Hi everyone, I am purchasing some properties and am trying to decide if I should leverage several 3 to 6 properties or what? Just had an offer accepted on a 4 plex in San Antonio area, new construction for 570K as of now putting down 300K and financing the rest probably going with a 15 yr. fixed but considering other options. Each unit will rent for 1350 each then I have the usual cost PM etc. Don't need the cash flow now because I am still running my construction business for another 8 to 10 years God willing! I am also looking in the middle Tennessee greater Nashville area. I have 430k cash to work with excellent credit, what would you do in my position? I will be needing the income from these properties once I retire, I also own a home in N. Scottsdale area that is leased out and paid for that property is worth about 500k and rents for 2,250 per month.
I reside in northern CA. Napa area but with the taxes and high property cost I have decided to look out of state for investment purposes and better ROI long term. I am also considering another SFR in Texas as well, even though I have had a rental/investment property since 2004 I consider myself a rookie when it comes to investment properties. Any input would be greatly appreciated and criticism is welcome , just trying to navigate through this 1031 situation and come out ok in the end. I can also adjust the down payment on the 4 plex it is early in the process. Thank you all very much!
@Jeff Crowson, It sounds like you're in a situation that many of us would love to be in. Good job.
Firstly, there are some strict time lines you must meet with a 1031 exchange. You must identify your next property within 45 days of the sale of your relinquished property, and you must purchase your next property within 180 days of the sale of the relinquished property. Also, you cannot personally receive the funds when you sell the old property. You must have the funds sent to a 1031 intermediary until you buy the new property(ies). I'm not sure when you sold your property or how you handled the proceeds, but those are pretty firm requirements. I'm no expert, but I'm familiar with the process. I have a contact of a 1031 intermediary that everyone in my Nashville real estate investors network swears by. I can pass her info along if you wish.
Secondly, as far as rentals go, I would also recommend following the 1% rule as well. Sorry if you already know this but since you consider yourself a rookie, the 1% rule is where your monthly gross rent is at least 1% of the purchase price. For example, a home that cost $100,000 should rent for $1,000 per month. If you follow this rule, you're less likely to run into financial trouble during down times, and it generally leads to better cash flow returns.
Also, typically you get a better cash on cash return when you use leverage to acquire properties instead of paying all cash or large down payments. I'll do an example using your San Antonio 4plex excluding all expenses (taxes, insurance, repairs, etc). A $270k ($570k-$300k) loan at 4% for 15 years has a payment of $1,997/month. That would leave $3,403 ($1,350*4-1,997) cash flow per month or $40,836 per year. Since you put $300k down, that's a return of 13.6% (40,836/300,000). If you do a 25% down loan for 30 years at 5%, that's a monthly payment of $2,295. You only cash flow $3,105 per month or $37,260 per year. However, since you only put down 25% or $142,500, you return is now 26% (37,260/142,500). This is a dramatic oversimplification since I haven't included expenses, but the principle is that if you get a long term loan with a minimum down payment, you can get a much better return on your investment, assuming you follow the 1% rule. Then you just acquire more properties with better turns as opposed to 1 or 2 properties with all cash or big down payments. There's a really good rental property analyzing tool on this site I would recommend utilizing. Just go to Tools and click on Rental Property Calculator.
Lastly, I'm in the Nashville area. It's a great market. It's hard to find the 1% rule in the city. Surrounding areas are also in high demand, and the 1% rule is obtainable there. It's a great market to be in. I would recommend multifamily over single family just for the ability to scale. I would recommend looking into apartments over $1.5 million. You are able to get Fannie Mae or Freddie Mac loans which are very favorable and allow for better returns than apartments under $1 million. I'd be happy to talk further, but I'll stop taking up a whole page here. Good luck!
I should have mentioned the 1031 has 730k in it and I have considered 300k down on the 4 plex leaving at this point 430k to work with. I also have 40k in the investment "kitty" to add to the property needs. Trying to stay with new properties but not a must just seems to make sense having a warranty and starting with nice stuff.
Have you considered SFR's as a strategy. New home in San Antonio costs $120,000; 3 bedroom, 2 bath, 1000 square feet. Section 8 guarantees rent of $1,189 per month. You can do the math and figure out what cash flow you need. For example, you can invest 20% down, finance the rest & begin with a nice cash flow on multiple properties.
Jeff, congratulations on working hard to put yourself in this awesome position! You may feel like a newbie, but your questions and concerns show that you are a thoughtful investor looking at opportunities from all angles.
I live in Scottsdale, but just met with a bunch of real estate investors in Honolulu and one of them was really strong on middle Tennessee. Since you already own a house in Scottsdale, it might also make sense for you to consider another purchase in Metro Phoenix, especially considering company expansions and job growth are so strong here. Good rentals are in short supply. This could potentially give you some PM advantages.
As far as your important 1031 exchange questions, I have a resource for you that I will DM you.
Congrats again on getting yourself into such a strong investing position!
Good to hear someone is hustling. I just completed a 1031 into the Pheonix metroplex and am happy that I did. Not only is the Phoenix Metro area hot it is great for multi family units. Rents continue to increase and there is only light ahead of us here. Plenty of new companies and building going on here=Strong economy. I would suggest steering clear of SFR myself but that is a personal opinion I have had many for 20-25 years. Best of luck Don
with out suggesting alternative markets .. IE pick me pick me which you get on BP..
less than the 1% rule in Texas with their property tax's might not return all that well.
I would for sure check those out.. many investors get caught after they close because the tax's today are just on bare land the next thing you know you end up with a 12 to 15k tax bill on that unit.. just say in.
All good advise and much appreciated, one of my main questions is I am 58 and will work 8 to 10 more years, so do I put less money down and acquire more properties and take less profit or basically no profit after cost? or more money down fewer properties and start income flow? I don't need the income now but certainly will in 10 years.
@Jeff Crowson, It sounds like you're in a situation that many of us would love to be in. Good job.
Firstly, there are some strict time lines you must meet with a 1031 exchange. You must identify your next property within 45 days of the sale of your relinquished property, and you must purchase your next property within 180 days of the sale of the relinquished property. Also, you cannot personally receive the funds when you sell the old property. You must have the funds sent to a 1031 intermediary until you buy the new property(ies). I'm not sure when you sold your property or how you handled the proceeds, but those are pretty firm requirements. I'm no expert, but I'm familiar with the process. I have a contact of a 1031 intermediary that everyone in my Nashville real estate investors network swears by. I can pass her info along if you wish.
Secondly, as far as rentals go, I would also recommend following the 1% rule as well. Sorry if you already know this but since you consider yourself a rookie, the 1% rule is where your monthly gross rent is at least 1% of the purchase price. For example, a home that cost $100,000 should rent for $1,000 per month. If you follow this rule, you're less likely to run into financial trouble during down times, and it generally leads to better cash flow returns.
Also, typically you get a better cash on cash return when you use leverage to acquire properties instead of paying all cash or large down payments. I'll do an example using your San Antonio 4plex excluding all expenses (taxes, insurance, repairs, etc). A $270k ($570k-$300k) loan at 4% for 15 years has a payment of $1,997/month. That would leave $3,403 ($1,350*4-1,997) cash flow per month or $40,836 per year. Since you put $300k down, that's a return of 13.6% (40,836/300,000). If you do a 25% down loan for 30 years at 5%, that's a monthly payment of $2,295. You only cash flow $3,105 per month or $37,260 per year. However, since you only put down 25% or $142,500, you return is now 26% (37,260/142,500). This is a dramatic oversimplification since I haven't included expenses, but the principle is that if you get a long term loan with a minimum down payment, you can get a much better return on your investment, assuming you follow the 1% rule. Then you just acquire more properties with better turns as opposed to 1 or 2 properties with all cash or big down payments. There's a really good rental property analyzing tool on this site I would recommend utilizing. Just go to Tools and click on Rental Property Calculator.
Lastly, I'm in the Nashville area. It's a great market. It's hard to find the 1% rule in the city. Surrounding areas are also in high demand, and the 1% rule is obtainable there. It's a great market to be in. I would recommend multifamily over single family just for the ability to scale. I would recommend looking into apartments over $1.5 million. You are able to get Fannie Mae or Freddie Mac loans which are very favorable and allow for better returns than apartments under $1 million. I'd be happy to talk further, but I'll stop taking up a whole page here. Good luck!
These are houses I build on demand. I choose areas where I can get lots at reasonable prices and build a 3-2. My emphasis is affordable housing since there is such a need in San Antonio.
All good points! heading to Nashville this Thursday for 5 days to check out the area, have a list of places to look at which include Antioch, Lavergne, Clarksville and a little higher end stuff in Mt. Juliet for a possible hold and flip. How do you feel about town homes and condo's? So far the 1% rule has been very hard to find maybe because I am looking for new or almost new thinking little or no repairs or under warranty so pay a little more up front and not incur repair costs or headaches.
I was thinking because of my age that I wanted to pay these off at some point, 15 years or so to get more income when I retire however the flip side and feeling I'm getting from investors is more properties less down more cash flow now and not worry about paying things off. I have always believed in paying everything off but in investment real estate I might not need to.
Jeff: You may want to consider using your 1031 funds in conjunction with a multifamily syndication. Many people who have 1031 funds still don't know that they can use this as leverage to get into owning a large apartment building as an undivided interest owner along with another entity that is purchasing that apartment building. I'm speaking at the Think Multifamily Fire Summit this coming September 7-8 in Dallas on this topic. If you find a good Multifamily deal Sponsor who understands how to incorporate the 1031 party, you can see exponential growth out of those funds! Hope this helps you!
