Real Estate Investor · Alpharetta, GA · Member since 2010 · 415 posts · 484 votes
Assumptions:
You can't leverage the money; no debt. There's no deadline as to when you'll have to give the money back. The goal is a solid, double-digit cash return each month, but some upside is necessary, unless the cash returns are simply obscene (as one would hope with rehabbing/selling).
I ask this questions because I've been thinking: What is preferable? A portfolio of single-family rental homes, or one larger multi-family property? From a management perspective, I have to think the multi-family would be easier, wouldn't it?
So, what would you buy (or do) with $5 million? Would you:
(1) Rehab properties and sell?
(2) Rehab properties and rent?
(3) Work in SFHs?
(4) Work in multi-family? (And what size?)
(5) Work in commercial?
(6) Make hard-money loans?
Since it cannot be leveraged, then I would focus on Cash on Cash returns.
To this end, I believe small multi's would be my best option in my market. Low prices means I could build a significant portfolio very quickly. In my market you can find 2/1 duplexes, triplexes, and quads for as low $20 to $25K per door with the average being $30K. With rents averaging $500 to $600 depending on area, cash on cash returns are anywhere 25% to 37% based on actual returns I am now acheiving.
Also, since it will take a very long time to employ fully the entire $5 million, I would also look to do some fix and flips and hard money loans to my fellow investors just to maximize returns.
If I had to return principal, I could easily refinance those properties and would forever have a cash cow.
Paul, could be dependent on your goals, comfort zone, experience, and power team. Probably it all comes down to how you can get the most return on the shortest amount of time. depends on the market that youre working on too. if youre willing to just work there in your locals or ur willing to invest wherever you can get the best return, and the safest, and the least effort.......
Ah, sorry -- I edited my headline/subject for brevity and lost the most important part. This is not for yourself; it's for a "rich uncle" or other investor. You'll be thrown a bone for your good efforts, but you can't keep all the profits for yourself.
So, Bryan, sorry -- kickin' it in the Caribbean and watching interest just roll into your account are not options here!
D.P., I appreciate the response, and I'd like to hear how *you* would handle the $5 million using your goals, comfort zone, etc., but keeping in mind that you can't use debt.
If it was not my money, but my "rich uncle's money" and I kept the profits, I would continue flipping houses but on a much larger scale and I would also provide funding for other projects, but only with equity stakes.
If it was my money, then I would do a few flips here and there to keep me busy and active and the balance of it to make loans.
Since it cannot be leveraged, then I would focus on Cash on Cash returns.
To this end, I believe small multi's would be my best option in my market. Low prices means I could build a significant portfolio very quickly. In my market you can find 2/1 duplexes, triplexes, and quads for as low $20 to $25K per door with the average being $30K. With rents averaging $500 to $600 depending on area, cash on cash returns are anywhere 25% to 37% based on actual returns I am now acheiving.
Also, since it will take a very long time to employ fully the entire $5 million, I would also look to do some fix and flips and hard money loans to my fellow investors just to maximize returns.
If I had to return principal, I could easily refinance those properties and would forever have a cash cow.
What Scott said! He took the words right out of my mouth. I like fourplexes. I'd look for rehabbers in edge neighborhoods that are coming up. I'd sell some once I got the rents up and I'd keep others that have better locations for the appreciation.
I could also look at doing a larger rehab with mixed-use: commercial ground floor and apartments above in the hip areas of town.
I can only speak of what I would do from the opportunities I see. Being in the lending world, I see a LOT of good opportunities where there is equity needed to close the deal. This is often from the borrower lacking the capital to meet the reserve/operating capital requirement by the lender who will hold the senior debt.
If I had the money, I would provide funds to be an equity partner in multi-family/assisted living facility projects where there is government financing in play.
You wouldn't see a high turnover rate like you would with flipping homes, but you could definitely pick projects with a 10%+ IRR, be the preferred equity partner, and even dictate that you receive residual income after being bought out. Not to mention you would have a solid lender in 1st position providing long-term financing.
Except for inflation, the cash flow alone from this amount would probably be enough to support most lifestyles; so there’s little need to leverage it or aggressively invest for appreciation. To me, that would cut direct ownership of real estate out. Who needs the headache of working with tenants or even property managers? In my view, I’d lend the money.
The returns on hard money loans can exceed 20% but, by their nature, these are short term and actually involve work to keep the pipeline filled. I’m frequently offered first trust deeds promising 10 to 12% returns on SFR’s with a safe amount of equity. I’d probably buy a portfolio of these and keep the duration in the 1 to 2 year timeframe. These would be laddered to the extent possible so that only one comes due at a time and it could be replaced by another. Depending on your lifestyle, timeframe, and tax situation, the returns here should offer modest appreciation and would certainly envelope inflation. (I suppose if you’re a hyperinflation kind of guy, you could buy $5m in Krugerands but that’s another thread)
This is not a king’s ransom so don’t forget adequate health insurance, life insurance as appropriate, a family trust, and general tax planning.
I would focus on projects where all cash would create an strong advantage...
Very high cap rate problem commercial/multifamily comes to mind. Mid-sized apartment buildings or larger MHPs which have high vacancy but are ripe for a rehab and management turn around.
I would also consider buying multiple units in distressed condo projects where bank will not lend. A large buyer could turn the entire project around an create a very nice return once the units could be sold with conventional financing.
I think we're about 2 years from market bottom on commercial multi-family properties (at least in my area). And I think we're pretty much at bottom for the residential market.
So, for the next 2 years, I would sink most of the cash into low-priced single family houses. I would rent them for a couple years, then rehab and resell. In my market, I think it's reasonable to make an 80-100% total return over 2 years on these types of properties, IN ADDITION TO the cash flow.
Then, in 2-3 years, when the commercial market were closer to bottom, I would start buying distressed commercial multi-family properties, reposition them, and resell with hold times in the 2-5 year time-frame.
Of course, these are my areas of knowledge, which is why I'd do these things. There may be more lucrative options in this market if you're more well versed in other strategies...
I agree with J Scott. I would buy approx. 75 houses for about $70k each (including rehab) and rent them out... which should cash flow about $400/mo. * 75 = $30k/mo. Then, in 5-10 years when my local market is back on top sell everything for $120k/house which is $9mil. Then, put that $9mil into a low return/risk free investment and work on becomng a professional golfer :).
I agree with J Scott. I would buy approx. 75 houses for about $70k each (including rehab) and rent them out... which should cash flow about $400/mo. * 75 = $30k/mo. Then, in 5-10 years when my local market is back on top sell everything for $120k/house which is $9mil. Then, put that $9mil into a low return/risk free investment and work on becomng a professional golfer :).
I'm curious as to why you think SFHs are the way to go. Do you think it's more desirable to buy 75 SFH doors for $70K each as opposed to, say, buying a 150-unit apartment building for the same $5 million? Do you think there's more upside/appreciation to be had with SFHs compared to larger MF properties? I presume that you're buying your SFHs "right" and walking into equity post-renovation, but I would hope that would be the same strategy with a MF property.
And would these SFHs be in neighborhoods where you'd hope an owner-occupant might have an interest, or do you think the buyers here are investors, too?
I prefer SFH because that's my experience. I don't have experience in multi-family. I also don't know if multi-family will appreciate that much over the next 5-10 (maybe it will). SFH may not either, but I am willing to bet that it will. Yes, these are neighborhoods that would/should sell to owner occupants in 3-6 months if priced right and rehabbed correctly.
With actual informations about some deals in the US I would buy an operating bank owned Hotel and a large bank owned apartment building for longtime hold. And there will be some money left in the pocket.
I agree with Jeff S, I'd lend it out. But of course, Jeff and I are in the same business.
I'm also a real estate investor, but I'm realistic about the issues of real estate - tenants, toilets, all that stuff. There is always the grief to revenue ratio, and residential tenants cause the most grief.
I'm curious as to why you think SFHs are the way to go. Do you think it's more desirable to buy 75 SFH doors for $70K each as opposed to, say, buying a 150-unit apartment building for the same $5 million?
Two reasons:
1. Because commercial has dropped considerably over the past couple years, finding sellers who are not upside down or who have enough equity to sell at reasonable cap rates is very difficult. Many, many apartments were purchased over market value between 2001-2006, and now owners are starting to feel the pain, but they can't afford to sell for what buyers are willing to pay.
Imagine the residential market today if you couldn't buy auction or REO properties...if you could only buy from private sellers (99% of whom can't sell for a reasonable price). That's today's apartment market (at least where I live).
2. Because selling apartment are much more difficult than selling SFH, and in 5 years when interest rates are much higher than they are today, this difficulty will be magnified.
I would use a combination of flips, buy/holds and hard money loans. I would put a portion of it in flips to maximize a short term profits.I would use hard money loans to also maximize profits and to decrease some of the risk (assuming it's less risky). With the rest I would buy and hold small multi-units and SFH to maximize future profits (piggy backing on what J.Scott said).
In my market 2M would generate $13,000 - $15,000 gross in rent from SFR's. I could easily live off that net even if it was as low as 50%. Those properties would remain paid in full for my lifetime. The remaining 3M would go towards flipping all types of property. Ideally all the profits from the flips would go towards buying a diversified set of property to be held through cycles. Multi family, SFR's, Vacation properties, Strip centers, Etc.
I'm with Jordan. I'd buy heavy into some REIT's. NLY / CYS / CMO all come into mind. Although I'd do MUCH more research on which ones do dump into prior to following through.
The 12 - 20% dividend returns would be nice, esp if you get a nice PPS increase over the time of the holding.
I'm holding NLY at 13.75 for the second year now, and I love the return it's giving me (although it's no where near 5M, and if it were I wouldn't be typing this).
Also I'd be more adept to lending it, since it's be easier to manage with a small group of people.
Without leverage, RE is a lot less attractive. I'll probably put it in stocks, although I may flip SFRs for a couple of years before doing that if unlevered ROIs remain at current levels.