Specialist · Milwaukee, WI · Member since 2013 · 40 posts · 1 vote
Hello everyone,
I am new to real estate investing and have a quick question to ask you guys. I'm in a pretty unique situation where I will be able to invest and/or save roughly $50,000 per year (sometimes more if I have a good year at my job) in some sort of real estate investment and want to be able to get the most for my money. I've been reading up a lot on single-family homes and whatnot, however, I found that in order to make the amount of money that I think I can with this amount of capital (Especially if I save it for a few years) it'll take a lot of properties (60-70 single-family rentals) in order to return the same amount it may for one or two larger multifamily apartments. My question is, should I save up a few years and use some of that $50,000 per year in order to put a decent sized down payment on a larger complex? Or, should I focus all on single-family homes and just purchase a lot of them? Maybe a mixture of both? I'm thinking of possibly starting off with a few single-family homes, and then once I've kind of learned the ropes, using my $50,000 per year to save up enough to start investing in larger projects. FYI - I am not opposed to going into projects with multiple investors… I'm not necessarily looking to do this all by myself.
What are your thoughts? Sorry for the long-windedness of this!
Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
13y
Hi Matt,
If I were you I'd think about buying now to learn the ropes. Maybe look at multi family (2-4 units) since they may make more money for you in your market. Save the cashflow from these investments to be used along with your $50k per year, and buy more. When you find something big, do a 1031 exchange- sell some of your SF to fund the larger purchase. Set some goals and go for it!
Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
13y
Hi Matt,
If I were you I'd think about buying now to learn the ropes. Maybe look at multi family (2-4 units) since they may make more money for you in your market. Save the cashflow from these investments to be used along with your $50k per year, and buy more. When you find something big, do a 1031 exchange- sell some of your SF to fund the larger purchase. Set some goals and go for it!
Specialist · Milwaukee, WI · Member since 2013 · 40 posts · 1 vote
13y
Thank you for the reply Kelly - good options.
I want to also mention that in addition to larger multi-family apartments, I'm also interested in / considering commercial property investments as well. I would just assume have a few larger properties to maintain rather than 70 SF units scattered around multiple cities/states. Am I wrong to think that way?
Specialist · Victor, NY · Member since 2013 · 823 posts · 844 votes
13y
Hi Matt,
You are not wrong at all to weigh the benefits of having one or two larger investments over 70 SF scattered around town. There are many benefits that come with such a strategy- which you obviously are aware of so I won't belabor the point. There are also drawbacks though. Remember that there is a cost and a benefit to all strategies. Very generically speaking, larger buildings usually come with increased barriers to entry such as more capital (or the need for partnering-which can be very good or very bad), an increased emphasis on your past "experience" as an investor, more complex asset management (especially if you are talking about something that is both REI and a business like Self Storage or other commercial endeavors). Fundamentally, the analysis of the investments are the same and the idea that larger properties are "the same but with more zeros" as you might have heard before is not outright wrong but it does oversimplify the comparison.
In my humble opinion, you should take a step back (and forgive me if you've done this already behind the scenes) and begin with the end in mind. Where do you picture your self in 5 or 10 years. Are you looking to just increase wealth with minimal involvement or are you looking to develop as an investor and make investing your eventual full time gig? Once you start to create a picture of what you want your life to look like in 10 years, you can better pin down a strategy for getting there.
Another important thing to do right away is start to ask the hard question which is.......why?
In my experience the most successful people have a BIG 'why" behind everything they do.
Wish you the best and welcome continued discussion.
Specialist · Milwaukee, WI · Member since 2013 · 40 posts · 1 vote
13y
Hello Michael, thank you for the reply! As you pointed out yes I have taken a step back and looked at where I want to be 5, 10, 30 years from now. I'm looking for more of a hands-off type of approach due to my current career as a commercial real estate broker…. that's something I foresee myself doing for the next 20 years or so while I build up my portfolio and eventually 'retire' and focus more on my real estate investments, stock market investments, and angel investing as well.
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
13y
Hi Matt.
I think your answer will come with a more detailed look at your future goals. "Not to have to worry about income and just enjoy life" is extremely vague. If you delevelope a detailed plan of what you desire your passive income to be as well as a lifestyle cost estimate then you can reverse engineer a plan that works for you and meets your goals. For example if you want a $3 million net worth and passive income of $300,000 a year then you can start to run the numbers on various forms investment strategies and see what you will need to do and how much capital and time you would be likely to need to invest in order to get there in 20 years. This will show you a path.
From what you have already said I would say start with a 2-4 unit complex and add a couple more if you enjoy it. Set them up in a way to meet your timetable and then if you want to jump up to a larger complex then do a 1031 exchange. This will allow you to learn the ins and outs as well as make solid returns in the interim. At the end of the day real estate offers many paths to the returns you desire but I don't believe that wealth will materialize until you find a niche that you enjoy and can become an expert in. Be careful to not to just look at the numbers as you will burn yourself out. Look where you can excel and really add value while enjoying the process and you won't ever having to get to a point where you can retire in order to enjoy life as you will be enjoying life in your business... hope that helps...
Investor · San Francisco, CA · Member since 2008 · 83 posts · 50 votes
13y
Hi Matthew,
nice to meet another wisconsinite! i grew up 3 hours north of milwaukee, but migrated west. the fact you're choosing to invest in income producing RE (vs say a cool sports car), is certainly what will get you closer to your goals more quickly.
my 2 pennies...
SFH vs multifamily: could be debated either way. i prefer multifamily over SFHs simply b/c of the economies of scale. i.e., with a duplex, you have 1 roof, 1 lawn to care for, etc vs with 2 SFHs you have 2 roofs, 2 lawns, etc. that said, i know people who own and manage a large number SFHs and love it and do incredibly well. regardless of what you do, be smart with your numbers, do thorough due diligence and never buy on proforma rents ;-)
its been my experience that banks are most comfortable lending bigger amounts of $ to people who have a solid track record or pretty deep pockets, both of which mitigate their risk ... so i agree with kelly's recommendations. if you have 50k to invest each year, i'd recommend accumulating 2-4 unit multi's and adding as you are able until you have assembled a number of units (try to keep them together if you are able, easier to sell as a block and less running around for you).
if you need capital to move into something bigger, sell them and if you are able, 1031 into something bigger. i know for a fact some banks (at least mine does) will look at you more favorable when you if you can demonstrate that you have a strong track record of managing multiple units, so start accumulating now.
diversifying is always a good thing, but i'd recommend you first learn about what you're getting into before jumping into it. there are pros and cons of different types of commercial real estate.
in terms of deepening your commercial RE knowledge base, i can't say enough about BP. some pretty smart ppl here. I also think the CCIM courses are excellent. top not curriculum, small classes, and top notch instructors with deep, deep commercial RE knowledge. i liked their case study method where we worked in small groups with people who ARE in the business vs who want to be in the business. i learned as much from my group as i did from the instructors. to this day i keep in contact with my CCIM 101 instructor and fellow students (who are brokers) they've been good mentors for me.
Matt,
Regarding commercial property, the commercial market is in the toilet right now what with small businesses closing up shop and big companies laying off thousands. I think this will continue a few more years. Therefore, I'd consider it a bigger risk than say SF or MF homes. Nonetheless, my point is not to discourage you but if you willing to take the risk, you could probably get a pretty good deal on commercial real estate nowadays. It would more than likely qualify as a buy and hold so location would be key. I would look for something that has a store front or offices on the main floor and a couple of apartments upstairs that will bring in income right away for you. Also, if at all possible I would try avoid spending $50K in one shot but rather do a minimum downpayment and get a low interest loan (while you still can) for the rest. That way, you establish a stronger credit line (never a bad thing, right?) and still have some cash for another investment. Have you looked into tax liens or trust deeds? I regular earn 10-12% on trust deeds alone, earning me $30K over the last couple years. Good luck!
Specialist · Milwaukee, WI · Member since 2013 · 40 posts · 1 vote
13y
Kyle Hipp and Kevin Young -- Thank you for the reply's and the great posts. As far as doing what's enjoyable... honestly, all real estate is enjoyable to me (as my living and as an investment opportunity). I might add, I have been pretty involved (and have done pretty well) in the stock market up till this point in my life so that is also something I want to continue to pursue.
My plan is this: If every year I can add $50-60k into real estate investments (using a mix of leverage from financing and some all cash deals (sheriffs sales are really hot right now in my area)), by year 7 I should be making an annual surplus from rents (after all expenses, management fees, interest, repairs, etc) of ~$60K (assuming I find deals that will get me 20% returns) with a good amount of property in my portfolio. If I stay at that pace of investing in real estate, every year I should be able to add an additional $8-10k to my 'income' (again, assuming I get 20% returns)... i.e. year 8 is now $70k of income, year nine of $80k income, etc. I will obviously save some of that surplus to go towards major renovations/repairs, but I will reinvest a good chunk of it into the stock market (diversify my investments). Using a compound interest calculator I have found that taking $50k every year out of my surplus money from real estate earnings (after it gets to that point; around year 7) and putting it in the stock market (at 8.5% return), after 15 years it's now up to $1.5M.
So at this point, after 20 years:
1) I would have my original investment in the physical real estate (if not more due to property values increasing) (original investment total of $1,200,00)
2) Yearly cashflow on those properties (adding ~$10k per year in cashflow with the adding properties. By year 20 ~$1,600,000 AFTER taking out $50k/yr to fund point number 3)
3) After year 7 or so, taking out $50k per year and putting it in the stock market (totaling $1.5M)
(Not to mention that none of this money is going towards funding my life (food, cars, entertainment, etc.) - All of that type of stuff is being funded by my lucrative job - which is what also allows me to invest 50-60k per year! Good thing I went to college!)
With my calculator in hand, on the low side, after 20 years; points 1,2, and 3 from above total roughly $4,331,600... Which would grow every year there after due to more cashflow from added properties AND from compounding my interest in the stock market. Does this make sense?
Obviously this is all assuming that lots of things fall into place correctly... this is sort of a "best case scenario".
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
13y
Why does it have to be one or another? I would suggest start with SFR with conventional mortgages. Thats the best leverage for your money you can get. 75%-80% leverage at low interest rates. Use all the cash flow to pay off those notes as fast as you can. Fannie Mae will limit you to 10 loans so there is a limit on this strategy. After that you can either find a portfolio lender and buy more SFRs or pay cash. By SFR I include duplex-fourplex since the financing is the same. Or you can move to larger commercial properties with your excess cash as a down payment. When SFRs are paid off, you can buy more with conventional loans and if you use cash flow from the first 10 plus the next ten, you can pay off the notes even faster. You can then sell some of the SFRs and 1031 them into a larger complex if you want to.
The key to success is smart leveraging of your capital.
Specialist · Milwaukee, WI · Member since 2013 · 40 posts · 1 vote
13y
Also important to note that I work in commercial real estate (as a broker), so I will be aware of the deals out there and have plenty of colleagues to point out what the "good" and "bad" deals are in our market.
Annette H. - not trying to disagree with you, but at least in my market (Wisconsin), our commercial real estate sales are WAY up compared to the last 2 years. We are on pace to beat our last years results by 17% (obviously varies state to state). But I sincerely appreciate your input and agree wholeheartedly on using financing to my advantage!)
ANISH TOLIA - I see that now... It doesn't have to be one or the other. I will slowly ween into bigger projects after getting my feet wet with some of the "smaller" stuff. Thanks!
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
13y
Matthew Cariello
If you can get 8.5% compounded return from the stock market for 15 years you would be better than 99% of professional fund managers. In that case you should be doing that for a living rather than real estate! Diversification is fine but if you are in the RE business as a profession, your money may do better if you invest in what you know rather than hand it to Wall Street.
Specialist · Victor, NY · Member since 2013 · 823 posts · 844 votes
13y
Originally posted by Matthew Cariello:
Hello Michael, thank you for the reply! As you pointed out yes I have taken a step back and looked at where I want to be 5, 10, 30 years from now. I'm looking for more of a hands-off type of approach due to my current career as a commercial real estate broker…. that's something I foresee myself doing for the next 20 years or so while I build up my portfolio and eventually 'retire' and focus more on my real estate investments, stock market investments, and angel investing as well.
Mathew,
Being hands off is hard to do right from the get go. I always feel its better to get your hands dirty first doing something. With this you have first hand knowledge of the process/skill set when you do ultimately outsource that task. Obviously your chosen career gives you considerable experience and knowledge that will benefit you in your investing. The folks that say small properties (singles to quads) are a good way to sharpen your teeth are absolutely right. If your plan is to "go it alone" initially, this would be a good way to go. If you head down the partnership path right off the bat, be sure to do three times as much due diligence as you think you should. Partnerships are a great way to get into larger properties as well as stay "less hands on" but they come with inherent risks and it is on you to vet the many "offers" to partner you will get when you tell folks that you have money to invest.
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
13y
If you have capital now I would start working out on a deal right away. If appears that you have a lot of the math down and the effects of compounding. I started the same way. I think the part that you will really benefit in is analysing a house or multiunit and seeing how the numbers actually fall into place. Once you get a property you will be able to start understanding the construction and other costs to the business. Once you can walk up to a building and start listing off what needs to be done and have a ballpark price to complete work and then rent out it really starts to click. You seem younger like me and it has been really important for me to understand that the market we live in now has not alway been this way and is always changing. I would recommend not counting the property to raise in value at all from the point in which you purchase it. Rental prices are always in flux and so are home values. I think the best approach for me has been to set up my financing to the time in which you want to be a full time investor. So for you 20 years. In that case don't finance a property longer than 20 years. Then count on replacing the roof, water heater, furnace, all appliances at least once, a deck or porch and the flooring from the time you purchase to the time you hit that 20 years. This might include the windows and siding as well. Long term mainenance is something we many times forget to account for and these costs can make our numbers much more realistic going out 20 years.
I would say look at the worst case scenarios more. You are already on board with the real estate investing path and so are the folks on here. You don't need to convince yourself and you will gain much more useful knowledge by looking for ways a plan will not work that how it will work is 10 things align perfectly. So if you invest $50,000 a year for 10 years and have properties worth only $575,000 after those 10 years is that ok with you? This is what many folks portfolios look like over the past 10 years. The other thing is that your plan might call for buying a property every 5 months but always be reviewing your plan to do what makes sense not just following a plan from years back.
You have the drive and now you just need to gain the experience and like I said I think you should start small and get a property in order to start seeing what everything is like off the paper.
Specialist · Milwaukee, WI · Member since 2013 · 40 posts · 1 vote
13y
Kyle - thank you for that detailed reply. Great information!
In regards to only having property worth $575k after 10 years... That would be the total of my INVESTMENT, not necessarily the property value (i.e. I plan on financing and using leverage to my advantage). Also, in regards to your point of needing to replace things like furnace, carpet, flooring, etc... That's why I'm looking into commercial property and larger multi-family properties that way I don't have 50 SF/2-4 unit properties that all need a furnace and a dishwasher, wash machine, and flooring within the same year. Economies of scale.
I agree though, starting out small and getting a grasps on things is what I am going to do. "Sharpen my teeth", as you say!
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
13y
With the $575,000 figure, I was saying that it is possible that that is all your property could be worth. I was speaking on the fact that property values could remain flat or fall over a 10 year period. Now you could do 50% leverage on each property and get a 10 year payoff which would allow for leverage to mitigate some of the risk granted that you can cover any losses from your personal cashflow. Main point was that property values are not garunteed to go up and in my experience it is best to not plan that it will but gladly accept it when it does.
As for repairs. You are gonna have repairs and issues in any form of real estate, single family, multi family or commercial. Look at threads on the 50% rule for specifics. One thing that could be an issue with large appartmemt complexes is that if you own one or two large complexes you have great ties to one or two areas. I livein wisconsin to the north. If I owned 75 properties from green bay to oshkosh from single family to 8 unit properties. I have a wide variety of locations and if one area starts having a crime problem or big layoffs like in Oshkosh, then the other properties still remain strong allowing me options to mitigate that loss, however if I just had a 80 unit complex in any area and that came into crime or other triuble my options to fix that are more limited. Also as for repairs. Your costs on smaller properties can be lower as regulations and the hassels of major repair on a 1-4 unit is a lot easier than a larger appartment complex or commercial property. There is definately lots of things to look at. Be careful not to fall into the trap of straightline scaling up. A single family acts a lot different than an 8-plex in everything from vacancy rates, repairs and all the other factors. But you will learn all of that. Keep at it.
Specialist · Milwaukee, WI · Member since 2013 · 40 posts · 1 vote
13y
Thank you Kyle -- all of what you just said will be looked into and certainly taken into account. I liked your example of crime rates and whatnot affecting a large property type vs. lots of smaller ones spread about... Definitely something to consider! I guess I was more focusing on property management being cheaper on a few larger buildings than a lot of smaller properties (single family houses for example). There is no way with my career that I have time to take care of properties... Paying someone 10% to take care of that for me is beyond worth it (so this is another expense that I strongly need to take into account).
Thanks for the advice - I sincerely appreciate it.
Residential Real Estate Agent · Hattiesburg, MS · Member since 2011 · 475 posts · 141 votes
13y
I'm in a very similar situation so here's my strategy...
Buy 1-2 single family rentals per year. That's assuming you are in a market where homes can be bought for $30-40K in decent neighborhoods.
In my market I see absolutely no positive aspect to buying multi family when I'm able to buy SFR for about the same price per door.. (Other than slightly reduced operating cost)
Much less desirable product than SFR... I had a duplex under contract for a couple months but the deal eventually soured due to title issues.. I advertised it prior to closing to gauge demand, and it was nothing but sleaze and section 8 applying. Every inquirer that spoke proper english was immediately turned off once they verified that it was a duplex vs a SFR.
Buying SFR for way below reconstruction cost prevents another conglomerate from going down the street and building the latest and greatest apartment complex and putting downward pressure on rents..
Multiple exit strategies with SFR... If there is a market shift towards home ownership vs renting then rental rates will decrease thereby reducing the value of Multi properties. At the same time there will be price appreciation in SFR homes due to increased demand.
You can start investing after 1 yr with SFR vs saving for 5-10yr with multi... The sooner you put money to work making returns the faster it grows.
Easier to learn the ins and outs of owning property starting with 1 tenant at a time vs many...
Last but most important, it's not such a life altering commitment to buy a SFR and try the rental business... Rental property definitely isn't for everyone.. Worst case scenario you hate it and flip the SFR property to another investor or homeowner.
This is just my 2 cents... It all comes down to the individual deal.. If I came across a multi in a good area that was a 3% deal I would jump all over it... Maybe I just haven't found the right deal yet!
Specialist · Milwaukee, WI · Member since 2013 · 40 posts · 1 vote
13y
Ahhhh okay I gotcha. And that $30,000 you mention... Is that YOUR investment (with the rest being financed -- i.e. $30k down on a $100k home for example), or is that the price of the home? I understand it's just an example but if you could clarify I'd really appreciate it - thanks!
Investor · Appleton, WI · Member since 2012 · 1k+ posts · 464 votes
13y
$30,000 is the price of the home in the above scenario.
Back with the economies of scale discussion. Have you talked with a property managememt company? I have a hard time seeing a large appartment complex with say 20 units being noticibly cheaper to manage that 20 single family rentals or small multi units in a general area. I would personally charge less to manage 20 single family properties than one average 20 unit complex. Simple reason is because it is much easier to manage a single family rental, less time.
Specialist · Milwaukee, WI · Member since 2013 · 40 posts · 1 vote
13y
Kyle - No I have not spoken to any property managers. Another local investor told me that MIGHT potentially save some money by them only going to a few larger complexes versus a bunch of small… This is something I will obviously have to look into a bit more.
Lastly, in that 3% per month example from above is that the amount of monthly rent or is that the amount of money taken home by the investor after all expenses, maintenance, taxes, interest, etc. are paid? (i.e. the surplus)
Residential Real Estate Agent · Hattiesburg, MS · Member since 2011 · 475 posts · 141 votes
13y
Originally posted by Matthew Cariello:
Kyle - No I have not spoken to any property managers. Another local investor told me that MIGHT potentially save some money by them only going to a few larger complexes versus a bunch of small… This is something I will obviously have to look into a bit more.
Lastly, in that 3% per month example from above is that the amount of monthly rent or is that the amount of money taken home by the investor after all expenses, maintenance, taxes, interest, etc. are paid? (i.e. the surplus)
Thanks much!
That would be gross income before expenses.
I'll give you one of my properties for example.
Bought home for $27,000 did a basic rehab for $8,000. Total investment is about $35,000.
Home rents for $750 per month.
I have the home insured for $75,000 with a $5,000 deductible and the annual premium is $350.00
Property taxes run about $1,000.00
I provide yard care which cost about $600 per year. (Most don't do this, but it drove me crazy driving up to my properties with the grass knee high)
So $750 x 12= $9,000 in Gross Rental income - ($1,950 FIXED COST) =$7,050.
Of course there's maintenance: It's hard to estimate a cost that can vary so widely from property to property. I like to budget $100 per month x 12= $1,200 in annual maintenance reserve.
Last there is Vacancy and this also can very widely. In my market SFR is highly desirable and will only take a week or so to rent. Apartment's tend to take much longer. Commercial is a joke right now, there is unrented commercial space all over town that has been vacant for over 6 months.
So for SFR I would budget $325 per year as a expense for vacancy. Basically half a month per year to fill a vacancy. This is the most important variable in any income property equation. A vacant commercial or multi property is basically worthless imo unless there is something obvious that can be done to make it more desirable. Actually it's worse than worthless because the fixed cost will continue to suck funds even when the property has no income. This is one of the reasons I like SFR having a 2nd exit strategy in case the rental market sours.
So Back to the numbers
$9,000 Gross - $1,950 (fixed) -$1,525 (Variable)= $5,525 in net income on this property.
To recap $35,000 investment with a $5,525 net= 15.7% annual return on investment.
This is assuming I paid cash and have no loan. Also I manage my own properties so that saves 8-10%.
If a property manager were involved I would back out $9,000 gross x 10%= $900 annual
$5,525-900= $4,625 with a property manager= 13% annual return with PM
A easier way to calculate all this is to use the 50% rule. Basis of this rule/guideline is that 50% of gross rents will go towards expenses (fixed, variable, PM, vacancy)
So $9000 in gross rents x 50% = $4,500... or 12.8% annual return when using that method to estimate income..
Amazingly that is only .2% difference than my prior calculation.