Have a decent sized portfolio of stocks, bonds, etc and a main residence. Have about 250K to deploy in an alternative asset class, preferably one that inst correlated with the stock market.
Work full time as an finance executive in a technology company. In pretty high tax bracket, particularly living here in Calif. An investment yielding current income would have a high hurdle to pass.
Live in highest cost RE area in the country - SF bay area. Housing prices are about $700 per square foot for SFR for mid tier suburb. Palo Alto at the top is $1200 per SF. The low income areas are about $300 per square foot. So local market is not a typical one.
Obviously recognize that RE investing is more work than just placing an mutual fund order. That said, I don't have more than 5-10 hour a week to devote.
Skills - I think good business sense, probably everybody thinks they have that tho. Better than average at working spreadsheets and understanding finance concepts. Strong analytic skills.
No real estate specific skills.
Dont want to deal with a tenants directly on a regular basis.
Risk averse in the sense that I don't want to take on investments that could bleed over liability into my other assets. The 250K can be in risky investments, but I am very wary of liability. Of course there is insurance, but there are crazy juries out there too.
As I write this up, I am not well suited to a lot of the categories of investing, but there a lot of niches so I am throwing it out there. I can always buy REIT shares in my 401K, but looking for something with a bit intellectual stimulation to it
You might consider being a private lender / hard money lender. Already a number of existing threads on how to start doing that so search if you think it might interest you.
Steve - What do you see as the core skills /characteristics needed for hard money lending
You can use a broker, so just a pile of money that you can lend and a tolerance for that money being at risk.
There is no risk free investment. Such an animal doesn't exist on this planet. If someone says otherwise they are blowing smoke. Now there are ways to minimize risk in your favor to give the best chance of a successful outcome.
A few hours a week time isn't much to devote.
You said you didn't want to deal directly with tenants. This can be achieved if you buy into larger assets and you can land also non-recourse financing. The operating agreement with the partners spells out exits, cash flow, and your equity percentage. These are generally single property syndications. The REIT's you do not have direct control over the properties you are choosing to invest in etc.
Commercial real estate assets tend to be more hands off due to scale but require higher capital outlays. The houses for rentals you have a pot luck on the property manager and if things go South you are the one dealing with the tenants now and it can be a mess. I find residential property managers many tend to not be professionally trained on a consistent basis. They tend to sell homes in between managing the houses for investors to survive. One minute they are on it and the next you do not hear from them while they are working on a large house sale and your asset deteriorates and performance goes down. Not all residential PM's are like this but many have divided interests.
With larger assets you tend to get professional management companies that all they do is manage. They have systems and processes in place to handle everything. You still have to look at operating statements and maybe a phone call once a month etc.
I got away from the small investments as they can turn into a job so I like scale. My mantra is it has to be an investment and not a job.
Your point about it being an investment and not a job is really on point.
At one extreme is how I do most of my investing. Pick an asset allocation, buy the index fund thru Fidelity or Vanguard. Rebalance once a year. Total time to invest - 2 hours per year.
The other extreme is some of the investments pursued on these forums. FOr example, there is one poster who provides a lot of detail on the Non Performing Loans he buys. He is dealing with a ton of admin work on a 20-40K investment. Talking to RE agents, to banks, to former owners/tenants. He seems to get good return on his financial capital, but his pay per hour seems kind of low. Tranaction costs in terms of time are too high for me.
Similarly, it seems like people are making good ROI in buying and renting very low cost properties in low income area. But to get any real capital at work, you need to buy a lot of them. Even with just a 250K nut, and assuming a 25% equity in each property, you need to have $1M worth of property, which is 20 houses at 50K per, 10 houses at 100K per. Thats a full time job to find all those, even if you have professional mgt.
So I guess I want an investing hobby. More engaging than buying Spartan Total Stock Market Index, but less than chasing down tenants for a 500 dollar rent check.
I agree with Steve and Joel. The obvious answer in in my view, @William P. , is private lending.
You don't have nearly enough to invest in any commercial property large enough that it won't require a lot of your time or potential additional investment. Certainly nothing in-state, and near home, where I strongly suggest you focus.
You do have enough to do a first position private money loan on one decent sized flip in your area. Very safe, secure, and time efficient. Done sensibly, to experienced flippers only, your risk is relatively low and you are always secured by the property. After you've done a few, your 5 to 10 hours per week limit will be per 6 to 8 month loan – consistent with your other investments. Returns in your area, before taxes, should be in the high teens.
There are many threads here, some step-by-step, on how to loan money privately, if you do a search. I promise, after you've done several of these, you'll pull money out of the stock market to do more.
Once you meet other lenders, you'll find they tend to be hands-off cash flow investors with access to various funds and syndications. These could interest you as well, especially if you are an accredited investor.
Because of their availability, non-performing notes seem to be the rage lately. The returns on these can as huge as the losses and they can take a tremendous amount of work and time. In my view, while you can make a nice return, these are just another job. You might find others who take on investors, thru a fund, and do all the work. This could be interesting.
Alternately, some here are fans of buying turn-key properties out-of-state and I suspect you have enough cash to buy or leverage into several. Here, in theory, someone else does all the work for you though there is no guarantee you won't have to feed your investment. How these will work-out long term is anyone's guess. Your responsibilities don't go away if your operator does. Also, I know many who have over-paid and are not doing as well as promised, so you have to be careful. Many pros and cons in this space.
Good luck, William.
Excellent point about being local. Seems to me the a very important element of hard money lending would be diligence on the flipper. Harder to do that non locally.
I think the very high cost of local RE is a challenge for private lending if I am going to limit to 250K. On the flip side, you don't have to diligence as many deals to get your funds at work, so that's a plus.
THe other challenge of private lending is that it creates income now, which I distinctly dont need living here in calif and near my career earnings peak. The funds I have to invest in RE are "post tax", but I suppose I could allocate differently and use IRA funds, but I would be more limited how much I could invested vs post tax $,
"Seems to me a very important element of hard money lending would be diligence on the flipper."
If this is your sole understanding and the basis for all loans, William, you will do well. In our lending business, we focus 90% of our time forming relationships and vetting our borrowers. The homes, and everything else, are a distant second.
While not a fortune, $250k should not be a challenge to fund one flip in northern CA. You won't exactly be loaning in Marin County, but skilled borrowers don't pay full price, and you won't loan the full amount anyway. Do a search here for the 70% rule (though we use 75%) and follow it.
For many reasons, you generally don't want to buy real estate in a retirement plan. These are custom made for paper however (notes, tax liens, syndications, etc.), which doesn't have the tax advantages of hard real estate anyway. If you had to chose, I'd focus my lending in a retirement plan where you can enjoy the tax deferred or tax free benefits later.
William if you do lending stay away from owner occupant. Too many recent law changes there where investors now focus on the investor side only.
Eric Michaels on here has lent a lot on hard money as have others. I would talk to many to see the good, the bad, and the ugly. Every avenue has a plus and a minus. With lending you need to look at the worst case scenario of if the deal went bad, the market fell out, I had to foreclose, etc. then what would the losses be?? Also how long would it take to get the property back?? Some judicial states take forever and costs a lot of money.
With lending you have the return on the interest rate and your velocity churn with the points. The faster you can relend the money out again and make points the faster the annual return versus a loan you have to keep extending at set rate.
In owning commercial real estate you can buy into a syndicate or partnership and still 1031 later but must use a TIC structure so you retain the same tax id number otherwise you will be stuck with your current partners. You want flexibility so if you sell off down the road you can 1031 exchange tax deferred into your own property.
You can buy a commercial property with 250k down just know it will be recourse versus the larger loans that start around 2 million loan balance or higher. Currently with leverage and 25% down my clients are seeing 12 to 14% cash on cash going in with commercial assets and that doesn't even include your depreciation for the tax equivalent yield. There are interest only options for the first 2 years which grows COC another 250 to 300 basis points where you could get 17% coc for example on a quality asset.
Most of my clients are high net worth and do not want to mess with any headaches. It's not worth it to them to own dumpy properties with low resale value to squeeze out a few extra percent a year. They do not need the money right away and want equity growth and write offs.
Hope it helps.
@William P. - a multi-family (apartment) with 50-100 units or more can generate excellent yields. At that size, the business can support management and maintenance staff. You need to know how to buy and you need a good team. You might need additional investors to get a large enough property, but these have great potential for being truly passive.
I have a contact in Marin County who owns and manages a number of MF apartments and other commercial properties. I also have a contact here in Houston who owns many properties and mentors other investors. I'm investing in single family and building up to multi-family at which point I will work with these guys. They enjoy helping others succeed.
Send me a personal message and I can share contact info if you like.
One thing that would help you make a better decision is your expected rate of return. It sounds like you are looking to hands off investment with minimum time investment.
- You can do some hard money or private money lending.
- You can do 50/50 partnerships on flips with experienced investors.
- You can purchase some turn-key rental properties.
The answers will depend on a lot on the ROI you are looking to make.
Where to allocate money is an age-old question that has different answers for everyone. For some people, finding the highest return is most important. That objective comes in two basic sub-categories: people who value current income, and people who value future appreciation. For other people, finding the highest return is less of a priority. For them, finding a good risk-adjusted return that requires the least amount of time and effort is the goal.
Those that seek high return frequently utilize the direct investment approach, buying real estate and managing it themselves or managing a property manager. Sometimes this works great, and sometimes not so well. Making great acquisitions requires time and skill, and some people don't devote the proper amount of time or don't possess the proper skill. This can produce results that fall short of the goal. If you have the time, you can learn the skill (right here on BP), but this doesn't sound like your situation as you've described it.
Investors who have capital that they wish to diversify into alternatives but lack time or the proper skill and/or experience to successfully execute a real estate plan do have options. One is to invest into commercial property leased to triple net tenants, with the advice of a skilled broker in the commercial space. In some areas, $250K might be enough to play. It would be a little light in the bay area, but it's not impossible to branch out to other areas if you are willing to commit time and travel initially. A potential downside here is that with a deal small enough to be taken down with $250K might be too small to finance with non-recourse debt. At the very least, the search for non-recourse debt of that loan size might take some time to locate.
Another option for people in your situation is to invest in syndicated investments. This is where an investment sponsor offers an opportunity to accredited investors to invest as a group into larger properties. This seems like a good option for you, as the benefits align with your concerns.
The investment sponsor, who is an experienced investor that commits full-time to the business of real estate investments, commits the time to select, acquire, and manage the asset. As an investor in syndicated investments, the most important function for you is to do thorough due diligence on the investment sponsor. Ask a lot of questions, and look at their track record. Evaluate the business plan to ensure that it aligns with your goals and is realistic.
If done correctly, the sponsor obtains the debt, which is non-recourse to the investors, executes the plan, and reports to the investors on a quarterly basis. In many structures, the investor benefits from depreciation that offsets some or all of the income (which creates a temporary tax shelter). This also allows you to be a part of a larger property or more properties than you can accomplish by investing on your own. This is important because smaller properties tend to produce more headaches than larger ones. For example, I own an 11 unit building that takes more of my time and attention than my 140 unit complex. Owning part of something big can work out better for you than owning all of something small.
Investing in syndications is the closest thing I see as the real estate equivalent to investing in mutual funds, other than perhaps REIT investments. Unlike REITs, syndications have little to no correlation to the stock market.
Private lending, as others have mentioned, is also an option. Similar to investing in syndications, due diligence on the sponsor is extremely important. The downsides to private lending as I see it in your case are two-fold. First, the objective of private lending is primarily current income (via interest payments) for which there is no tax shelter (unless done through a self-directed IRA) which runs contrary to your goal of not producing additional taxable income. Secondly, the returns are likely to be less than in direct investing or syndication. Experienced flippers have a lot of lenders competing for their business and that has driven down borrowing costs (and thus return to the investor). Returns north of 10% are still achievable, but more often than not those rates are paid by flippers with less experience than you'd likely feel comfortable with.
I'm not a fan of REIT shares because then you don't gain a lot of the financial benefits that you would from owning real property, such as tax benefits (huge for rental properties). I live in LA so same cost of housing issue here as up north, so I've always bought rental properties out-of-state. Using a property manager on the properties will free you up from having to deal with tenants directly. I never even know my tenants' names nor do I ever even have keys to the properties. It's great!
@William P. , I would disagree with those here who suggested being a private money lender given you said you have no RE experience. I've seen a several make this mistake and became an RE investor by default inheriting a ton of headaches. I'd also recommend against investing into a REIT as owning the asset itself is safer than owning stock in the REIT that owns the asset.
Best thing you can do is find an area of the country to invest. At the moment, there are a few areas in the country where the institutional investors & REITs are still buying and there is a good reason for it. After you find the area(s), find an RE professional that knows what they are doing and a good management team. This will minimize your issues.
While we have done just about every type of investment real estate there is known to man for almost 15 year including apartments, student housing, retail, medical office, etc.. in my opinion single family homes in selected markets for buy and hold 3 to 5 years is a good safe bet. Buy multiple properties spreading your risk. Not only will you get the revenue but you'll get the equity gain over the 3 to 5 years and it is a much safer bet than most asset classes at the moment.
@Brian Burke That business about "...If done correctly..." - you wouldn't happen to know much about that, would you?
@William P. I have worked with investor capital for a decade, and know a few things about real estate. But, I have to recommend Brian Burke. You'll never read anyone (besides me) talking smack to or about him. I know his methodology, and it stands up to anybody's scrutiny. You'll do yourself a disservice if you don't click on the link underneath his comment!
Now - if looks are important to you, then you might want to also click on the link at the bottom of this comment as well, since everyone agrees that I am much better-looking than Brian :)
Lots of good insight.
Sharad - I think my goal is to get ROI commensurate with the risk I am taking, with a little kicker for my effort. And that raises a good point how material all this is. Lets say I put the 250K into Vanguard REIT index (Kathryn, I disagree with your claim that owning the asset itself is less risky. Only risk to the REIT index is the general market risk, which is not trvial. But the variability in return in owning your own property is way higher, which is why you can expect to make more doing it yourself on average.) Anyway, Lets say in the REIT index my expected ROI is 7%. Compare to private lending, where maybe I can expect 10% ? So in exchange for the work, I get 3% more on 250K. That's 8K a year. Nice, but prob not worth the effort unless I can do it in an hour or two a week or so. If I had 10M to invest, then a different story.
Ali - your point about taxes is valid of course, but I would hold the REIT in tax deferred account. Helps a bit.
Brian - your point about a being part of a syndicated investments resonate. Biggest challenge there, of course, is how good/trustworthy is the investor. One assumes that if he is REALLY good, he has lots of access to capital, including a ton of his own. But maybe that's ok, its all trade-offs on the risk-return frontier. I am an accredited investor, but 250K to put to work in RE isnt much. what is the typical size of investment you see? ie is it 10 investors at 100K each? 50 partners at 250K each? And of course where do you find them?
@William P. You didn't speak as to why you are looking into real estate. Answering that question allows you to more specifically direct where you want to allocate your time and money. Are you looking to "retire" from your regular job? Are you wanting to take advantage of the tax benefits of real estate? Are you simply wanting to expand your wealth? Depending on how you answer that question leads to where you should direct your time and energy. Pick the brains of those in each area of the industry - lending, multifamily rentals as a primary, multifamily in a syndication, single family rentals, flips - and see if that meets your end goals. This is definitely the place to learn from the successes and failures of others.
I see opinions all across the board with my clients. Some have 300,000 to invest and others have tens of millions.
I am talking liquid cash not net worth. I find the answers vary based on the total amount of money and goals they have in mind.
I am thinking of starting my own syndicated fund for retail properties and commercial. I have many smaller clients where if they buy on their own they are looking at a local bank and a 3 to 7 year term and 20 to 25 year amort. Rates tend to be slightly higher than market as the local banks know there is less lender competition for those small loans. Sometimes you can get a better rate if you have a lot of money and deposits with one bank. They will put in a clause though that if your bank account balance sweeps below a certain amount the rate changes and goes higher.
Conversely if the loan balance is 2 million or higher I can usually get a 10 year term with a 30 year amort. fixed in the 4's for rate and non-recourse with standard carve outs that are not banks . So usually maybe 2 to 3 investors will go in on an offering. I do not like deals with 40 investors into one deal because it's just too many things can go wrong and moving parts. The more complex a deal is the less of a percentage chance it has of closing.
@William P. you are absolutely correct...the quality of the sponsor is critical. A bad sponsor can turn a great real estate deal into a disaster. Looking at their website isn't enough. Ask to see details on their track record. Talk to others who have invested with them. Visit their office and look the principals in the eye. Study the business plan and see if the math and assumptions make sense. This is a trust and reputation business.
As to your point on access to capital, really good sponsors DO have access to lots of capital. It's the lifeblood of their business. But most good sponsors continuously grow their businesses which results in an appetite for capital on a fairly regular basis.
The typical investment size that I see personally is $100K to $500K. Sponsors set their own minimums so this is likely to vary. In my first fund (many years ago) I set the minimum at $5,000. It was reflective of my experience as a sponsor at the time. I didn't know wealthy people so I was going with the friends and family route. As my business grew, my minimums went up to $25K, then $50K, then $100K. That said, you can't equate a fund's minimum investment to the sponsor's experience in all cases. I know firms that have raised billions and have certain deals roll out with a $25K minimum, and I've seen first-time sponsors try to go out the gate with $100K minimums.
Just as minimums vary, so does overall fund size. For example, a purchase of a $5 million apartment complex might raise $2.5 million from investors. You might have 2 people at $500K, 4 people at $250K, and five at $100K or some variety thereof. Or it could be a portfolio of rental homes raising $5 million with a similar mix but double the number of investors.
You are right, $250K isn't much in the realm of direct RE ownership (especially to us Bay Area guys). But it's about the average in a syndication, and you get the economy of scale of larger properties or portfolios that are out of range on your own.
Sponser Is critical.. last thing you want to do if you want to only spend a few hours on your investments a year is buy property out of state as some above have suggested.. That endeavor is not a passive one and the returns are only pie in the sky.
Look for those that Have skin in the game do not fall into the trap of working with West coast marketing agents that own nothing and only make a commission selling you some dog in the mid west or rust belt.
I wrote an e book on how to deal with TK companies and out of state investing if you e mail me I will send you a copy its free and non biased as I have nothing to sell .
Anytime you get on BP and say you have 250k to invest you will be hounded... tread carefully and in my opinion only invest with those that have deep track records as @Brian Burke mentioned or those with deep experience as @Joel Owens
mentioned as for SFR's @Sharad M. has a lot of experience and you can buy direct from him not through west coast middlemen that will take a huge cut off the top. NO need to deal with them.
Wow....As usual BP community has come with great information and presented you with different options!
I shared your positon in many aspects, although I'm in NYC and this is my limited experience. I have succesfully invested in small syndicated deals with a minimum of $10K and have been offered up to $50K to invest at rates of return between 7-10% in a year or two. I decided to go with little money and short term to "test the waters" and so far I'm pleased. As Brian mentioned I scrutinized the syndictor the best I could, looked at his track record, model of business (something I could understand) and met with him several times before investing.
Now, in addition, I'm looking in to turnkey properties within 2-4 hour away from NYC. I recently went to TX with the intention to invest there, but realized that I prefer a closer markets (at least to start), as eventhough turnkey properties are hand off, I want to pass by my properties from time to time and look at them.
To finalize my comment, I think Kristin's point is worth to consider as investing is like a journey. So before choosing the route is important to choose your destination.
Ben Leybovich in case you read this: Sorry, but in my opinion, eventhough you are fairly good looking, Brian Burke is better looking than you :)
Hahah - @Vania Castillo touche!
Let us be logical abpout this. Both @Brian Burke and I have 2 podcast on BP to our names. However, Podcast 61 with your's truly is available on YouTube as well as audio, because @Brandon Turner and @Joshua Dorkin wanted to make sure and capitalize on my obvious stellar looks. Conspicuously, both of Brian's segment are available only in audio...just sayin' :)
Enough of this; let's talk shop. William - neither Brian nor I woould consider floating a PPM that underwrites to anything under 15% IRR. Vania - you mention 7%-10% - this is laughable. This will become 4% before you know...Further, is this CCR we are talking about, or is it IRR? Big, big difference!
William - you pose the question relative to what you can do with $250,000. I wonder if this is the right question to ask. I feel that the entire conversation around trust-worthiness of the sponsor, while very legitimate, is besides the point unless you have the skills to be able to analyze the opportunity at hand, and trace the proposed methodology and execution of arriving at the floated returns. I wrote about this on the blog on several occasions; perhaps a quick read would be beneficial:
There's more, but this should truly help. Brian is crem de la crem; no question about that. And I'd like to think that I'm not so bad either - never lost anybody's money (though I have lost some of mine). You've heard it said "Trust but varify" - this is nowhere more true than in REI, and especially in PPM situations. As an LP you have no say on procedural nor strategic matters, which is why you MUST be able to underwrite the opportunity from here to Timbaktu before you deploy capital. If you are not able to trace the steps in the offering and acess the probability of successfull outcome, then perhaps any talk of capital deployment relative to you as an LP is premature.
Ben Leybovich: Ha,ha,ha.....Keep dreaming :)
I agree with you ( although way better in a year than a CD!). However,as I become a more sophisticated investor (Thanks BP!) and deploy larger amounts of money, I'm expecting higher ROI. Obviously with a larger capital and higher risk I would not go for less than 15% these days.
I just shared my simple experience with WIlliam to validate the fact that after doing due diligence; BP is good a place to get information, ideas, check reality and why not? find partners and make deals. I has worked for me and perhaps, hundreds of other members.
William: You are on the right track, connecting with people that can add a lot of value and wisdom to make the best decision: Brian and Ben among those!
A debate with @Ben Leybovich ? I'd better put my seatbelt on, this could be a wild ride.
I'd suggest that @Brandon Turner decide who is better looking, but I fear for Ben's well-being should he not be chosen the winner. So I'm fine with conceding that I have a face for radio...
Talking shop...Ben, I think it's OK to offer an investment with an IRR less than 15% if you aim to appeal to investors that value safety over yield and you find a property that has safe characteristics but produces a lower return. Every investor has different values and goals, and as a practitioner in the investment space it is our job to develop products that appeal to a variety of audiences. That said, this is only possible for experienced sponsors - new sponsors have built-in "sponsor risk" such that even safe real estate won't attract the safety-oriented investor to a new sponsor's offerings. This is a mistake that many newer sponsors make. They find a deal that throws off a 11% IRR and then wonder why they can't find investors for it.
Projected IRR means very little...the 10% IRR deal that @Vania Castillo participated in might outperform another sponsor's 20% IRR deal if her sponsor actually performs on the investment plan and the 20% IRR sponsor blows it. And she might very well come out the winner because she went further than most LPs go - she did thorough due diligence. Even meeting with him several times. That's a step many investors don't do, but should.
I agree with what you say about having the skill to analyze the deal. Investor suitability is important in private offerings. So important, in fact, that our fearless leaders in Washington established a litmus test many years ago. The Feds say, "hey, if you are smart enough to be worth $250K/year to an employer, or smart enough to have accumulated a net worth exceeding $1MM, you are smart enough to invest in a private offering." This test fails, however, because every lotto winner instantly meets the test despite their education or background, so the suitability test of "sophisticated investor" should play a strong role in the suitability analysis. This is where the investor "possesses the knowledge and skill to evaluate the type of investment offered." This is why subscription agreements have an attached investor suitability questionnaire that dives into the investor's background to extract whether the investment is appropriate.
@William P. meets these tests from all perspectives. By his own statement in the OP he is not only accredited but he's a finance executive with a tech firm. If I look over my roster of investors, I see a lot of individuals just like William, and I'd bet you see the same. I think your point, however, is well stated to all of the other folks on BP who will read this thread - choice of sponsor is critical, but so is looking in the mirror (no, not you Ben, you look in the mirror enough!). LOL
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