090: If I Had $100,000 to Invest in Real Estate…

SHOW NOTES FOR EPISODE 090  –  IF I HAD $100,000 TO INVEST IN REAL ESTATE…

In this episode, Bill answers the question, “If I had $100,000 to invest in real estate, how would I do it?” Now, granted, there are many many ways to invest in real estate.  However, Bill tackles the question from a rental property cash flow point of view and you may be surprised with the results.

Overview

People often  ask me “I have this amount or that.  If you were me, how would you invest that money in real estate.”  Well, first off, I usually say, “I am by no means an expert in ALL things real estate and there many options when you refer to Real Estate Investing”    Another common question is, “How much do I need to Invest in Real Estate?” – but that is a question for another episode…

Regarding the question, “how would I invest $100,000,”

Also, real estate investing is multifaceted and includes such things as:

• Passive investing through crowdfunding
• Syndication
• REITS
• Fix n’ flips
• Wholesaling
• Buy n’ hold
• Notes
• Deeds
• Leins
• Raw land
• Single family residents
• Trailer Parks
• Commercial
  • Multifamily
  • Strip Malls
  • Office Buildings
  • Triple Net
  • Retail
  • Storage Facilities
• Speculation
• New construction or developments

I, personally, am a buy ‘n hold investor, specializing in multifamily value-add deals.  I create steady streams of cashflow through rental property income.  Therefore, I will be answering the question from a rental property investor perspective.

What are you investing for?

• Cash Flow
• Equity
• Tax Savings
• To diversify your investments
• Short term returns
• Long-term growth

Or, more specifically,

• Are you looking for more cash in your pocket monthly?
• Are you looking for a tax-sheltered way to save for the future or for retirement?
• Are you looking for just the best return on your investment?
• Are you looking for steady passive income flow for now and for the future?

I am investing for passive cash flow income.  And I would emphasize the term “passive.”

On the multifamily front, I am looking for a property that is off-market and undervalued that I can add value through re-positioning/upgrades, putting strong management in place, reducing expenses and increasing income.  Once the upgrade work is done, I can look forward to a steady source of cashflow income and increased equity.

My goals are three-fold:

#1 – I’m trying to create/generate a steady, consistent cash flow from rental properties that will provide long-term income for my retirement years.

#2 – Secondary, I am also trying to help generate funds for our non-profit organization in Haiti (Child Hope International) that aids orphaned, abandoned at at-risk children.

#3 – And finally, I want to create and build a legacy that I can hand down to my children and grandchildren.

So, in answering the question “What would I do with $100,000?” I looked at three options of which I have direct experience and my primary evaluator:

1. Pay $100,000 cash for a house to generate monthly rental income
2. Buy 5 houses worth $100,000 each at $20,000 down with a mortgage for the balance
3. But a 15-unit apartment building

Let’s look a little closer at those options:

Option #1

• Pay $100,00 cash to purchase a house in-full
• Monthly rent: $800
• Monthly cashflow: $300 (after expenses and an allowance for vacancies, misc*)
• Annual profit: $3,600
• Home value after one year (4% increase): $104,000

Advantages

• Don’t have mortgage payments
• 100% equity to borrow against if I need it
• High monthly income
• Can deduct depreciation on taxes
• Only one tenant to deal with
• If you lose your tenant, you don’t have to worry about covering a mortgage each month

Disadvantages

• Can’t deduct mortgage interest
• Not enough cashflow to save for bigger emergencies
• If you lose your tenant you will have 100% vacancy
• Cannot force appreciation.  Property is subject to market comps for value.

Option #2

• Pay $100,000 for 5 houses ($20,000 down on each home and 5 new mortgages).
• Monthly rents: $4,000
• Monthly cashflow: $500 (50% rule says you’ll get $2,000 per month but I’m being conservative)
• Annual profit: $6,000
• Home values after first year $520,000 minus debt

Advantages

• Can deduct loan costs and mortgage interest
• Higher monthly income
• Can deduct depreciation on taxes
• It you lose a tenant, you still have the income from the other 4 properties

Disadvantages

• Five tenants to deal with
• Five mortgages, property and insurance payments to make
• Five roofs, five buildings’ plumbing, electrical and structural issues to deal with
• If located in different states, 5 different property mangers to deal with
• Cannot force appreciation.  Property is subject to market comps for value.

Option #3

• Use the $100,000 as a down payment on a $500,000 15-unit apartment
• Monthly rents: $7,500 (15 times $500 per month)
• Monthly cashflow: $1,500 ($100 per door times 5 doors)
• Annual profit: $18,000 without value add or $6,000 with value add deducted
• Value add: Take out $1,000 per monthly for property improvements of $12,000 for the year
• Apartment value at the end of one year (with value add rent increases and expense reductions) 20% increase – $600,000 ($100,000 plus in equity)

Advantages

• Can deduct loan costs and mortgage interest
• Highest monthly income
• Can deduct depreciation on taxes
• It you lose a tenant, you still have the income from the other 14 units
• Only one mortgage, property tax bill, insurance bill and roof to deal with
• All tenants in one property are easier to manage
• Property management costs less than a house.  Houses are typically 10%, a building of this size could cost only 5-8% of the monthly income
• You can force appreciation to boost the value of the property, resulting in:
  • Instant equity that you can borrow against to buy other properties
  • The opportunity to sell in 3-7 years for a significant profit
  • Higher valued property means higher personal net worth – a higher personal et worth means you are able to buy higher priced properties

Disadvantages

• 15 tenants to deal with
• 15 toilets, sinks, etc. to deal with
• However, with a good property manager at the helm, “I” wouldn’t have to deal with the two items above, my property manager would
• More activity because more tenants (again see the third item above)
• Requires stricter, more focused asset management skills and heavy oversight of your property manager

PLEASE NOTE:  I made the examples simple to illustrate a point and are not real accurate on the specific costs involved.  However, I believe the examples are close enough to present an accurate (though not detailed) picture.  Below are my assumptions that I roughly (or not) adhered to.  If you feel I did not accurately represent the exercise, missed key points or costs, or left something out, please post a comment or write me.  I will respond.  Thanks.

Asumptions

• DISCLAIMER: This is a quick assessment comparison only.  It does not take into account closing costs or other fees that may affect down payments and monthly expenses.  It is meant as a general, quick comparison only.  I do believe, however, that properties can be purchased at the prices I listed above because I see these prices all the time (but never in California!).
• Monthly rent will vary significantly from market to market, I am assuming the property is a a 2 or 3 bed/one bath in a “C” class neighborhood.  The apartment has one bed/one bath units.  Rent is calculated at .8 of the purchase price
• Expenses: 50% rule (50% of income goes to expenses, not including mortgage payment) – -This is really just a rule of thumb and I’m more conservative than that.  My “rule of thumb” is to get $100 per door and if you can get more that than – hallelujah!
• Regular Monthly Expenses factored in
  • Property management
  • Repairs and maintenance
  • Cleaning
  • Utilities
  • Trash service
  • Sewage
  • Lawn service/landscaping
  • Property taxes
  • Insurance
  • Cap-X
  • Misc (from my experience, there are always “other” or “miscellaneous” expenses
  • Allowance for vacancies and turn-over costs
  • Please Note:  You may be able to have tenants cover some of these expenses, thus increasing cash flow

PLEASE NOTE AGAIN:  In the podcast I said there would be an Excel spreadsheet but, after breaking everything down above, I didn’t feel it was necessary.  The math is very simple.

I hope this was helpful!

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