Hypothetically speaking with $500,000 of available capital...

5 Replies

Hypothetically speaking of course, if someone has $500,000 in liquid funds, could it be invested to make $200,000 residually?

Math:

Property price: $2,000,000

25% down: $500,000

Debt service of $1,500,000 at 6.25% with a 25 year term: about $120,000 annually

Cap rate 16%: $320,000

Cash flow: $200,000

I understand that finding a property at a 16% cap rate is a little ridiculous - but I know they are available. Also, I'm not factoring in closing costs, inspections, etc.

That being said what am I missing?

another 30% or more of cap ex reserves  tax's insurance  repairs vacancy etc etc.

@Jay Hinrichs Wouldn't all the expenses be calculated in before the cap rate is determined?

well if your doing it that way then the 320k is after expenses but before debt service.. but there are much smarter folks on that cap rate stuff than me on this site.. lets see what they say..

Anything is possible. This is highly unlikely. What you need to do is flip this cash a few times to grow it to at least $1.5m.   Then keep flipping that $1.5 at an average of around 15% profit each flip. Accumulate those profits every new $1.5 flip. Use this continuous profit stream to buy into the cash flow properties you're looking for. Since the 1.5 flips keep generating new profits, and thus added cf properties, you don't need to aim for 16% caps

Sounds good to me.  Would diversifying into several smaller properties be better or go for larger properties? 

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