Best use of 100k for long-term buy/hold strategy?

Question

Hi Folks - thanks in advance for your input on this - looking for feedback/opinions on the best use of 100k in capital to purchase buy/hold rental properties as a long-term wealth strategy (optimizing cash flow + opportunity for appreciation)

All things being equal and assuming financing/credit is available and in good standing - I am curious to hear your thoughts on three strategies I am currently considering :

1) BRRRR method - pay cash for (1) property all-in for 100k - perform necessary repairs, rent it out, cash-out refinance asap and repeat process over and again

2) Pick up (5) properties valued at 100k each - putting 20% down on each, mortgage the balance and use cash flow/depreciation to pay down mortgages over time

3) Purchase a multifamily complex valued at 500k, putting 100k (20%) down, finance the balance and pay down over time w/ cash flow/depreciation

Thank you all for your insight, I look forward to hearing the feedback  - Zac (Clearwater, FL)

Arthur Hunt · Answer

Hey Zac,

I was following the discussion and I was wondering that none mentioned the notes business. So, let me explain how it works. You buy non-performing loans at a significant discount, once you re-perform these loans you will start making money. The big advantage of notes is that owning a loan usually results in an equal or greater cash flow or passive  income with less liability than owning a rental property. Also keep in mind that once it note becomes performing the value of the note increases. Re-performing loans sell for about 65-70% of UPB and the market is very liquid.

Jay Raught · Answer

Arthur makes a great point @Zac C. take your 100k and buy more than one mortgage note and you are the bank. No tenants and toilets, just monthly payments...as long as they continue to pay. There is plenty of work in this space as well but I find it to be worth the payoff. Good luck!

Aristotle Kumpis · Answer

If you are just starting off your portfolio, I highly recommend you leverage. You need to acquire as many properties as you can, and financing will allow that to happen. With $100K, you could buy 3-4 financed properties with 20% down. (assuming each one is $20K down with closing costs)

Take advantage of the low rates today while you can. If your goal is to start building up as much cash flow as possible, this is a great strategy.

Zac C. · Answer

Thanks guys, appreciate the input - Monique, if I do what you say and put only a down payment on one property, say 20k (20%) I don't see how I would be able to quickly refinance the property - aren't most cash-out refinances maxed out at 65-70% LTV? It seems I would have to pay all cash initially to be able to quickly refinance and pull the cash back out to rinse/repeat ? Maybe I am missing something - thanks for the clarification :)

Bob E. · Answer

Many of the non performing notes will never re-perform.  You will have to spend money to keep the taxes current, spend money to foreclose, and then spend more money to rehab and make the house rent or sale ready, then you will be able to rent/sell the property and collect a cashflow.

For a new person I would start with buying some shorter duration partial payments (you buy 3-4 years of the payments on a note with 5-10 years of payments left).  The seller does not collect any additional money until the partial buyer is paid in full.  It is a reasonable way to test drive a performing note without having to buy the whole thing and make a 20-30 year commitment.

Jerry Padilla · Answer

NA Beard

There are pros and cons to both options. Yes, conventional can be aggrevating sometimes, I have been through it myself. It is also fixed rates for 30 year terms and some of the lowest rates in the industry...... Well worth the hassle for my cash flow and no need to refinance, unless I choose to pull cash out.

Thomas P. · Answer

Everyone has different strategies.  I think you need to laser in on what your goals are.  Start with the end goal in mind.

If you want quick cashflow and aren't concerned too much about investing above and beyond the 100k, maybe #2 is ok.  You would really need to make sure you buy right so that your expenses are covered.  But you did say "long-term".  If you are in it for the long term, the BRRR strategy is the way to good.  Leverage is the name of the game.  I have bought all 6 of my rentals using the BRRR strategy before I even understood I was doing it.  I just knew I always wanted all my cash back to move on to the next property nand continue building my portfolio.  The BRRR strategy may work with bigger multifamily units, but it will typically take you longer to cash out because they are valuated differently than a SFR.  There is a wealth of info here on the pros and cons or SFR vs Multifamily.  Read up and do what makes the most sense for you.

We do SFR's because we can refi them out quickly with commercial lending usually at an ARV of 80% based on appraisal, sometimes 85%.  I would imagine you have local lenders who will do the same.  Don't be afraid to call local banks and ask what they offer or what they can do.  Also, if you know a banker personally, maybe someone you go to church with, talk to them.  You wouldn't believe what they are able to do if they understand your business model/goals.  We just locked up our 7th rental, closing on the 22nd.

Purchase price: $89,200Repairs: $5000After Repair Value (ARV): $120,000 (conservative comp, may appraise for more)

So, we will have $94,200 in it.  Refi 80% of $120,000 appraisal = $96,000.  Closing costs of $2000.  I have basically purchase the home for free, have 20% equity in it based on appraisal and will cash flow $150-$200/month.

Rinse and repeat as fast as you can.  The more relationships you have with banks/lenders, the more likely you are to be able to build your portfolio faster.

Just my  $.02

Jeff B. · Answer

Don't forget, Reserves are part of the qualification for the loan, not required for the life of the loan/ownership.

A commercial loan avoids the issue and isn't restricted by the aggregate of other existing properties.

Jacob Sampson · Answer

@Zac C.

Based on the information I can glean from your post and your profile, I chose option #1 and here is why.

I'm assuming as a contractor you are a reasonably handy dude, I think this is an advantage and you should capitalize on any advantage you can.  Option #1 lets you find a home that you can purchase under value, repair it (using your skills) and then rent it out.

Certainly you can put your skills to work on the other options, as well.  But I think it is important to step into the business slowly.  Get your first rental, maybe don't refi for the first year.  Learn how to landlord, find out if it's something you really want to do.  Then, if you decide you still want to, refi and go!  You will be moving forward with real experience.

The idea of leveraging up as much as possible is just gambling, it assumes we have more control over the myriad variables at play than we really do.

Finally, as you are getting advice, I would take, with a grain of salt, any advice from people who have been investing for less than 10ish years.  Because, it means that all of there experience has taken place within a rare run-up in values following a rare tanking in values.  There is absolutely know way to know if their success is based on their knowledge, talent, and skill or if it is based on the fact that a rising tide lifts all ships.

And, by the way, that includes me.  I have only been investing since 2005.

Best use of 100k for long-term buy/hold strategy?

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