Thoughts on what to do with ~$150k

15 Replies

Hello - just wanted to hear some opinions on what everyone would do right now with ~$150k. I've been looking for some buy and holds in the last year or so, but am having trouble finding something worthwhile. Two options I'm looking at are:

1) Payoff mortgage on 2 current rentals. One is currently a 30 year fixed at 4.25% and the other is a 15 year at 2.75%. Going this way would allow me to transfer the properties under a LLC (lowering risk, but minimal return - especially with the low interest rates).

2) Continue looking for multi-family properties while I leave the money in the market, investing in REITs and other Mutual Funds. 

I've been stuck in option 2 for the past few years, but am somewhat getting impatient/frustrated with not being able to find a good multi-family to invest in (would like something with a >9% CAP in a B class neighborhood).

Other notes: day job currently takes up a good amount of my time (so multiple smaller properties or any major rehabs are not preferred). Ultimate goal is to cash flow ~$15k to $20k a month in the next 10 to 15 years with rentals. Given that - what would you all do?

I would probably buy a couple more single family rentals and then a small multifamily rental.

Unless your market is much cooler than the rest of the country finding a 9 cap in a B area is going to be difficult. You’re about 5 years too late.

Good luck

Thanks Caleb. I agree - maybe I need to adjust my expectations instead of comparing properties to my current rentals. I'm looking out of state but it's still been tough. 

@Eddie C. - Sounds like given your capital availability and lack of time that being a money partner to someone would be a better opportunity for you. Have you ever considered doing a joint venture, participating in a syndication, or private lending?

James - I have given it a little thought but it would have to be the right person/deal. It also seems a little bit harder to find. I probably need to go to some real estate networking events in this area to build some contacts, but would consider it if the right opportunity came up.

I'd take option 2, but modify it a little:

- Your mortgages are cheap, cheap money. You should be able to find opportunities to return more than 4.25% with your $150k. It just might take some patience.

- I'd go with Index Funds rather than Mutual Funds, for all the reasons covered by Benjamin Graham in The Intelligent Investor.

- Get out to Real Estate Networking events as much as you can. 

I run a Multifamily Meetup down here in Richmond, VA. We have members doing deals who are always looking to build their partner/investor list. My meetup is posted on the BiggerPockets event section if you're interested. You're welcome to contact me for more details.

- To be honest, do not bank on >9% cap multifamily deals in B class neighborhoods right now. The market isn't there and if someone comes to you advertising that you should be very skeptical. Particularly in Fairfax/NOVA/DC.

- I'd also keep plenty of cash. If the market takes a turn you'll want to have some dry powder.

Originally posted by @Caleb Heimsoth :

I would probably buy a couple more single family rentals and then a small multifamily rental.

Unless your market is much cooler than the rest of the country finding a 9 cap in a B area is going to be difficult. You’re about 5 years too late.

Good luck

Our market is white hot. Also our market has next to no small MF. There are no deals in Fairfax, VA market that make sense. If I were OP with $150K I would venture out of state into larger MF. Get about $600K - $700K commercial loan, and have about 8-10 doors. You can even do better than that.

Paying off the mortgage is never a smart idea if your goal is additional income and growth.  As long as the mortgage makes sense and you are cash flow positive, no need to pay off anything down to zero. If the mortgage doesn't make sense, I still wouldn't pay it off if I can sell the property for a profit. That way I am more liquid than I was.

Of course individual circumstances differ, and one must consult a Financial Planner/CPA for more tailor made answer. 

@Taylor L. I should have clarified, most of my liquidity is in index funds, with some scattered around specific stocks. I'm a fan of the index fund approach for long term growth. As far as my criteria, I've already come to the conclusion that I won't find any great deals in the NOVA area. I know others who have done well, but their return was heavily dependent on appreciation, which is difficult to forecast. I'm looking out of state right now for the right deal (midwest, down south), but even then, it has been difficult. Thanks for the info on the meetup - I'll check it out and see if it is something I can make it to. 

@Chinmay J. Agree with the mortgage payoff. Leaning against this option, but the only reason I considered it is to reduce risk by moving the properties in a LLC. I can still retain some liquidity if a great deal came up by pulling out a HELOC - though that will be at a higher rate than what I'm paying now.

Originally posted by @Eddie C. :

@Taylor L. I should have clarified, most of my liquidity is in index funds, with some scattered around specific stocks. I'm a fan of the index fund approach for long term growth. As far as my criteria, I've already come to the conclusion that I won't find any great deals in the NOVA area. I know others who have done well, but their return was heavily dependent on appreciation, which is difficult to forecast. I'm looking out of state right now for the right deal (midwest, down south), but even then, it has been difficult. Thanks for the info on the meetup - I'll check it out and see if it is something I can make it to. 

@Chinmay J. Agree with the mortgage payoff. Leaning against this option, but the only reason I considered it is to reduce risk by moving the properties in a LLC. I can still retain some liquidity if a great deal came up by pulling out a HELOC - though that will be at a higher rate than what I'm paying now.

LLCs are overhyped. If you got the mortgage in your personal name, you can get really good insurance coverage. That will protect you more in case of lawsuit than an LLC will. No reason to take drastic step of paying off the mortgage, so you can move the property in an LLC.

You can still move the title to an LLC if you want (even when you have mortgage on the property), and yes it will invoke due on sale clause, but I don't know of anyone whose note was ever called because of that. In theory the bank can call the note, but in practice its not likely they will.

These issues have been discussed ad nauseum on the boards. You might want to search for older posts. 

How much do you owe on your current mortgages? Owning property's free and clear is nice but if you have to sink your 150K to pay off those homes then you won't have any available money to purchase another property. Maybe you can pay one off and purchase another property too? Not sure what price point you are looking in to purchase but 150k is enough for more than one down payment on cash flowing property's in many areas.

@Eddie C. I cant add much here because I largely agree with the other posters but I would say emphatically you need to get in to multi-families.  With interest rates still being rather low you should be able to get a 500-600 dollar multifamily with the 150K down.  It is fairly easy to get cap rates in the 7.5/8 range in many markets and you need to be willing to accept those lower rates as long as you still cashflow.  

Best bet is probably a syndicated deal from some other investor or an area where you have some familiarity.  The main point is do it sooner rather than later because I dont see rents going down in next few years and interest rates will go up which means while you might be able to buy a 9 cap in a few years if the market corrects downward the cost of acquisition will be higher and that will off set the cap rate gains. 

Jeffrey Holst, Real Estate Agent in Tennessee (#343371)
Originally posted by @Eddie C. :

Hello - just wanted to hear some opinions on what everyone would do right now with ~$150k. I've been looking for some buy and holds in the last year or so, but am having trouble finding something worthwhile. Two options I'm looking at are:

1) Payoff mortgage on 2 current rentals. One is currently a 30 year fixed at 4.25% and the other is a 15 year at 2.75%. Going this way would allow me to transfer the properties under a LLC (lowering risk, but minimal return - especially with the low interest rates).

2) Continue looking for multi-family properties while I leave the money in the market, investing in REITs and other Mutual Funds. 

I've been stuck in option 2 for the past few years, but am somewhat getting impatient/frustrated with not being able to find a good multi-family to invest in (would like something with a >9% CAP in a B class neighborhood).

Other notes: day job currently takes up a good amount of my time (so multiple smaller properties or any major rehabs are not preferred). Ultimate goal is to cash flow ~$15k to $20k a month in the next 10 to 15 years with rentals. Given that - what would you all do?

It sounds like you have the opportunity to build on your residential rentals and build out a nicely diversified portfolio. In terms of paying off the mortgages, I would recommend not doing this. Keeping the debt helps you take advantage of the leverage to enhance your return on equity invested in the homes. With that said, it sounds like you may have an opportunity cost of lower pass-through LLC income tax rates compared to your non-pass through income tax rates. It may be beneficial to conduct a break-even analysis of holding your current mortgages in tact versus refinancing the mortgages at today's market interest rates and transferring the ownership of your properties into an LLC to achieve potentially lower tax bills.

A diversified real estate portfolio would contain residential, public commercial, and private commercial real estate. Since you already have residential and REITs, I would look into passive, private commercial real estate investments. I think passive would be best for you because actively owning commercial real estate can be time consuming and it sounds like you don't have a lot of time to give. Another benefit of passive investing is that you can achieve passive cash flow with these investments, just like actively managing them. There are plenty of managers out there that would be great to partner with and would do all the work for you.

I would partner with a fund manager that:

  • You can trust;
  • That provides transparency;
  • That also has equity in the same investment(s);
  • That has a proven track record of performance;
  • Can efficiently diversify your private commercial real estate allocation into different properties/regional markets to ultimately minimize your risk.

The benefit of fund investing over taking part in deal-by-deal syndications is the ability to diversify across different properties and markets all within the same investment.

-Vince

@Vince DeCrow great point about the LLC pass through income vs. non-pass through. I didn't think about that but will add that to my analysis.

Has anyone considered the crowdfunding sites (ie. Realtymogul, Crowdstreet, etc)? Seems to be fairly straightforward and allows for both debt and equity stakes, with wide strategies (private/public commercial, fix and flips, residential, etc). Most require accredited investors, but many do not.

Originally posted by @Eddie C. :

@Vince DeCrow great point about the LLC pass through income vs. non-pass through. I didn't think about that but will add that to my analysis.

Has anyone considered the crowdfunding sites (ie. Realtymogul, Crowdstreet, etc)? Seems to be fairly straightforward and allows for both debt and equity stakes, with wide strategies (private/public commercial, fix and flips, residential, etc). Most require accredited investors, but many do not.

Thanks, just one factor to consider - although it's possible that even if your pass-through tax rate is lower than your personal tax rate it might be cancelled out by likely higher interest rates on new mortgages today then the mortgage rates you currently have.

In terms of crowdfunding sites, InvestorMint conducts third-party reviews on these and other similar sites that might be helpful for you.

https://investormint.com/?s=real+estate&submit=

Eddie,

You could come out to the Woodbridge Meetup. The last Wednesday of every month at 6pm. You can find it in the meet up section of BP. There are a few of us that are doing deals in the area and I am sure that if you felt comfortable they would want to partner on a flip or offer a strait interest investment. This way you could learn the ropes and get your money to work.  Let me know if I can be of any help. 

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