If you had $1m cash to invest what would be your strategy??

Question

So big wide world of real estate investing is giving me many ideas and options but I thought no better place than Bigger Pockets so get real insights.

Currently live in Los Angeles and have a SFH rented locally and a property in London (my hometown). The LA market is so hot but rare/unable to make more than 0.5% yield or exceed 4% cap rate.

I have gone back and forth on mfh v sfh, out of state, yield v appreciation etc... You all know the drill. I have cash deploy so the key element is to do it effectively as part of an overall strategy.

Appreciate any advice or thoughts

Jon Schwartz · Answer

Marc,

I'd invest in LA if I were you!

LA and all of California gets dragged through the mud on BP. Midwesterners attack our low cap rates, but the reason our cap rates are so low is because our real estate is so desirable. Anybody here who has the capital to invest here does; everybody who doesn't have the capital to get into this market writes it off and blames the cap rates or rent control or liberal state legislature, etc.

Current yield matters in your typical Midwest market because there's no rent control and barriers to new construction are few. So most buildings are already generating market rents (and if not, they're the unicorn-like "value add" opportunity), and the game is to find good yield and ride it out until another part of town is more popular. Midwesterners probably wouldn't describe their investment strategy in such terms, but who are they kidding?

In LA, current yield is secondary to the future value of the building, not just in terms of natural appreciation but in terms of rental upside. It's not uncommon to find a building with rents 50% below market. Because of our low cap rates, when market rents are achieved, the building will be worth 2, 3, even 4 times what you paid.

New development is also very difficult in LA, and all of the buildable land has been built. These aren't bugs, these are features!

This is what you should do with your $1M:

Buy a commercial property in a gentrifying LA submarket. Metro LA has a population of 13M, more than the entire states of Arizona and Nevada combined. LA is not a market; it's 1000 different submarkets. I focus on identifying which submarkets demonstrate the most promise for rent growth and appreciation.

Next, hire a "cash for keys" negotiator. Yes, these people exist in Los Angeles. Your negotiator will be able to reach mutual agreements with some of your tenants to move out. Especially in COVID times, when many tenants are behind on rent and facing an eventual eviction, offering them money to move now might be exactly what they want. And LA's rent control ordinance regulates this negotiation, so it's actually impossible for you to take advantage of a tenant.

Next, renovate your vacated units and re-rent them at market rents. Your building will be significantly more valuable than when you bought it.

If you're aggressive, sell the building and 1031 into a new one. If you want to be less aggressive, refinance or open a HELOC to recoup some capital to put toward your next investment.

That's LA investing in a nutshell. Happy to discuss in more detail with you, too!

Best,

Jon

Todd Rasmussen · Answer

@Marc Cohen

People preach what they know. If they invest out of state, they talk about how great it is. If they invest locally, then that's the only way to go. The real answer is that it's completely subjective to you and what you want to do. Every market can make money, a lot of money. It's about identifying what strategy/market is right for your situation then applying it in the most efficient way possible.

Identify what your situation and goals are. Once you have that, you build the least aggressive model that will reach your goal. Once you have that model in place, start small and test it. If it works, great keep going. If it's not working like you planned it, then make an adjustment and try again.

I think that in a low cap rate area, flipping commercial properties is the best route for the biggest returns. The appreciation from buy and holds is great, but you just can't keep up with a reinvesting buy and hold model from some of the high cap rate areas.

Lee Ripma · Answer

@Todd Rasmussen

I agree 100%. You can make money or lose money in any market, different markets and different strategies are great for different goals. I am personally in 3 markets 2 in CA and one out of state. All great for different reasons. The one thing I won’t do is invest purely for cash flow. Show me a deal where the bulk of your return is made up of cash flow and I’ll show you how that deal has very low returns.

You’re in a great position to have a solid chunk of equity, so lots of good options!

Jay Hinrichs · Answer

YUP you described it well..  and that is certainly accurate for the investor starting out with 50 to 100k liquid..

Out of state one just needs to make sure your not buying in rough areas.. if you buy at the median home price in a given market

success is better.. but its a very long game

Carmen Dettloff · Answer

Hi Marc,

It totally depends on your goals. I would stay out of investing in California! Between the population migration out of California plus the political climate being unfriendly to landlords, California isn't very appealing.

Personally I'd invest for cash flow because appreciation is hopefully but not guaranteed. Additionally I would invest in MFR over SFR. You lower your risk level by increasing your unit number. And I would invest in several syndications (unless you have the time to manage something yourself) so you can spread out your investment over several cities and states. Then you are diverse in areas invested and lower your risk.  You could even invest some in storage unit syndications to diversify as much as possible.

Good luck and happy investing! Carmen

Calvin Ozanick · Answer

Marc,

Judging from the fact that your market is so tough to crack at the current prices, I would highly recommend looking elsewhere. I am a manager and agent here in Rock County, Wisconsin and I would love to pick your brain about the potential of the market. I work primarily in Janesville and Beloit and both of these markets are currently booming. This is for 2 major reasons. 1. Large businesses have invested quite a bit of money into the area in order to create a better living and local economy. Companies like Amazon, ABC Supply, Dollar General and others have set up in the area and the local economy is benefitting greatly. 2. The price to get into the market is significantly lower than most markets in the US. Let me know if you would be interested in getting involved in the market or taking some time out to learn more! I would love to set up a phone call to give you some more information! Thanks for your time and best of luck on your search.

Carmen Dettloff · Answer

@Marc Cohen With a syndication your money is tied up for 3-10 years (depending on what you are looking at). But most likely if you invested on your own you would have your money tied up for 3-10 years well. You can find a syndication that meets your timeline.

I like some of midwest and most of southeast, because they are landlord friendly.

I agree with other commentators that you need to vet your syndicator carefully as you are stuck with them for 3-10 years. You want to look at past success and ask for investor referrals. You can find them on Bigger Pockets or on podcasts, etc.

Matthew McNeil · Answer

People preach what they know. If they invest out of state, they talk about how great it is. If they invest locally, then that's the only way to go. The real answer is that it's completely subjective to you and what you want to do.

True. True. True.  I will propose that Idaho is the best place to invest. Only because that's where my portfolio is and its what I know. Try to convince me that Kansas City is the best. I don't KC so you're going to have a problem convincing me because its unfamiliar to what I know.

Caleb Brown · Answer

For me I'd dump it into mulit fam preferably value add. You would most likely invest in another city/state.

Mack Benson · Answer

The first thing I'd do is head jump on a quick flight to Vegas and put it all on black.

Joking aside I know what I'd do, I would likely continue to do what I am doing because that's what I am passionate about. It would just let me get to where I want to go faster. However, because I don't live in that hypothetical I would have to do some deep soul and goal searching to determine if that is what I want to be doing in the long term. If, after the search, I find I need to pivot then I'd go all in and get as educated as I feel I need to be in order to make a wise investment.

For anybody else it's hard to say because it's all about passion and goals. Some people like the hustle of SFR's and self managing others like the passive nature of being an LP in syndications. Others like to invest in the stock market either in individual stocks or in mutual funds.

If you had $1m cash to invest what would be your strategy??

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