Using 600K to invest in cash flow properties or primary residence

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Using 600K to invest in cash flow properties or primary residence

Ryan Smith
San Diego, CA · Member since 2017 · 2 posts · 0 votes

First time on this site and not sure if tis is the correct forum but here it goes:

Important background info.  I do have experience with 2 single family rental properties in the past and growing up my father had lots of investment RE so this is not completely foreign.

My father has sold 2 properties and the funds are currently wth 1031 company.  He is "gifting" me the 600-700K to do what I want with (I realize I am very fortunate so please no spoiled brat eye rolling- its not like that).  I live in San Diego and my partner and I currently rent but would like something a little bigger (in this market that means probably around 3K/month.  

We have a combined annual salary of 260K.  Mine is by far the smaller contributing amount to that total.  We have been approved for a loan up to 1.25M using the 1031 proceeds as a down payment for a single family home.  Given that this is SD that almost put us in our favorite neighborhood but even still, here, that doesn't buy you a lot close to the city which is where we want to stay.

Now, the question:

What is the best way to spend that money.  Would it be smarter to spread it out over 2 properties or put it all into a singe family or maybe a home with a back unit to rent out that we live in?  Because of family money that I will eventually be privy to I don't feel tremendous pressure to buy a residence for myself/us at this time however the ever increasing cost of real estate here does make me feel pressure to do so now.

The other side of the coin is that creating extra monthly cash flow is extremely tempting right now and would be beneficial especially because it could help bridge the income gap with the work that I do.  I am self employed my partner is salaried in a secure job/field.

If we decide to go the investment route what would be best?  There are so many options.  Maybe pay cash for a place in Palm Springs to rent out and use, buy a multifamily in a gentrifying area of San Diego that could be rented out or AirBnB, Pay all cash for one and finance the other or finance both to get more house for the money (I have yet to talk to lender about what we would qualify for in this situation), buy a 4 plex in a place like San Bernadino and rent that out?

If you were in my shoes what would you do?? All of these are good problems to have but I really want to leverage this money the smartest way possible.  

Any and all advice would be greatly appreciated! Thank y

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Robert Freeborn
Real Estate Agent · Bellingham, WA · Member since 2017 · 427 posts · 182 votes
9y

Personally, I would go the 4plex option and owner occupy one side. That would create rent free living, thus increasing your "cash flow" by not having your existing rent.  This holds true even if the rent doesn't completely cover the mortgage. You'll still be net positive cash flow each month.

I don't know the SD market at all, so I'll leave that for more experience investors in the area. Its a very large down payment, so they may have some better suggestions. 

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  • Robert Freeborn
    Real Estate Agent · Bellingham, WA · Member since 2017 · 427 posts · 182 votes
    9y

    Personally, I would go the 4plex option and owner occupy one side. That would create rent free living, thus increasing your "cash flow" by not having your existing rent.  This holds true even if the rent doesn't completely cover the mortgage. You'll still be net positive cash flow each month.

    I don't know the SD market at all, so I'll leave that for more experience investors in the area. Its a very large down payment, so they may have some better suggestions. 

    1Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    9y

    Well it completely depends on the numbers. If you can house-hack or rent out a garage or something and that will cash flow, then cool. But you're in San Diego so that's probably not likely. 

    For general considerations about buying a primary home vs investment properties, check out-

    https://www.biggerpockets.com/renewsblog/2014/01/1...

    But more so, because it sounds like the numbers may be more of your determining factor- 

    https://www.biggerpockets.com/renewsblog/2013/01/1...

    Use those equations to run numbers on each scenario you are considering and then use that as your starting point (the numbers) to decide which way to go.

    Hope that helps!

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  • Ryan Smith
    OP
    San Diego, CA · Member since 2017 · 2 posts · 0 votes
    9y

    Thank you! Im leaning more toward purchasing one primary residence that is a multifamily (i.e. main house with 1-2 granny flats that I can rent out).  That allows me to leverage the money more by getting a bigger property and simultaneously taking a big chunk out of the monthly mortgage payment.

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  • Steve Kontos
    Investor · Great Neck, NY · Member since 2016 · 679 posts · 467 votes
    9y

    @Ryan Smith

    You have many options here.  I would either purchase a multi-family and live in one of the units or invest in one or two multi-family investment properties.  If your really are about the cash flow, I would definitely choose the second option and purchase investment properties.  Here in NY I actually invested out of state because my funds couldn't do much for me locally.  I wanted to build my passive income then eventually purchase my primary residence.  I am happy I chose that path because it allowed me to spend time building my portfolio rather than throwing it into a primary residence earning me a lot less.  

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    9y

    The STR rules being proposed in San Diego really favor owner occupied. I suggest you look into the proposed STR rules. If I were in your position (assume young, no kids, quite a bit of money to invest) I would leverage the money into as nice a small multiplex (duplex to quad) that you could afford (maybe Mission Beach) and live in one unit and STR the other units.

    If this STR legislation goes into affect most San Diego STRs will no longer be allowed to be an STR (at least not more than 90 days/year). Even if your purchase would not be a great STR currently because your finances do not permit beach front that will change a lot when a majority of those great STRs are no longer available due to the new STR regulations. A block or two from the beach could be prime STR with virtually no vacancies. Same concept for downtown.

    So look into the proposed STR regulations. Then decide if what I would do if I were you is the best solution for you.

    Good luck

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  • Casey Murray
    Investor · San Diego, CA · Member since 2015 · 290 posts · 80 votes
    9y

    @Ryan Smith Considering San Diego is near the height of the real estate market, I would buy a 2-4 unit multi family property in your desired area by living in one unit and renting out the other units to help offset your monthly mortgage payment (AKA househack). This also allows you to reap the benefits of what I call the 6 powers of real estate. I would use conventional financing (20% down payment to avoid PMI) or FHA financing (only 3.5% down but you incur PMI until you have 20% equity) to take advantage of low interest rates. If you're going to pay cash, make sure you're getting a screaming deal on the property.

    For the cash left over, it's important to know what your long term goals are; are you looking for cash flow, appreciation or both? If it's cash flow, you will find more opportunity outside of California. If it's appreciation, there are properties in San Diego where you can rehab to force the appreciation. I personally am a big fan of multi family properties as it's a great starting point where you can scale up in the future and build your wealth. Feel free to contact me with questions. Best of luck.

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  • Anthony GaydenPro Member
    Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
    9y

    @Ryan Smith

    I honestly don't like either of the options you gave. $600,000 is a decent amount of money and could be used toward the purchase of a  multifamily property in a different market that can get you enough cash flow to easily pay the $3000 a month rent.

    Using that lump of cash to buy a primary residence would mean only that you still have a payment to make every month, and you would have no renters to offset the cost.

    I realize that you said that you aren't concerned with the money due to I'm guessing a reasonable inheritance, however I do believe you should act in a way that gets you the best benefit and wealth and not depend on receiving an inheritance. If you do get it, it will be icing on the cake.

    Podcast Guest on Show #21
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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    In your shoes I would take the money to my financial advisor to discuss investing. The returns on most moderately aggressive funds would be far greater than any cash flow you could earn investing in your area.

    If on the other hand all you are interested in is appreciation, since no property under your situation will produce actual positive cash flow, buy a personal home and forget about investing. You already earn enough actual income without need to increase it farther. Be happy.

    1Reply
  • Cory BinsfieldPro Member
    Financial Advisor · Duluth, MN · Member since 2012 · 157 posts · 194 votes
    9y

    You have a great problem here. Here's what I'd consider in your shoes.

    1. Forget a primary residence. Its cheaper to rent in San Diego then buy due to a whole host of factors-price, market cycle, taxes and insurance.
    2. Depending on your ability to get a loan, $600,000 allows you to buy 2.4m in investment properties assuming 25% down. The key question is will this allow you to cash flow? If not, see next point.
    3. As people have mentioned, house hack with a FHA loan then take leftover money to invest in other deals. Ideally, a 4 plex. A nice 2 unit if fine.
    4. Again, the deal needs to put money in your pocket each month to pay you for the hassle of operating a business.

    The bigger question is this: Do you want to start an income property business in San Diego?

    $600,000 gives you lots of options.

    Don't rush into a deal.

    Be very careful and consider sitting on the money for at least a year until you figure out your long term goals.

    A 1.2M primary residence might not be the best choice since you are already questioning this idea on a forum.

    Podcast Guest on Show #86
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  • Jake ThompsonPro Member
    Rental Property Investor · Albany, OR · Member since 2015 · 312 posts · 136 votes
    9y

    Have you talked to your dad about his opinion? It sounds like he's a very experienced investor and could provide a lot of insight. I personally would recommend a 2-4 unit property that you and your partner househack. Since you have a substantial amount of money I would suggest getting a fixer upper, and combine the househack strategy with the BRRRR strategy. If you can put yourself in a situation that allows you to cash out refi 6,12,18 months down the road, you could get your money back, and be living for free (or close to it).

    You could definitely go to another market that provides more cash flow, but there are a few things to look out for. First, you will need to build up a trusted network to manage the property while you are away. BiggerPockets is a great place for that. The other thing that people often forget is that in a larger city like San Diego you have a lot of rental demand and resources at your disposal. In a small town you may have a higher vacancy rate due to less demand, you may not get the kind of rental appreciation you can in a larger town (although you NEVER want to bet on appreciation). Additionally, you may have a hard time finding vendors in a smaller town. On one of the recent podcasts, @Brandon Turner was discussing how hard it can be to find good vendors (A plumber in his particular case). All of these things are just important to consider. You can certainly invest in an area with better cash flow, you just need to do your homework.

    Personally, my wife and I are househacking a duplex in La Mesa right now. We have been considering investing in an area with better cash flow and then moving out of the duplex and renting our primary residence. There are some really nice million dollar plus homes that we can rent for cheaper than buying. That's a little ways down the road for us however.

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  • Lee RipmaPro Member
    Rental Property Investor · Prairie Village, KS · Member since 2015 · 2k+ posts · 2k+ votes
    9y

    @Ryan Smith

    I agree with @Anthony Gayden I would buy larger MF out of state. With that kind of capital, you could buy a completely rehabbed apartment (or a few) in an A or B area with some cash-flow and low risk. Let's say that you can get a MF to cash-flow 100/mo/unit in a nice area. You have PM in place and there is high demand for your rentals. You'll have to set aside CapEx money but you can buy something that is totally renovated so you won't have anything major for the next few years. You could put down more than 20% to get your cash flow up. You could buy 3 15-unit apartments and get $4,500 a month in cash flow. Use that to rent whatever place you want in SD, and keep scaling up your MF holdings. You've got enough capital to achieve financial freedom right now. If you park it in renovated MF then you'll get the cash flow. If you do value-add MF you'll be able to just grow and grow that cash flow. You're in an awesome position! Since you're in a 1031 exchange situation you probably need to buy something soon but really take your time to learn MF and find folks you trust to work with.

    I split my time between SD and LA and rent in both places. I buy MF in Kansas City and I'm expanding my portfolio there. It's so much cheaper to rent in CA! I look at how much money it would cost me to get into a SFH or even a MFH house hack and I just can't justify doing it, I would rather rent and buy cash-flowing assets in the midwest. Now people say you're missing out on appreciation by not buying in SD but when you look at how much just the property tax and interest will cost you monthly the number is just crazy and the downpayment is monster. For me, this is in no way the time to buy in SoCal, especially when you can easily rent something awesome. Renting=no interest payments, no property taxes, no CapEx, no downpayment.

    Podcast Guest on Show #373
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  • Justin R.
    Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
    9y

    Yes.

    You have too many variables you haven't nailed down.  You need to stack rank the outcomes so you have a framework to make decisions. For example, how would you order the following, from most to least important to you (this is what a good financial advisor would walk you through):

    • I want to live in a neighborhood surrounded by people like me.
    • I want to live in my own house with my partner.
    • I want to bring in as much income as my partner does.
    • I want to have my own income stream so I don't feel reliant on my partner.
    • I want a simple life.
    • I will "eat bitter" now so I can gorge in []3 []5 []10 []30 years.
    • I want my $600k to earn maximum returns since it's "play" money.
    • I want my $600k to earn good returns with minimal risk so I don't put this gift from my dad at undue risk. 

    There's plenty more, but you get the idea.  Remember too that if you're filing taxes jointly, any net income you bring is gonna get taxed up the wa-zoo, so true cash flow may not be your primary goal here.

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