Do you have 50k that you want to invest in real estate?

Question

Hello everyone.

I am sure people have done this in the past but I wanted to make sure.

My idea: Find 4 investors who want to invest 50k into a 3 unit multi family in the boston area valued between 100 - 200k. With that 200k I would use it towards the down payment and rehab.

I would live rent free in one unit and become the care taker for the property/investment. I would make sure the units always stay rented and the investors are receiving their monthly checks from the rental income.

Does this make any sense? Would someone consider this a risky investment? What type of return would an investor want to see on his money in 'x' amount of years?

I am dying to move out of my mom's house but refuse to rent! And I cannot afford to buy anything right now. :D

I hope this is post does not offend anyone's intelligence.

Alex K. · Answer

I live very cheaply Rich.  I bought my house for $47k cash that I saved.  With taxes, ins, utilities I pay about $400/mo to live there.  My girlfriend lives with me and she pays me $300/mo rent.  So my monthly expenses are very low and I save 80% of my income to buy properties, which will support both me and my girlfriend in the future.

It can be done, but it all starts with the discipline to save and not spend your money on useless crap.

Jon Holdman · Answer

First, a $400K property that generates $3500 in gross income is a crummy deal.  That's going to lose money.

Assuming you have a good enough deal to be interesting, you would have two roles in this deal.  One is as the syndicator which is the person who puts together a deal.  The second is as the PM.

A syndicator does often get paid some management fee for running the deal.  A property manager gets paid a PM fee, which is on the order of 5-10% of the collected rents (lower percentage for more units).  And perhaps a fee for filling vacancies.

As the PM, it might be reasonable that you would live in one unit in lieu of getting paid.  But that would have to be one unit out of about 10, not one out of two or even four.

If you don't bring cash to the table, IMHO, you do not get any equity in the project.  The investors own 100% of the project and get 100% of the returns, split up according to their ownership.  As the syndicator, you might be able to get paid some management fee for running the deal.  This is going to be fairly small, though I have one investment where this fee plus the PM fees are the only money anyone is making.  All of us investors are getting nothing because the project is unprofitable.

Sorry, here I have a real issue.  It costs SOMETHING to have your own place.  Whether you pay rent on an living place or pay rent on the money to "buy" a place to live, you're paying rent.  There are many locations in the US where it is cheaper to rent than to buy.  I don't know about your location.  But its as simple as comparing prices to rent.  If the monthly rent is under about 1% of the purchase price, its cheaper to rent.  If monthly rents are more than about 1.5% of the purchase price, its cheaper to buy.  The exact numbers depend on the rent, higher rent and that second percentage can be lower. In between and its a toss up.

What you're doing is proposing a complex scheme that lets you "not pay rent" by taking your PM and syndicator pay in the form of a living space.  Get past the "refuse to rent" hurdle.  Because in what you're proposing you are very much renting.  Separate earning the money (by being a PM, a syndicator, or some other means) from spending it on living quarters and you will have many more options on both counts.  By building yourself this mental "refuse to rent" hurdle, you're hiding the rent inside this complex, and probably unworkable, arrangement.

Richard Gleason · Answer

Afternoon Rich,

As an investor, I would have to agree with Alex that  no investor would find this deal appealing, and if by chance they did why would they allow you to do it an not a family member who the trust.

As an investor this is what I hear,

Hey I want to use your money to by a nice place in a nice neighborhood, fix it up really nice, live rent free, because I have to get out of my Moms house but I don't want to pay rent.  I will make sure you receive your rent payments (which tenants usually mail or deposit directly into account for landlord,) not really a benefit, and make sure units are rented*.

The only benefit I see is getting the unit rented, however here are the issues.

1. You finding a unit (I have SEASONED Realtors/birdogs and wholesalers for this)

2. You fixing up property (I can probably get a team cheaper and than you seeing as how this is the business im in)

3. You want to live for free in a unit that I can rent. I can pay a management company 150-300 per month (depending on area and units i have with them) manage the property for me.

Again this response is not in any means to discourage you, I just wanted to give my thoughts(as an investor) and share with you what I heard when I read your post.

Account Closed · Answer

I'm in the same boat as Alex and George.  I built my house and paid cash for it.  Now I live on about $900/mo including property taxes, home/truck insurance, maintenance (setting aside $100/mo for long term maintenance), food, utilities, etc.  The rest of my income gets set aside for investments.

I wouldn't suggest building a house unless you are actually a builder or in the trades yourself.  Instead, I would be looking at finding a duplex, buying it with an FHA loan (3.5% down payment), and living in one side while renting the other.  Seems that would be one of the best ways to get into the rental game and start building some equity.

Bryan Hancock · Answer

Perhaps you can look at REDUCING your rent as compensation for putting the deal together and managing the building.  The investors could then possibly put up the bulk of the money and you could add value by:

1.  Locating a good deal (not this one)
2.  Managing said deal...a turnaround project where you can add a lot of value comes to mind
3.  Doing all of the legwork to close the deal and keep it running

Keep in mind that the investors will want you to commit to staying there long term if you make an arrangement like this.  If your presence is what is adding the value then this arrangement will work because you lose the value to you if you move.  The agreement would stipulate that the unit will be marketed for market rents if you decide to move on.

I could see something like that working.  The devil is in the details though.  How much would the rent be?  How long?  Etc.

J Scott · Answer

Here's the quick way to look at it:

You get one (of the three) units to live in for free in exchange for you doing all of the property management.

In this scenario, the owners/investors are spending 33% of their gross rent (1 unit out of 3) for a property manager.

A good property management company will generally ask for between 8-12% of the gross rent...you're asking for 33%...

George P. · Answer

alex, i am like you. but this country was not built on savers, my friend....people want things. and they want them NOW, darn it. it's our constitutional right to need them asap.

lol

Scott J. · Answer

First of all, best of luck to you Rich and it's good you are excited to get into the real estate game.

The biggest issue is the free rent. If rent is $900, we're paying you $10,800 a year to take care of the property and collect checks. That's not a good investment. Even if you wanted to be a partner and put $100k down, I wouldn't let you take a unit rent free.

Investors want partners with skin in the game. You have no incentive to keep the property up, raise rents, or do anything else for the good of the property. If things get financially ugly, you are not affected.

Save up as much money as you can and consider starting smaller. Perhaps you could manage the property and take 10% of the gross rents (common property mgmt. fee) off of your rent to make it fair for all parties.

Rich Hupper · Answer

Again, Thank you all for responding. This is great information. I will look into the syndication.

Have a great day!

Bryan Hancock · Answer

Thanks for the plug Jon.  There is also a new syndication forum on BP as part of the new CRE section.  You can post money raise type questions there too.

Do you have 50k that you want to invest in real estate?

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