Need guidance on how to invest seven plus figures in current mark

26 Replies

Hey everyone,

I bought a lot of property in the Indianapolis area in 2013/14. Since then my main, unrelated business tied up funds for years. It was worth it, as now substantial cash is releasing. The industry is volatile and unpredictable, I count myself lucky to have made it this far, and don’t want to rely on this income in the future. I would like to have a portfolio of rentals netting >$200k annually and then I can rest easier. 

However I find that the market is in a much different place than it was back then. Whereas before finding 12-cap properties was easy, the same properties are now 7-8 cap. I’ve heard (this may or may not be true) to never buy under 8 cap. Some properties I am considering are  in decent areas and renovated, but they are mid-7s, so I am considering those despite my better judgment. The 8-9 cap range seems to be in questionable areas and somewhat dumpy properties. Note that I only look at properties that are virtually turnkey—clean carpet or vinyl “wood” floors, reasonable interior condition etc. 

I then considered going to a different market, even though I was hoping to greatly expand my indianapolis portfolio as I have trusted property management in place. I took a look at memphisinvest.com, which has access to several markets and is turnkey, but was disheartened. Their "ROI" figures are low at 5-7% even for the lesser cities, and on closer inspection these ROI numbers do not represent a reasonable cap rate, which would be even lower. Now they might argue their tenants stay for many years so vacancy is almost nonexistent, but I am skeptical of this kind of thing.

Is there any major metro in the country that is not a Detroit or Chicago where 10+ cap on a C level duplex or something is achievable?

I am also unsure if I should even be piddling around with buying duplexes and SFRs. I have substantial cash to invest...7 figures...and have heard several times in this forum that buying an apartment building/complex is far superior to buying SFRs. However I fail to see how this is true at the scale at which I would be capable of buying...in my price range the properties would not be large enough to merit their own on-site Management, unless maybe I just bought one and bet my entire future on it. I would be looking at small to medium sized multi family, which seem to behave very similarly to the duplexes that I like to buy. 

I am nervous that I am going to squander all this cash I worked so hard to make, by buying the wrong property type or buying at the wrong time.

Without guidance, the current strategy is to comb the listings in Indy lookng for turnkey 8+ caps. If I dumped all my cash into this (I also have stocks and crypto etc, so I am diversified) I could in theory generate enough income to reach my goal, however I am nervous that buying in a different metro may have been a much better option, or buying C grade SFRs and duplexes in a peaky market will comeback to ruin me, or buying apartment buildings / complexes would have been a much better option.

Also if I want to buy apartments, how do I accomplish that? It’s  not as easy as loading up Zillow and combing through. Loopnet seems to be garbage. A commercial broker seems like maybe an option but I believe they are limited to the state in which they operate? So if I want to cast a wide net and search in several metros, I would need to have like five different brokers searching for me? Is that correct? I see some commercial properties on here but most seem to be either 1) gigantic and out of my range or 2) quirky. I prefer simple, uniform properties, not ones that require tons of work, creativity, or time investment. I Ann just too busy running my main businesses for now.

Can anyone give me some guidance?

If it was still 2013 I could just dump all the money in Indy SFRs/duplexes and fall it a day, easily.

Apt is the way to go. 1unit = 1sfh but all in one Bldg, 1 location, etc

Plus of you have that many sfh it’s prob a good idea to diversify into commercial. 

Find a commercial RE broker for anything larger than a 12unit (unless you’re experienced in commercial). 

If you need any assistance I’m happy to support any way I can. 

Which companies would you recommend calling, to get a commercial broker? Or do you have one you’d recommend? It just seems much easier for me to quickly source and offer on 1-4 unit properties, whereas I can’t find any 5+ unit ones, but maybe that’s because the commercial brokerages have all of them.

I would invest all of that into apartment syndications. Lots of them. In 50-100k increments to diversify your risk. And just live off the 10% returns without having any of the headaches of being a Landlord or managing properties.

Is there a marketplace of some kind to find those deals? Just the one here on BP or is there a MLS/loopnet kind of arrangement for them? 10% returns? Sounds nice. I'm a bit skeptical because I'm already losing a cut to property management, then with a syndication I am also losing a cut to the people who put the deal together. However I also get their expertise. IF they're good, that is...could go either way.

@Steve A.   I think your best bet is to diversify your portfolio. Granted investing in various things will require educating yourself first. However I believe it is all worth it. Here're a few investments suggestions for you to consider.

1) stock market - if you're not too familiar, invest in Index Funds

2) become a lender - depending on the size of your investment, the rates will vary 

3) invest in syndications - you keep mentioning turn-key (you pay a lot of overhead for these). so I figured syndications maybe an option for you to invest some money passively. if you want to be active, learn it and then partner up with someone experienced to do it yourself. Overall, scaling up and not buying SFH is a better strategy for someone in your position.

Also, since you have your own business (it sounds like it based on what you stated in your initial post), consider putting some money away via solo 401k. will save a lot on taxes! 

If you would like to chat further about any of these or other strategies, feel free to PM me.

Good luck!

I am originally from Indianapolis and I know the area very well...anything I see on Loopnet over 8 cap is either in a bad location or in need of significant work.  I'm comfortable with what one might call a "C" class area but those are beyond that IMO.  Maybe there is some good stuff in the $2mm plus range but I wasn't even looking at those as I cannot buy them. (I could with lots of leverage, and without much diversification...so effectively, I can't)

you may want to blend your portfolio or cash.

some depreciable assets ( rentals)

syndications  with a VERY good Vetted Sponsor

Performing Trust Deeds  Be the bank 

NPN funds let the operator do all the heavy lifting in that space.

stock market 

then see what performs and what you like..  for me i like being the bank..

It seems like cash flow is your primary focus, if you're willing to forego some advantages of real estate such as appreciation, I recommend taking a look at note investing. FCIexchange is a marketplace for notes that appears pretty simple. I'm still new so take evrything with a grain of salt haha!

But overall it's as Jay said, there are many options.

Originally posted by @Steve A. :

@Jay Hinrichs thank you very much. Do you by chance have any recommendations for NPN funds or a syndication sponsor?

sure send me a PM if you like 

Originally posted by @Steve A. :

@Jay Hinrichs thank you very much. Do you by chance have any recommendations for NPN funds or a syndication sponsor?

 
Steve, you may be better off investing as a passive JV partner with someone who has experience in the NPN space than into a fund. There's a greater chance of higher returns, as these funds have overhead costs that need to be paid first then remaining profits distributed.

Originally posted by @Mazin El-Achkar :

Hi @Steve A.

I agree with @Jay Hinrichs. 

Performing notes by yourself

NPN as a JV partner with someone experienced.

Goodluck!

Mazin being a Canadian are you aware of portfolio interest ??? if not you should really check it out.. once you understand it you will never buy the asset again you will only do notes in the US.. if its cash flow your looking for. and or NPN or anything like that.

@Jay Hinrichs

I only do notes in the US and i buy MFR in Montreal, and no i never looked into Portfolio interest...i just googled it; i'm not sure if i'm reading this right, but is it a tax exemption on interest income received for foreign investors???? lol

Originally posted by @Mazin El-Achkar :

@Jay Hinrichs

I only do notes in the US and i buy MFR in Montreal, and no i never looked into Portfolio interest...i just googled it; i'm not sure if i'm reading this right, but is it a tax exemption on interest income received for foreign investors???? lol

 YUP properly set up like I do for my foriegn investors they make interest on US notes tax free.. !!!!

I don't think you should "diversify" into stocks/rentals/syndications, etc like some are suggesting unless you have a $h^t ton of money. Why don't you focus one ONE thing. If you want to be a lender, then do that. If you want to do apartments, then do just that. Learn and get good at one thing and put your cash there. Most of the successful people I know are doing 1 or 2 things really well. But that's just my opinion :]

Warren Buffett says whenever you get money to invest, you are better off putting it into your best idea rather than your seventh-best idea (the concentrated portfolio approach). He also says 98% of all investors, including professional investors, are better off investing it in a broad-based passive index fund (the extreme diversification approach).

https://www.youtube.com/watch?v=wbjPiYE-F4Y

I combine the two approaches with my CORE and EXPLORE portfolios. My CORE portfolio has the money I can't afford to lose and is invested using extreme diversification. My EXPLORE portfolio has the money I can afford to lose (5% of my net worth), but don't want to lose, and I'll be investing it using a concentrated portfolio.

DISCLAIMER. Warren Buffett has more money than I do, so ignore me and listen to him.

Originally posted by @Steve A. :

Is there a marketplace of some kind to find those deals? Just the one here on BP or is there a MLS/loopnet kind of arrangement for them? 10% returns? Sounds nice. I'm a bit skeptical because I'm already losing a cut to property management, then with a syndication I am also losing a cut to the people who put the deal together. However I also get their expertise. IF they're good, that is...could go either way.

Congrats on the savings. If you are not adding value with direct owned real estate, you will get higher returns with passive investing in syndications (IRR in the mid teens).

You find sponsors and offerings by networking...here on BP (it's why I have 1700 posts), listening to podcasts, REI meetings, some registered investment advisors have them, crowdfunding sites. I have likely analyzed 100 offerings over the past year.

Unfortunately you're considering purchasing very late in the cycle, and cap rate compression is an inevitable consequence of that. Indianapolis and Memphis are already tertiary markets, which people flooded into after the primary and secondary markets got too expensive. And this has now because those to become too expensive also.

Some would say to wait for the next recession to pick up bargains. However, the reality is actually not that simple. If you look at real estate pricing over the last six recessions, in three of them prices continue to rise and in three of them they dropped. So basically there's a 50/50 chance that the price today that seems expensive may actually seem cheap after the next recession. So in reality, there's no easy way to judge if prices are too expensive today or not.

In my opinion the only way around this is to invest in "vintages". Don't put all your money into real estate in a single year, because you might be guessing wrong. Instead, spread it out over many years, and then you will spread out your risk.

Personally I have found that the economics of purchasing C grade single-family rentals and multifamily is not sustainable or feasible. The increased crime leads to increased costs with maintenance as well as increased turnover (from lesser quality tenants as well as higher quality tenants that will move out). And many times they are cheaper houses, where one big capital expenditure easily wipes out most of the income. So my advice would be to make sure to catalog every single capital expenditure based on the lifetime of the items of the property, budget for their replacement, and then still see if it looks like a great return or not. In my experience, the numbers have never worked out.

Also, you mentioned the fact that you are really busy running our main businesses. You are actually a better match for a passive investment strategy, using syndication/crowdfunding. I own properties directly as well as invest passively, and both have pluses and minuses. For you, the lack of time will make it difficult to own properties directly. The other advantage for you of syndication/crowdfunding is that you could diversify into a lot more asset classes than just single-family houses or multifamily. You can also diversify much easier and cheaper over geography so you are less exposed to the risk of a single metro area experiencing the loss of a major employer or other unique problem and messing up your returns.

You guys have all given fantastic advice. Thanks especially to @Jay Hinrichs who introduced me to MULTIPLE service providers in the space who can assist me. That was invaluable man, thank you.

It does look like syndication is the way to go. I am leveraging the expertise of an experienced operator. I get the economies of scale from hundreds of units. I get on site property management instead of 8-10% off the top (and some guys who I don't use charge first month's rent, yikes). I get 4% HUD interest rates instead of the 8% I could get on my own. The deals seem to cash flow 7-12% in the holding period and then pop at the end for double or more on the money invested. Really compared to anything else it seems like a no brainer. Also I get the ability to diversify geographically, and with multiple syndicators to hedge my bets.

NPN sounds like potentially outstanding returns but yeah, I would have to partner with someone and not sure I am up for that.

Performing notes - I will probably add some of these as well to see how they perform and if I like them.

I already max a SEP-IRA with a bunch of vanguard mutual funds (all equities no bonds). Will probably get some outside of the SEP-IRA as well. I also have a small % of my net worth in crypto and other speculative stuff.

I have this vision of owning an empire of housing spanning the nation...I don’t get that feeling with syndication but I know this is an irrational wish. However, I am going to continue buying SFHs and duplexes at the 8 cap and above range as well with a portion of the money. The depreciation is nice for taxes and I trust my existing PM. 

I'm looking into buying a 21 unit apartment building as well, in another midwestern metro. Seems to cashflow well and doesn't need any work. But the more I look into it, the more this deal looks sour compared to just buying more houses in my current metro and definitely compared to syndication. Why? Because lenders are wanting 7-8% for a fixed 30 yr term, and I don't mess with ARMs or balloons...I do fixed rates and only maintain about a 50% LTV on my stuff. That rate is pretty nasty, and then also the current PM of the property, who I would prefer to keep on board, charges 10% plus first month's rent. I have made it a policy to never work with anyone who charges this much. Can anyone comment if this is wise? The way I see it, first month's rent, assuming transient apartment people who probably only stay for an year on average, could be 10% or more of gross, so I'm being asked for 20% of gross to go to the property manager alone. No thanks.

@Steve A.   your welcome sounds like you have a good handle and some exciting projects to look at wish you the best

we find that performing notes are quite appropriate for sidra as well.

Glad to help..