What would your 500K strategy be?

Question

This question is for RE Investment Veterans.  If you had 500K what would your strategy be knowing now what maybe you didn't at the beginning of your career.  My goal is to get financial freedom as quickly as possible.  I live in San Diego so property prices are high, but so is rent.

Mark Reynolds · Answer

Well I am going to give you precisely the opposite advice of these guys. If you're trying to replace a $30,000 a year job with a $500,000 lump sum capital you don't need to leverage which increases your risk. I'd buy a bunch of very conservative performing notes at a discount-- should be able to get the right thing for about 10-12% annual return which on $400,000 of your $500,000 equals a $40,000 to $50,000 annual income with no work, no rehab, small risk. Buy a bunch of small note (10-15) so that the default risk is spread out. Next I'd take the remaining $100,000 and use it to do something riskier with a big learning curve-- maybe rehab a SFR. Then I'd work on deals with lots of leverage and low cash commitments always having my basic overhead covered with the note income.

Joel Owens · Answer

You would first need to qualify what financial freedom is for you.

To some that is cash flow of 30,000 a year and others live a lifestyle of 200,000 a year.

Does financial freedom mean quitting your current job and doing real estate full time or something else?? Financial freedom can mean so many different things to many people.

Joel Owens · Answer

Joseph if you are quitting your job I would not put all of the 500k into one property with a syndication. You have no control and all of your money is tied into one property.

If you own the property then you can make the decisions.

You might want to buy a business and can for say 100k purchase get cash flow of 4,000 a month after expenses. You put 50k down and do a private note on the rest. Now you have replaced your personal income and then some and have 450k to go after multiple income streams.

If you were making 200k to 300k a year and staying at your job putting all 500k into one syndicated property might make sense. If you have plenty of income you then have something to shield against a potential loss if things go bad. If you put all into a syndication with no other form of income and it goes south you could be into very deep trouble.

Dennis Tierney · Answer

If you can trust the syndicator that would be an easier way to go and you would still have the advantage of the depreciation to get tax advantaged income. Mark's strategy of the notes is good , but, my preference would be to use that in a tax deferred IRA/410K account that doesn't need the depreciation to lower the tax burden.

Joel Owens · Answer

75% LTV would be 2 million. You would need about 12k to 15k for all closing costs typically (legal, survey, cost reserve stable, phase 1, site inspection, appraisal, etc.)

If the bank allowed a seller carryback of 10 to 15% you could go higher in price and leverage.

A 60 unit at 500 a month rent  for 2 million for example would look like this.

500 x 60 =  30,000 a month x 12 = 360,000 yearly divided by 50% costs = 180,000 NOI (net operating income). Go 55% to 60% if landlord paid utilities.

Note at 1.5 million with a 7 year with 25 year amort. fixed at 4.85%.

Payment would be close to 11,000 a month. Let's say 11k just for an example even if it's high.

11,000 debt service by 12 months = 132,000 a year. 180,000 NOI - debt service of 132,000 = 48,000 a year or 4,000 a month cash flow. Take out 3,000 a month to pay yourself and keep 1,000 for reserves to build up.

You could buy a business or a mix of things to bring in more income.
Example you can typically buy a business  with 50% down and the seller holds a note.

Dennis Tierney · Answer

I am biased toward mulifamily and I would buy an apartment for $2 mil. You should be able to get a loan at 75 percent LTV. Hook up with several commercial brokers and tell them your investment criteria and make sure you are careful on the due diligence.

Mark Reynolds · Answer

Yes, you can purchase notes with your SIDRA.

As to where to buy them. Good question. If you find a good answer let me know I will advertise my notes there.

Mary Joe · Answer

I see that NOTES have been mentioned a few times, can someone tell me where do people go to shop for these NOTES?

I am trying to educate myself how these NOTES work and whether they are appropriate for my portfolio.

Also, I assume there is a way we can use our self directed IRA to purchase these NOTES, correct?

Thanks in advance

MJ

Mark Reynolds · Answer

Well to chime in again, its going to be tough to find the cash flow you need in San Diego unless the market there is a lot different than the last time I looked (which, I will admit is nigh onto 10 years ago now). Part of the reason I suggested a bunch of small notes is it seems to me you want to avoid 2 very common mistakes:

One is partnering with a syndicator you do not know well (or one you know socially but do not have business experience with) with any large part of your portfolio-- in the current case I'd say ideally no more than $50,000 but you may not be able to buy in for less than $100,000. Don't trust anybody enough to give them more than 10-15% of your total portfolio.

The opposite mistake is not to trust anyone and try to do it all yourself. For a first-timer with a big checkbook and no experience this is fraught with danger since that wad of cash means you can bail yourself out of most mistakes but when the cash is gone its gone. That's why I'd put a big chunk of the money "on the shelf" where you cannot get at the principal (I'd even consider putting this in some kind of trust that would make it almost impossible to touch the principal) but where it gives enough cash flow to cover your base expenses each month.

I will admit that my note advice is not entirely disinterested as I do happen to have a group of notes that fit the profile. But I'd advise against investing more than 10% of the portfolio with anybody (especially some stranger you met over the internet), even me (and I know me to be completely trustworthy;)).

Marco Santarelli · Answer

Hi Joseph:

These are guidelines from my own personal experience:

1. Stick to markets that make sense (good employment, positive net migration, stable housing market).
2. Stick to good neighborhoods.
3. Stick to properties that are in good shape or newly rehabbed (i.e. turnkey).
4. Try to select properties with a minimum of a 9-10% cap rate.
5. Consider 3 to 5 properties per market for some market "diversification".

[Let me know] if you would like some market suggestions, or have any questions.

Continued Success!

Marco Santarelli

What would your 500K strategy be?

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