BiggerPockets

I'd be thinking along the lines you are and look for a distressed apartment or MHP in the $1.25mm to $2mm range. I'd work on stabilizing and forcing appreciation where it makes sense. I'd probably keep it long term, but perhaps borrow against it later to do more deals.

500k is a good number to start with. It will get you a deal or a few under your belt depending on what market you are in. If you dont want to get rich quick, I would buy rentals.

First, I would buy 4 SFR-4-family and max out on my residential loans. You can do these with 20-25 percent down (I dont know how much property costs is your area) or buy REOs with cash do rehab and refi.

While buying your first four you will start to meet people and get an idea of what is out there. Your next deal might find you!

500k sounds like a lot of money, but in the REO market with all cash offers and rehabs you will eat that up pretty quickly. You could also go after a small apartment building but without a PM company it is a steep learning curve.

Jon & Jeffrey-thanks. Sounds like my initial interests are still the way to go.

Steve-thank you for your concern. I considered the vultures descending but felt accurate answers to my question were more important. Do you have an answer to my question?

That stuff all has more risk and more BS. I would rather see him hands on and understanding the business before he jumps in to funding deals. 500k is not enough to gamble with like that.

Call me conservative, but I think rentals are the way to go. 500k will give you a nice start and will teach him about the business. If he buys right and buys the right type of property he should be able to get his money out.

Vikram...Flips are still subject to macroeconomic risk. Bad events will impact your ability to sell property at a profit just like it would a rental. I don't understand your reasoning here.

Both activities have risks. IMHO rentals are safer as is evidenced in their lower returns. A skillful investor can hedge risk in either activity, but it is hard to control things like interest rates and whether or not the government decides to issue tax credits for buying at certain time slots.

Bill and Vikram, how much annual return would you reasonably expect for a transactional funding business? How much time and attention to run $500k? Could you do it out of a SD-IRA? And finally, how well would this business scale as it grew?

Vikram,
I also disagree. I am with Hancock. The maco is the resale of the rental and buyer confidence, their ability to get a mortgage, the apraisal (subject to local and national trends and conservative numbers), and lots of other things.

Just because you are in a focused area doing your work does not mean that the world stands still and waits for you.

Lots of people might say that 500k is a lot of money, and it is, but not in real estate. You can make a few loans with that. The people who make loans for a living do it on a large scale over a lot of deals because it is a numbers game and you have to understand you are going to loose in some deals.

I know you guys think it is easy in practice because you have either been doing it for a long time or you have never done it. To make loans you have to understand real estate and understand you could loose all of that money.

Originally posted by Jon Klaus

Bill and Vikram, how much annual return would you reasonably expect for a transactional funding business? How much time and attention to run $500k? Could you do it out of a SD-IRA? And finally, how well would this business scale as it grew?

Jon, I think someone who focuses on doing JVs with an expert investor in short-term deals can reasonably expect to convert their $500K into $2 million over a two-year period or maybe 3. I believe someone told me you could do it out of your SDIRA funds but it will be good to get an expert opinion on it. I think you should not commingle retirement and non-retirement funds, or something like that.

Regarding short-term deals, one should consider transactional funding within the context of other short-term deals and not do it exclusively. For example, I primarily flip properties but do occasionally get contacted by other BP members with transactional funding opportunities. If I have excess cash lying around, I may consider the opportunity but it is not my primary activity.

Mark makes a very good point. What I can do with the money does not mean that someone else could do the same thing. But if you are strating from ground zero, and having to learn, transactional funding would be pretty simple.
Keep in mind that;

The transaction to be funded has had title insurance issued for the B-C transaction and good title has already been assumed.

Knowing that the b-c is sold for more than the a-b means you don't need any market analysis of the collateral.

The fact that the b-c funding is there at the closing table means there is no credit issue.

Knowing that the closing agent is insured means they are responsible for and will pay for any loss arising from mistakes in the settlement or the documents.

Other than being robbed in the middle of the transaction, I don't see any risk.

All the investor needs to know is how to check that these matters are correct and the closing agent can make assurances that the deal is closing. So, just get to know the closing agent and title company.

500 K would be a full time business. Expenses would be in the advertising your services and making yourself know to Realtors, Banks and Closing Agents.

In many instances, the usury limit imposed by state law will restrict your rate. In my state it's 10%. I will let you figure out what your annualized yield would be on 50K at 10% for one day.

But I have to admit that your money will not be turning or working 365 days, but at 30 days, that's 300%!

So, the trick would be having 100 deals at 50K. every 30 days. That's alot of business!

You would be considered a lender, you would need to get a license, which means an office and telephone. You would need to store loan packages and keep them on file (could be in a storage building).

The question would be is there enough business to be had for your activity? If you had a list of 200 investors that actually did deals regularly and you set up the infrustructure with closing agents, then yes, you could keep your money busy. To set it up, it would probably take me a month to get it going, it might talke someone else a year.

But having done most everything at one time or another, I can tell you the easy money and the most profitable is in lending, not in painting, driving nails, collecting rents or doing quick flips. But they all make money and bottom line, as Mark mentioned, you should do what you are suited for, what makes you smile everyday.

Who knows, you might make more buying and selling oil futures! But profit to risk, transactional funding has got to be the easiest dollar to legally steal with the least amount of risk, knowledge and effort, per dollar in the pocket associated with real estate. IMO

Originally posted by Vikram C.

But the macro-economic risk on a longer term investment is several magnitudes higher than with a shorter term investment. In addition, the valuation risk on a longer-term investment is also higher because you have to consider more variables.

Which additional variables are you referring to?

In one instance you buy, hold for a while, and sell. In the other instance you buy, fix/flip/improve, and sell more quickly. Are you claiming that there is less risk in one period of time than the other? Interest rate risk or other large risks can happen rapidly so I don't see any merit in the argument that one strategy is an order of magnitude less likely to suffer from systemic risk than another strategy.

Originally posted by Vikram C.

I disagree with you about the lower-returns being evidence of lower risk. Long-term investments are actually higher-risk investments with a lower return. The reason for this is twofold (a) those investments have a reputation for requiring less effort at managing them once acquired and (b) those investments have much higher competition at the acquisition stage and therefore returns are driven down.

I agree with point (a). I disagree with point (b). At some point the added competition for assets really has a negligible impact on pricing anyway.

I think that buy-and-hold projects have less project-specific risk than a fix/flip project does and thus rationally carries a lower return. There are potentially huge variables with the cost of repairs, duration of the fix, etc. I'm not saying that buy-and-hold is immune to all risks, but I do think they are less risky in almost all aspects from a project perspective. Notable exceptions are contamination risk and possibly a few others.

I guess this thread is a good example of what makes for a market! People would do different things with $500k and I don't think many of them are bad options.

The one other thing that I would mention is that some of the more business-type uses of cash being discussed are subject to people taking advantage of newbies. I have seen many new investors lose ALL of their investment lending money incorrectly to wolves. I guess you could do the same with buying real estate for cash, but it would be much harder to screw it up totally if you close through a title company. This type of "newbie risk" is hard to quantify or account for.