Where to invest $500K over the course of 2020

[Sameer A.]

Hello all,

I am new to the real estate investing world, but I have already benefited greatly from the Bigger Pockets community.  I just started looking for deals 6 months ago, but Brandon Turner's The Book helped me immensely in establishing a framework through which to evaluate deals.  I am currently reading David Greene's book Long Distance Real Estate Investing as well.  Aside from that, I learn something every time I browse the forums here.  I am very grateful for this incredible resource!

A little background about me: I operate a business in the steel manufacturing industry and I am an avid investor in stocks.  Over the last decade or so, I have learned a fair amount about various industries and businesses, but I don't have much experience in real estate.  I am fortunate that the business is doing well and so I have a source of capital to deploy into real estate.

Between the books and resources I mentioned above and conversations with agents in a few different areas, I developed enough confidence to start making offers a couple of months ago. Since I am running a business full-time, I decided to look for newer properties that would not require too much of my time. As a Southern California resident, my local market rarely offers cap rates over 5% for high-quality properties, so after doing some quick research online about burgeoning markets, I chose to look at deals in the Phoenix and Dallas areas. To get started, I set some ambitious targets of the returns I want to achieve (6-7% cash on cash return with 20-25% down, estimated appreciation of 2-3% per year). With the loan paydown, this results in an overall ROI in the teens. With that framework in place, I've looked at probably 50-100 deals over the last couple of months and made offers on a few in Phoenix. In order to meet my return targets with high-quality properties, my offers were generally 10-20% below list price. None of them panned out, but I did get a taste of the process, counters, etc.

As things stand today, I have about $500K that I would like to deploy into real estate investments in 2020, if I can find the right deals.  But I have so many questions!

1. I look at my first deal as a way to get my feet wet, learn the ropes, and start creating a foundation from which to build a portfolio.  Is it better to seek that first deal here in the Southern California vicinity, where cap rates are very low, but markets are perhaps less risky or is it prudent to go out-of-state if I can find the return characteristics I want?  Are there some specific markets I should look into?  One agent told me to look for properties with good return characteristics in cities that I would want to spend time in.  Any thoughts on that line of thinking?  Any reason to prioritize nearby states vs. those further away?

Here is what I have seen so far: In Phoenix, I can probably get a deal done on a renovated duplex or fourplex at a 6-7 cap, which would yield a cash-on-cash return of 3-5% depending on the financing details.  Lower than my targets, but if it's secure, still a solid overall return with the loan paydown, etc.  In the Southern California markets, the better deals I am seeing are 4-5 caps on older properties in established neighborhoods that might eke out a cash-on-cash return of 1-2% to start, with the potential to get that up to 3-4% in a couple of years by investing in some modest upgrades and bringing rents closer to market.

2. I have a very good relationship with a large national bank, however, it is one of the more conservative mortgage lenders and only offers up to 60% LTV with a rate today that would be in the mid to high 3% range. That said, given my relationship with the bank, it would be relatively painless to arrange the loan. Is it worth starting a relationship with another lender with more favorable terms now, or should I cut my teeth with the financing that I have?

3. With this amount of capital, does it make sense to look into industrial real estate as well?  I have some experience there through the business and it seems like cap rates tend to be higher in warehouses, manufacturing, etc.

-Sameer

[Bill F.]

@Sameer A.

RIP your inbox.

You have gotten a lot of advice from people who have a product to sell you and the advice they have given highly correlates with product they have to sell. Funny how that works. 

That's the danger in posting I have $X to invest in a public forum with your full name. 

Why do you want to invest in residential RE and not commercial? You have experience in the light/medium industrial space that most other folks don't have. 

The first place I'd look is buying the building that your business is in or one that is big enough to house your operation and that of a few others. That way, the other tenants pay the note and you have more control over your lease terms. Particularly in SoCal, that could be a long term competitive advantage.