Is it worth it to invest in another property....?

Question

Hi Friends - I am pondering a new investment. A small (6 unit) MF deal ( in a market I am very familiar with) that will need financing and will ultimately cash flow a small, but decent, amount. I am not like most investors. I like to have little leverage as I like to play it safe - However I want to expand my investment portfolio and this deal is exactly the type of investment I like..... Anyway.....This deal has me wondering: how do I decide if it is "worth it" ? while i understand the answer will be different for each investor, I am wondering what questions I should be asking myself so I can come to a rational conclusion. Asked differently I guess I could ask "once I make a decent amount of money, why should I invest and make more?? "

Is there a calculation I can do to tell me if the cash flow makes it "worth it"? ultimately if I go thru with this purchase I will be at about 28% LTV on all my assets...

I am not sure if this question even makes sense? thank you in advance for helping me think this thru!

Ed Matson · Answer

Hi @Mary Mitchell, Your question makes all the sense in the world to me.  I find myself in quite a similar situation.  I retired early nearly four years ago and needed to increase passive income to fill the income gap created by my paycheck's ending. My goal was simple, increase income to the point where my personal budget was at equilibrium and I did not need to withdraw from retirement savings until age 65. Through a combination of active and passive RE investments, and fortunate increases in income from existing RE investments, this goal was achieved. So now I only invest in "superior" opportunities.  These allow me to replace "OK" investments with "superior" investments, and still meet my goals, while also diversifying away from stocks.  I guess it really boils down to what are your goals, and are they being met?  In my case, I don't need or want to get bigger for the sake of bigness at this stage of my life. So, I have become more selective.

Jeff Kehl · Answer

@Mary Mitchell I wish more investors would be as cautious as you seem to be. I'd suggest two calculations for you to investigate more. One is a 'stress test' or 'scenario analysis'. Basically you assume several exceedingly bad and increasingly unlikely scenarios and see what your finances would look like.

For instance, look at what your numbers would be if 2,3 or 4 units went vacant and you had large capex expenses like a new roof. If you're still ok under the worst case scenario then you should be fine.

The second thing I would suggest is looking at risk-adjusted returns for comparative investments.

For example, if you don't buy this 6-plex you need to do something with this money. If you hold it in a bank account there is 0 risk but also very little return. Or you could put it in T-bills for 3% for very little but some risk. Or you could put it in corporate bonds for say 5% with higher risk. Or you could put it in stocks for a 8% return with a higher risk. Or you could buy the 6-plex with a higher risk. Or you could buy powerball tickets with the very highest of risk.

Part of the problem with this analysis is you yourself have to determine what the risk level for each of the investments but many people (especially on BP) would tell you that purchasing a place where people can live has much lower risk than some of the other options.

Ed Matson · Answer

Also, I now use less leverage as I don't need to maximize Cash on Cash return %, but rather prefer reduced risk.  Again, a personal decision, and a different one than I would have made twenty years ago.

Mary M. · Answer

Thank you for the feedback. I am slowly working my way thru the process :)

I think remembering to set my goals, then check this againt those, and also be sure to see if there are better returns i could get elsewhere are my main criteria right now.

I am just a small investor that got lucky and was able to sell something in SF a few years back ;).  I manage my properties myself. I am not really set up to do value add type investing- instead i look at either new or recently renovated properties which makes it easy gor me to manage. I also, given the above, look at smaller properties ie 5-15 doors.

Are there consultants thst could help me analyze properies?

Thank you again and thank you Bigger Pockets for all the wonderful information.

Is it worth it to invest in another property....?

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