How to maximize after-tax cash?

Question

Hi all, I own a few properties in CA, but I'd like to buy a home to actually live in myself in the next few years.  I'm currently renting in a pricier part of SoCal and would love to buy a home there, but houses start at $1.6M.  The down payment alone is daunting, but the ~$8000/month mortgage for 30 years is what really spooks me.  Making that work is a tough prospect, but I really want to see if I can get resourceful and make it happen.

The idea: buy a property that can yield a lot of cash and knock out a bunch of the monthly payments.  My hope is that I can find a place for around $1M that will yield 20% after tax, something like $3,300/month.  That will take the $8k/month down to $4,700/month.  I should be able to refi one of my other properties for a decent chunk of change before too long, so within a few years I can have the down payment.  And voila!  A down payment with a nice little money printer to help with the mortgage payments.

First, is this a good idea, or is this actually hare-brained?  Second, where is the highest yield on after-tax cash?  I'm willing to look anywhere in the US.  Lastly, if this a sound plan, is my 20% goal realistic?

I'm currently in south Chicago looking at properties, but haven't found anything that fits the bill.

Thanks for any advice you have!

Don Konipol · Answer

@James Baxter

20% ROI is not found in the current market unless the property has severe deferred maintenance issues or is in a war zone.

Properties can be turned into 20% earners if

1.  The right under utilized property

2. Purchased at the right price

3. Managed by a creative, smart, experienced investor

4. Leveraged with a low interest loan

James Baxter · Answer

@Joseph Konney Yes, we're looking at 12- to 25-unit buildings in general as it appears that's the best way to maximize cash.  We're looking at places that are around $1M and spoke to a few lenders who said we could do 20% down with a roughly 5% interest rate.

We did the primary residence route for our first property, but buying out of state means we wouldn't be able to do that.  I think we'll really have to look outside of SoCal to get a high enough cap rate to pull in the cash to make my plan work.  I'd be open to SFR's but I haven't seen any with cap rates where I need them to be.

Joseph Konney · Answer

@James Baxter - What are you looking to do as a down payment? Is the 20% gross income after tax? Are you looking at 5+ unit buildings as well? You might need to do up to 25% down for those depending on the lender and interest rates will be a bit higher than 1-4 units.

You have to play out the numbers. Renting your primary residence may be less expensive and you could give you a greater net worth by investing your extra savings into cash flowing rental properties. If you speculate your local market will continue to appreciate well, using the rental income to supplement may be an option. Personally, I like to invest primarily for cash flow and the SFR will help you out in that regard!