What are the smart ways to invest 3M in real estate?

Question

We're recently found LLC based in Boston, MA with 3M to invest. We had experience doing some multi-family, condo rental, flipping houses in Lowell, Boston, Quincy, etc. We are thinking to become developers in the next step, but have limited idea on how to search valuable lands. We also do not have clear blueprint on how to leverage the $3M and maximize the profits (ex: buying apt complex, flipping, wholesale, etc). Investors/shareholders are relatively conservative and we guarantee them a 7% annual return rate (ie: the minimal net ROI we need to achieve). We do have some reserve so that we can take about three years to develop the business. Any thoughts are very welcomed. Thanks.

Alina Trigub · Answer

@Calvin Lin

Think of your question from a passive investor point of view: would LP entrust money to someone to invest into an undertaking that they've never done before?!

If you have a proven strategy that has worked for you and your investors and brought them the expected returns that's a viable option to continue with. Another alternative is to partner with "experience" in the area you're considering (in this case sounds like it's a new development). This option will help you to somewhat mitigate the risks of being completely inexperienced in a field of your choice.

Jonathan Bombaci · Answer

Hi Calvin, That's a great question. You can make money doing all sorts of real estate transactions in the greater Boston area. It sounds like you already have some good experience, what do you enjoy most about real estate investing?

What are your goals for your newly formed LLC? Are you looking to grow that $3M nut into something larger and scale quickly or are you looking to establish a healthy long-term business that can grow in any market?

Are you looking to only use the $3M or would you use that as the downpayment and then seek $10M-$15M of bank financing?

Personally if I was in your scenario with "relatively conservative" investors I'd try to find a large apartment complex with a value add opportunity. If I could leverage $1.5M to purchase a $6M - $10M property with a 8-10% CAP that would meet my "conservative investors" standards. I could then use the remaining $1M to do significant value add to the property (renovate the units and increase rent, separate utilities to increase cashflow, build additional units on the property) and increase the value of the property and the overall ROI. It's kind of a mix between a buy and hold and a flip.

This strategy would leave me and my investors with about $500,000 of a reserve to safely operate our business and then a year later, once the property stabilizes, refinance the property at it's new higher valuation and roll the down-payment + additional equity into the next project. In fact I'm doing something similar to this at a smaller scale in the greater Lowell area.

Sounds like you have some exciting stuff in the works. Goodluck and congrats on raising that capital!

Greg Dickerson · Answer

Development can be a great business model. It is risky and you really need to know what your doing but the rewards can be significant. With the right skills, expertise and the right guidance you  can double the $3 million.

There are a lot of ways you can go in the development business so you really need to know your market and the gaps that need to be filled. Developers are opportunistic investors  meaning having the knowledge, skills and resources to take advantage of challenging deals. The more challenging the higher the return.

Caleb Heimsoth · Answer

@Calvin Lin step 1:  don’t tell the internet you have 3 million dollars

Step 2:  don’t violate securities law by guaranteeing a certain return

Step 3:  profit

Will Barnard · Answer

Very good advice here. You may have meant "preferred 7% rate of return" rather than "guaranteed 7%" as there is a big difference. Guaranteeing any return is a no no.

I also agree that your investors will likely expect you to continue with the strategy that they signed up for in the first place, going off that path could cause problems as some investors may be ok with it and others not.

Shari Peterson · Answer

Are you thinking of using the capital to invest in the Boston area alone, or are you considering neighboring states on the east coast?

Dan K. · Answer

Great suggestions by everyone, just a couple quick thoughts that I have:

1. Guaranteeing a 7% return can get you into serious legal trouble,

2. As @Alina Trigub mentioned, the investors are probably expecting you to continue with your current strategy versus coming up with a new strategy.

John Drowns · Answer

Good points made by all! Utilizing the power of leverage (lots of attractive financing in the current environment) while still keeping a reserve and identifying some up-front uses of the capital to improve a property are good considerations.  Given your current experience, a suggestion would be to purchase an existing building rather than try to develop raw land, unless you have a good relationship with a company that has performed ground-up development and understands the process. Depending on the municipality and product type you plan to build, you may find yourself needing an advanced level of knowledge to get it done (infrastructure concerns that @Lior Rozhansky mentioned above come to mind).  Buying raw land is usually a longer investment horizon, but as you know, every deal is different.  There could be a ripe little parcel in an area of gentrification that could work well, but the owners who hold that land my already have that priced in.  Obviously, rent comparables are key whether you are building new, or buying to reposition.  A helpful question to ask yourself is can the rents (and reasonable growth in those rents) support the development/capital improvement costs, plus what you plan to yield?  If apartments, what improvements are other communities getting best rent premiums on, etc.?  In some cases, just adding new supply to a densely populated area where all the surrounding communities are at 95+% occupancy might even be enough with minimal amenities.

John Fortes · Answer

Hello @Calvin Lin I'm just south of you in Brockton. Would be happy to connect sometime.

With that much access to capital, my direct focus would be taking abandoned apartment building's with a great shell and revitalizing them to their original purpose. There are quit a few of those if you go south and north outside of Boston. Just a suggestions but good luck going forward!

Happy investing!

Lior Rozhansky · Answer

@Calvin Lin Awesome that you were able to raise those funds. Development in Boston can be profitable but tricky, as you need to really master multiple components including understanding the zoning feasibility, the permitting process, land entitlement, and construction management. If your investors are more conservative, then going head first into a development project may not be the move (unless maybe you partner with or fund an experienced developers project).

That being said, 7% CoC is not too hard to achieve through your typical apartment investing; even with turn-key buildings close to the city you can get pretty close to these returns. As you climb up the ladder of risk towards value-add projects, you can get your investors (and yourself) higher returns.

The other factor to definitely consider if you are going down the apartment game is how much leverage you are going to use with your deals. If you are planning on buying with just cash and no financing (which would be the least "risky"), then again your expected returns would go down. If you are comfortable levering up and using these funds as a 25% dp on commercial notes, you can again begin to realize higher returns.

Good luck!

What are the smart ways to invest 3M in real estate?

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