How best to use $400k?

Question

Hey there! My husband and I are sitting on a pile of cash ($200,000) that we've been squirreling away for 5 years in order to buy a bigger/nicer primary home.

BUT...

We live in California, and even in the rural Central Valley prices have gone nuts (a nice 2,500 sq ft home on an 8,000 sq ft lot in the nice part of town is going for $600,000) so we have decided we would rather put that money to work.

We currently have a single unit (SFH--3/2) in our town that we purchased for $150,000 in 2009 that we can now sell (easily) for $300,000 (the mortgage is currently $79,000). The rent is below market at $1,200 (long-term tenants, husband willing to raise the rent $50/$75 a year to reach market level).

Here's what I'm thinking--take our $200,000 cash, sell the SFH, and invest our $400,000 in a more favorable market/endeavor than SFH.

What would you do with the money if you were in our position?

Thanks so much for your input!

Jay Hinrichs · Answer

These are always entertaining threads and of course most that respond have something to sell you.. or want you to invest in THIER deals.. now that's OK.

But first and foremost before you leap have you ever been a landlord ?  Do you understand recapture tax treatment.. IE once you go down the road of buying rentals and if you ever want to ACTUALLY exit without giving the portfolio to your kids or charity you have recapture.. so you can end up getting on the Hamster wheel. you end up having to stay in the asset class for fear of a huge tax payment.

Now that all said diversification is something to look at maybe you spread your funds around to a few different investments don't put them all in one spot.  Most money managers I think will agree with this concept.

Also I bet dollars to donuts @Jill F. lives within an hours drive of where she is buying.. and if the numbers work were you live then I am a huge proponent of that play..

If you really want to build doors and with your cash position and most likely your credit the BRRRR that is talked about on BP is one of the best ways to scale..

I would also consider debt to off set the assets.. Notes have no recapture and are on their face and done correctly a lot more passive than owning rentals.. And you have total control unlike going in on a partnership of some type were your sending your dollars to someone else to manage and your success is 100% in their control.

so few things to think about.. but remember BP is landlord centric and most that respond have product to sell you so be cautious there.. if you go down the syndication route I always want to talk to those that lived and worked through the crash.. that's important.. you want grissled veterans LOL running the show.

Jill F. · Answer

if the deal we are working on now closes, we will have bought 41 units in ohio with a 400k investment over the last 18 months. So that's what I would do. 😀

Jay Hinrichs · Answer

Account Closed  while I agree with you about syndicators doing their first deals or few... as in going through someone ones learning curve but they have to start somewhere but is that with you ?

There are some good ones out there that have been at it pre 08  that's kind of my litmus test if they made it through 08 to 2010 without losing or BK ing a project I kind of think they are going to do fine.

its all about the sponsor.. and right now with the internet and such .. I see this a little like the Wine business bare with me.. LOL..

in the Wine business  one year Merlot is hot.. then the next its Pinot and every one switch's and starts making a Pinot.. that loses flavor and now you have Rose coming on strong or last time I was in Napa everyone was doing a Temperanillo ( sic)

But so what I see on 4 years of BP is  buy and hold going strong.. then you have NPN  everyone starts talking about that and how the average person who has never bought a note is going to start with a NPN ( which can have a very steep learning curve) to Gap funding ( seconds on big rehabs RISKY) now it seems many want to become their own syndicators which again god bless them however for the investing public they need to choose sponsor carefully.. and I think that's what your alluding to is professionally run reits as compared to new crop of syndicator's.. now out of this new crop your going to have what happens in all business's those that excel and go on to be top tier companies those that muddle and those that well, don't do well.  And then you have a site like this that allows those access to investors .. and you have beginning investors reaching out for advice and well they need to be cautious I have seen investors invest with some like the Morrisinvest/Oceanpointe were its just off the charts on how goofy it can go and how to lose money the day you make the investment by aligning with a pitch man with Acknowledged limited experience and a ground team that from what others are posting on BP is dysfunctional at best.

Lastly property owners and PM's will put a 600 dollar a month tenant through a more rigorous vetting process than 99% of all investors will do to someone they are going to invest 100's of thousands with..

Shiloh Lundahl · Answer

@Heather Lanser by now you should have 10-20 new colleague requests with deals and a way to invest your capital. I was going to do the same thing but @Jay Hinrichs outted me so I’m going to keep it to myself.

Jay Hinrichs · Answer

Account Closed  YUP one only has to look no further than Morris/Oceanpointe to see how wrong it can go with someone you put blind faith and trust into.

Tom Yung · Answer

@Heather Lanser

I do not know your age. But I believed you nailed at the right approach( income & slower growth). 1031 exchange your property & use the $400K, buy & Hold 4-5 SFH outside of CA. areas that will net you 1% rental return on your $80-90K homes. Use 45% return estimate on your rentals. Save it & reinvest into other SFH. I think you can easily attain the $10k/month before tax in 10 years. If you do need big lumps of cash in the future, just sell one SFH at time of need & pay capital gains & recapture deprecation accordingly. The amount  will be lower than selling a multi & take less time & effort. But to be successful in out of town investing, make sure you have a good property manager for your properties & learn how to manage them(property managers). It's not as passive as other tells you, you have to keep track on top of details; but let others do the work. Good luck.

@Jay Hinrichs

Well said & honest opinion with no hidden agenda.

Ivan Barratt · Answer

@Heather Lanser some great discussions going here.  Glad to hear you're looking at more income property vs buying a bigger home.  For now, I'd keep your $$ in the bank and invest in your own education of what the next level might look like.   A fool and her money are soon parted! ;)

Salem VanderStel · Answer

@Heather Lanser

Hi Heather, not a bad position to be in!

With the current market conditions, I would advise against taking on an additional SFH or a small multifamily property.  The cash income will be too small relative to your investment and you will be ask risk of a downturn devaluing your total investment.  As an example, if you bought another SFH at the numbers you described as market - $300k, $1300 rent.  That would require a 25% down payment plus closing costs totaling an~$80k initial investment. If you yielded 45% of the rent after all expenses, that would equate to a 8.5% return not including the extra work and the risk of losing equity with the downturn.

Alternatively, middle market syndicates are in a much more stable section of the market.  Properties valued between $2M-$50M are usually sold on a cap rate basis, meaning that the income drives the price of the property, not local comps or speculation.  Deals in this market yield 16-18% total IRR and 8%+ tax mitigated yearly cash flow.

If interested, reach out, my team syndicates deals for people in precisely in your situation looking to find long term stability.  I hope this was helpful.

Best,

Salem

Michael Bishop · Answer

@Heather Lanser depending on how active you prefer to be in your investments, I would say to consider looking into apartment syndication. This vehicle offers several benefits over SFHs:

1. The obvious - a passive investment

2. Access to larger deals/more units

3. Tax benefits. It's not uncommon to have paper loss even while realizing attractive annual returns

4. Forced appreciation

Here are couple of blogs to get you thinking if you've never explored syndication:

What is Apartment Syndication?

Recipe for Successfully Investing in Mult-Family Syndication

8 Reasons Apartment Syndication is an Appealing Investment Vehicle

Always happy to discuss more so don't hesitate to reach out!

Jay Helms · Answer

Congrats @Heather Lanser! All depends on your goals but I'm partial to @Jill F. strategy and will look at an apartment complex here and there :)

How best to use $400k?

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