Best way to invest $250,000

15 Replies

Hey BiggerPockets! 

Im new to BP and soon to be working towards my first "major" move as an investor.  After selling my logistics business and 2 rental properties Im looking to leverage $200,000 - 300,000 cash the best way possible to achieve long term financial freedom.   Although I have the luxury of a small pool of capital I would prefer to start slow by managing as much of the process myself to save time and gain experience. 

Im leaning towards applying BRRRR method on a multifamily or a few 2-3 bedroom units that are in good areas to maximize cash flow (open to furnished rentals VRBO, AirBnb, etc).  Im also considering living in the first property that I rehab to gain direct experience in the project managing and/or finding a good GC. 

I am targeting Chicago and the surrounding areas for now but eventually open to less established markets.  Would love the portfolio to net $8-10K per month after 5 yrs and a few low risks transactions (BRRRR).

Does 10-15% cap rate exist on $750,000 - 1,000,000 multi unit buildings assuming I needed to put 20% down?  Or smarter to hope for 10%+ average cap rate on several smaller units?  

  

Any words of wisdom based on success (or failure) taking a similar route would be greatly appreciated!!

Jake

@Jake Fugman it sounds like you’ve thought this through, and have an idea of what you’re looking for. This is half the battle. 

I think you’ll find cap rates about half of what you’re looking for in this market. If you dig or go to tertiary markets you can find the returns you’re looking for. 

Number of units will also be a factor. 

Hey Jake,

Welcome to BP! There are many routes you can take in your current situation, here is one. 

1) Use current equity on flips to multiply your cash, to buy a larger rental portfolio/property. 

You can definitely find 10-15% caps in million dollar properties. I find they tend to be found in lower class neighborhoods. However, your never know what you find find...

Thank you,

Congrats on your success @Jake Fugman ! Sounds like you’re on the right path to finding the best cash flowing properties. In my experience 10 caps do exist for apartment complexes, but maybe not in area where you want to invest. And with apartment complexes, the bank will want to see that you have 3-6 months of operating reserves set aside, which makes your needed money to close more like 25-30%. Happy to work through a deal with you if you find one of interest (will sign NDA if required). 

just wonder down to the southside of chicago you can find 10 to 15 caps there those returns in any other city will have the same issues as the southside.. if your prepared to handle that then yes.. if your not.. better to buy a few more units of better quality so your management issues are not so intense..

As stated on this thread by a few, the ONLY way you’re finding anything with those kind of numbers are on the southside of the city.

Not a day goes by that a northside buyer/seller of a multi comes out looking to buy/sell a 5-7% CAP on the northside. Rarely will you find better and if they exist, they’ve got many suitors for sure.

Love the mindset tho. Best of luck

Ted Kuhlmann, Real Estate Agent in Illinois (#475.122470)
(773) 640-1089

Thanks for all the quick replies!  @Jay Helms It makes sense that there are higher cap rates in lower income areas - trade off for more effort spent on tenant management. @Ted Kuhlmann  

@Casey Mericle Assuming I plan to apply BRRRR would it be smarter to buy, for example, 4 $250,000 properties VS a single $1,000,000 multi family to diversify? OR is it really only dependent on the pure NOI that is projected?

@Lane Kawaoka - Assuming I have access to get $100 - 200K more what business model would you apply to scale into apartments?  

Would you buy a 5-10 unit for about $1M assuming the need for $300,000 - 400,000 cash (20% down + 6 months capEx + light renovation)?  Knowing this would tie up 100% of my capital would you leverage equity to refinance down the road for future investments or just aim to flip it?

@Jake Fugman Welcome aboard! Also, from the Chicago area and happy to chat if you're interested.

I Just posted something similar on another thread, but I agree with @Lane Kawaoka , the best investment you can make right now is to slow down and educate yourself. There's a lot to learn and there is a lot of inventory on the market that just doesn't make sense. 

Cap rates for the type of buildings that you are describing in the Chicago area range anywhere from 4% (prime location in the city) to 7-8% (suburbs) to 9-10% (far suburbs) to 10%+ (south side or distressed). Many of the smaller mf buildings that are advertising higher cap rates are basing them off of BS numbers. I looked at one property that was advertised as a 10 cap and even doing the math on the numbers they gave me (which were still way low) put it at a 5 cap. This is so common on the smaller buildings.

I would say your first decision point should be how active do you want to be as a RE investor? You can make great returns as a LP in an apartment syndication deal. Maybe consider starting with a duplex/triplex house hack, learn from that and invest passively while you're learning.

Good Luck!

@Jake Fugman congrats on your success so far! I’m in the exact same boat! About the same amount of money and am trying to figure out the best route to go.

So far I have three options, and am still trying to figure it out.
1. Invest in multiple smaller deals (duplexes etc).
2. Invest in a larger deal (16+ units). Whether that be on my own or with a partner.
3. Invest in somebody else’s deal and try to learn from them as they go.

Good luck and I’ll be following this thread to see what you end up choosing!

@Scott Skinger thanks for sharing.  I do believe in the model of leveraging group capital via a syndication or crowd funding.  I definitely want to be on the middle ground b/t a truly passive investment VS full on ownership/management of a multi unit building.  I have the time and ability to add sweat equity (finding deals, property management, etc) but dont want it to be a full time job.  

Assuming general conditions - what would you consider a good return, for example, on a 100K equity purchase into a syndication?   20% (post fees) after a 3-5 yr hold?  Any opinions on the croudfunding site RealyShares.com?

@Amanda M Laird I personally am leaning towards whatever can generate the most cash flow short term since I am moving away my salaried day gig. I like the idea of applying BRRR small project (duplex) to start. Self manage it for the first 3-6 months then hire a management company once there is proof of cash flow. Lets keep in touch to see where our money goes!

@Jake Fugman - yes cap rate >10% do exist for those assets, but you have to decide if that's a neighborhood you want to be in. Closing on our first apartment complex (42 units) 5 months ago, I have some fresh on mind experience I'm happy to provide you. Let me know how I can help. 

@Jake Fugman Originally posted by : 

Assuming general conditions - what would you consider a good return, for example, on a 100K equity purchase into a syndication?   20% (post fees) after a 3-5 yr hold?  Any opinions on the croudfunding site RealyShares.com?

My experience so far has been talking to 7-8 different syndicators/operators on their strategy and how they run their deals. I have also read a decent amount and have spoken with other passive investors to pick their brains. I have not wrote a check yet, I'm waiting for the right deal(s) to come along. Here are my thoughts right now:

1. The syndicator/operator/sponsor is the most important piece. I'm looking for an operator that has been around for a long time, has diverse experience, lot of deals under their belt and preferably has the experience of going through a bad market. A lot of mf syndicators have a great recent track record but the market is hot, how will they handle a bad market? bad deal? I want somebody who is ultra conservative, who under promises and occasionally over delivers. I have these words of wisdom a few times and I believe it..."A great operator can make a bad deal work out ok/good, an average/bad operator can make a great deal bad". #1 in my book is capital preservation.

2. Regarding returns, they really come in all shapes and sizes. What I have looked at the most are apartment "value add" opportunities, basically taking a B/C asset and doing some combination (or all) of the following: fixing up the units to compete with B+ properties, rebranding, raising rents to market, improving operational efficiencies, etc. For these types of investments it is common to get a 8-10% CoC dividend monthly/quarterly, 15%+ Returns, roughly 2x your money over 5 years. The investment time horizon is typically 5 years but depends on what the market is giving them...sometimes they will sell/refinance after 3 years, sometimes it will be longer than 5. Your money is not liquid. Also, these are conservative returns from a great operator, you can definitely do better. So for a $100K investment, your returns might look something like (using easy math) $10K cash dividend, year 1-4 and $60K at the end of year 5 for a $100K total return on your investment.

3. @Joe Fairless brought this up at his Best Ever conference and I think it is important. I believe he called it his "3 Laws of Security" but my notes may not be accurate. 1. Buy for cashflow  2. Secure long term financing (think 10 year institutional)  3. Adequate cash reserves (5% of purchase price + $1000-$2000/unit in cash reserves) .

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