA I'm your area and let it be known you have money and you'll be swamped.

You may want to find a mortgage broker to work through. They will take a cut but will do a lot of the leg work.

You need to figure out rates I'm your area. Three of four points, 15%, 70% LTV and six to nine months is common around here.

You will get a mortgage or deed of trust and a promissary note from the borrower. The borrower will buy a "lenders title policy". Do it all with a title company or lawyer and they will help with the paperwork.

Typically the title company will cut a few "repair escrow" checks. You tell them what  to do. These are made out to the borrower but given to you. After you inspect the work, you hand over the checks. Last check only comes once all work is done.

You will want to get an appraisal from an appraiser you choose. The borrower should identify the work to be done, and the appraiser will consider that I'm coming up with the ARV.

You should get monthly payments. Some lenders will take a single interest payment with the loan payoff, but you should get a higher rate for allowing that.

You should be prepared to foreclose if the loan isn't paid according to the terms. It's an investment, not someones home, so no slack. Hopefully, the borrower will do a deed in lieu if it comes to that. If so, I'd let it go at that. If you have to foresclose, I'd be ruthless with fees and judgments and would report it to the credit bureau.

Do learn and follow your states usury laws. If you don't use a broker, get a lawyer to help the first time.

Don't know about 1031. Check with a CPA.

Rich Weese · Answer

Here is a contrarian view. Use this money as hard money loans. Do 3-6 month loans at 14-16% with 2-3 pts up front.  Do this for 2 years and depending on how many 3 month loans you do, you'll return  close to the same amount as the first example and just clip the coupons for the 2 years. The points and rates are what an investor will pay on the right deal.

Diane Menke · Answer

Rich,

Can you clarify that "hard money loans" means you are acting like a bank, lending to investors at the fixed % you mentioned, for a set period of time and a set up font boot (points)?

I like that. No tenants. No surly roofers. No house to mess around with....

Can you tell me a bit about the documents you would use to protect yourself from non payments? How does that investor make it a safe bet for you? How would you find that qualified investor?

Can you do "hard money loans" using a 1031 exchange? I'm wondering if you could keep rolling the "in money (100K)" so as to avoid taxation.

If you can't do the 1031, the gains would be taxed at what rate? 15-18% or more like income at 28-30%?

I really love this aspect of Bigger Pockets. It stretches my thinking about real estate investing.

Thanks for the puzzle and the intelligent answers guys.

Diane

Jon Holdman · Answer

I think Rich is on the right track.  Something to consider about hard money loans is that it's lumpy. It's hard to get every penny invested. With $100k it will work better if deals in your area are under $50k  And it takes some time to get a new loan once one is paid off. Nevertheless this can generate nice returns.

Joshua Dorkin · Answer

I actually like your line of thinking, Rich!

Diane Menke · Answer

If you looked a little harder you might find a better buy in a transitional neighborhood, and do a better ROI or even spend a bit less.

I usually look for areas where artists and builders are moving in, new rough around the edges coffee shops...signs that the neighborhood will turn. You can get a property in foreclosure or just cheap.

I try not to do much work to these. In this way there is cash in the bank in case its empty for a while or something breaks. I try to keep 3 months expenses, minimum, liquid.

Nice puzzle.

Diane

Jon Klaus · Answer

Just one month to put your "money" to work.  Anyone...?

How would you put $100K to work now?

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