My goal is to create financial freedom through passive real estate income and I have listened and read so many podcasts and books on strategies but most have been from investors who started with little to no money (much kudos to all of you- seriously i have been inspired.) Now I know this is almost a silly question "how to start out with money" but my real question is what strategy would you use if you started with around $200k?
Would you start in multiple smaller complexes or go for larger complexes? Maybe try and save up or partner with someone else and go ahead and invest in a 50+ unit complex?
Would love to hear thoughts!
200K really isn't much when investing in real estate. In theory, you could leverage and buy up to 1 million. I would start small if this is your first time at real estate investing.
I know that the L.A. area isn't cheap these days. But I generally like the fact that your state is wealthy, attractive, plus lot of start up companies originate there. I like to buy in my own back yard.
@Brian Ploszay thanks so much for your response. Yea 200K really doesn't get you very far here on the west coast and its the main reason I have been looking in other markets (san antonio and various cities in South Carolina). I just wasn't sure if there was a better strategy that an experienced investor would recommend if he/she could go back if they started out with an amount of $200k.
Can I ask how you first got started out?
@Ellis Hammond It just depends on what you need out of your investing. You can invest more for short term needs or for long term wealth and each of those two routes should encourage different approaches. I'm in Charleston, which is probably a market you've looked at. I would advise you to be hesitant investing all the way across the country for your first few deals. I know most of CA is insanely expensive, so I'd try to to find a smaller market within a 3-5 hour drive and focus on that area for now. You could leverage your 200k and get close to a million dollar asset, but that's a steep learning curve. I'd probably break that capital up and try to do a couple of residential multifamilies as the residential lending and rental industry is a little less complex than the commercial side.
Staying closer to home is always helpful and optimal. Value add is the name of the game. Lemon grove, spring valley could be considered. Not sure you can do a multi but perhaps a sfr on a larger lot that your could add a adu.
I did something similar to what you described. I did it in the Bay Area.
It's a lot more capital intensive than you want it to be. I would say that you likely have enough money for a smaller thing in Phoenix. Like 600k-ish which might be a duplex in your area
Since I had a story that is similar-ish to yours before I got my first building your buyer profile doesn't sound like it's very strong. These banks are relationship based you will get it in the teeth for the interest rate.
Oh, and if the property is less than 750k total then you will take it in the teeth because they would likely need to keep the loan on their books so you're interest rate is going to be higher as the portfolio loan penalty. Most buildings don't qualify for an 80 LTV loan.
These fancy situations where the seller carriers some, the bank comes up with some and you come up with 15-20% I've never actually seen but some of the folks on BP will swear it's a thing.
If you want to do this 100+ unit thing
I would recommend you talk to some of the syndicators here on BP there are some podcasts like:
That you might want to check out. You can find a syndicator and use them as a mentor for a deal that you all work together. Then you will get the experience of selling deals to some of the people that fund you and help out other members of your spiritual community.
@Jason Monroe how can I build relationships with banks who are not in my area? Most podcasts/books I have read have recommended building relationships with smaller portfolio banks as well.
Would it build credibility with a bank if i could go in as a partner with someone the first time on a deal before going in on my own?
Thats great advice about teaming up with syndicators. I do have a large network of supporters who I believe would want to invest I just need the experience and some deals under my belt before I can approach.
@Troy Gandee thanks for the response! I have looked at the CHS market bc I am most familiar with that market and still have family there I get back to see but like you said being so far away does make it hard to know what you are really looking at.
There are a ton of national banks one of the people I found on the site that I talked to but didn't use was
Upen was willing to go to bat, but my property was short some things that made it so it didn't work for them. I went with a bridge loan that had a "Prove You Love Me!" interest rate.
Most national banks Wells Fargo etc... can write anywhere US Bank has portfolio loans and they can write for anywhere those loans go up to I think either 3 or 5 million.
If you had a partner with multifamily experience and BOTH YOUR GOALS are aligned. Then yes, it will change everything and open up the world to you. BOTH OF YOUR GOALS need to be aligned.
There will be a power dynamic that will change as you get up to speed, so agree up front on when you're going to evaluate the partnership maybe it's 2, 4, or 7 years
The roles and responsibilities need to be very clear. Each building is a business onto itself that way there is no miss when it comes to expectations.
There was a biggerpockets podcast for this multi family guy in NY that wrote a book on multi family so you might use that to come up with a roles and responsibilities matrix so you can ensure that you have all of the various facets of the business covered.
LA and the surrounding areas have lots of rent control. DO NOT BUY IN RENT CONTROLLED AREAS unless you can sell ice to an Eskimo or you have a lot of capital set aside for those buy outs. If you don't have a bunch of alternative housing options it can be very expensive to get people to leave.
AND IF you like my posts VOTE ME UP. Every vote gives me airline miles and I like Hawaii ;-)
@Ellis Hammond After over a few hundred investor consultants over the past couple years here is what I tell W2 employees. For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool... but just remember why we got into this... To be free from a JOB. Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. Whatever you do, try to be as close to the investment as possible. This is the fundamental problem I have with Wall Street who takes too much fees off the hard working efforts of the middle class.
@Ellis Hammond - Invest where the numbers make sense. I have a youth pastor friend in a similar situation to you and he was able to buy a duplex, live in one side and rent the other. Once he learned about being a landlord and got some real world experience, he was able to increase his portfolio by finding good deals. If your market doesn’t get you rents that equal at least 1% of the purchase price, you should look elsewhere. As Lane mentioned, turnkeys could be a good alternative. Always better to start local if the numbers make sense and you’ve got someone who can mentor or walk along side you for your first few deals...
@Ellis Hammond With that kind of money, you could BE THE BANK. Owning and trying to put tenants in and etc is not the only way to be passive. Think PML, Gap lending, etc. The best possible scenario is be active first before being passive, of course that will defeat the purpose of your post.
When it comes to apartments the bigger is better and easier. It is a little bit counter-intuitive but if you think about it it does make sense. If you are buying 50 units property you will need manager and maintenance guy full time and maybe another guy to help occasionally with make-readies, but if you will buy 100 units the staff will be the same 2 full-time guys. The economy of scales works better with larger properties...
So bottom line definitely look for a partner and think larger or just invest passively into someone syndication deal.
@Ellis Hammond Your OP said you were looking for a strategy. My $.02 is a lot simpler than many of the other responses. You are building a business and it will only be as strong as its foundation. It's like legs on a table. If the table has one large pedestal (income stream) in the middle and something happens to it the table falls. If the table has 6 smaller legs (several smaller income streams) under it and something happens to one or two of the legs the table may lean but likely won't fall. Just like the table legs likely one larger income will be easier to manage than several smaller ones. I would look for some kind of middle ground. A 6-8 unit and some single family's or a couple duplexes or what ever mix you can find/ afford. My portfolio includes SFR, duplexes, and a small self storage facility spread out over 4 towns. If I get a vacancy somewhere or have a problem the rest pretty much carry that unit till its fixed. RR
@Ellis Hammond what's your day job? What do you do better than anyone else? You'll need to focus on a biz or a job that generates more income that can funnel into income producing assets (whatever real estate model you pick). If you want to play big and fast you'll need other biz/job income streams to plow into real estate. Think back to RDPD cash flow quadrant. If you want a big "I" quadrant that gives you true financial freedom; you'll need a big E, S, or B (best) column too. Happy to elaborate and walk you through a formula over a call some time.
Keeping your capital aside, I think you have some skills in the capital raising area through your nonprofit activity that could be leveraged to work with a REI syndication team. You can learn the business, develop your money raising skills and help the syndicate in a variety of roles to increase your value to the team. You can gradually invest some of that $200K money into the deals you are part of the syndicate so that you are aligned with investors you are working with who will want to see that and increase your equity / passive income. I've done it and here's my story for hopefully inspiration and idea generation.
@Ellis Hammond I think it comes down to if you are able to save more than 30k per year after your income minus expenses. If less stick to SFHs. If more you should be looking to get into larger investments AFTER getting the experience with smaller stuff. Let me know if you want to get my opinion.
@Lane Kawaoka Thanks for your response. I probably don't meet the savings criteria you talk about but I do have the up front cash. I understand that the larger you go, the more complex deals may get, but don't I also lower my risk the more doors I have? (so 2-10 doors instead of SFR).
I hope to approach real estate the way I have approached most other things in life and had success and that is with the right team.
I also don't plan to self manage my own properties, I will outsource that to professionals.
Would love to hear more of your thoughts and feel free to reach out to me individually.
@Ellis Hammond reach out and Let me know how I can help you? A deal, contact, or even a problem that you are stuck on?
Other investors help is how I progressed.
@Ellis Hammond If you want higher cash flow, don't stay close to home. If you just want a few retirement properties I can see how going virtual can seem unnecessary... but if you really want to make a business of this you will need to learn how to be hands off anyway.
I would say be clear about your long term goals, determine the short term goals that can get you there, and choose a market based on those two benchmarks. Within a year I ramped up to virtually wholesaling 4-5 deals a month at large assignments without having a local partner at all, just service providers that we pay small fees for assistance.
If a virtual model supports your goal, find out what the potential risks are and work your plan to dilute them as much as possible. Let me know if you ever have questions about investing from afar.
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