Best way to maximize rental income with $800,000+ in cash?

16 Replies

Hi all,

First time posting here, but I have been lurking for a while. A friend's parents asked me for help to invest approximately $850,000 into the LA (and surrounding) real estate market. As they are international investors, they won't be able to get any financing, so any deal(s) to be made will be all cash deals.

I've done tons of reading and listening on BP, but I feel like I am still way over my head. I would like to give them the best options possible to maximize their monthly income from this investment.

So dear BP community, what would you do if you had this cash to invest and financing is not an option? Would you look into a duplex/triplex that requires some TLC before renting them out? (But rent control is an issue). Would you buy multiple condo units in different up and coming districts/areas to rent them out? Invest into an REIT? Invest out of state into higher risk markets like Cleveland?

Any advice will be very much appreciated. Thank you in advance!

800k at 25% as down will give you 3.2M. Think bigger. Small apartment complex or a 5+ unit. Commercial financing is less stringent.

You need to get financing if you ever want to see any cash flow. The opportunity value of cash at a conservative 10% will kill any possibility of achieving cash flow with a all cash purchase. Leverage is necessary to gain positive cash flow.

However if all they want to do is park their cash for safe keeping they would make more money investing in a REIT unless appreciation is their primary goal. Assuming they have the money to carry the property then this is a entirely different option.

You must know what their investment goals are...cash flow, appreciation, both ?????

Your best option however would be to partner with them...50/50. They put up the cash you qualify for the financing and manage the investment. Win/win.

If they can't get any financing, you can get 2 decent homes 3-4 bedroom homes in the Temecula/Murrieta area.  Not quite LA, but you can get some nice cash flow with each renting for 2000-2500 month. 

Great area with low crime, great schools and driveable to san diego, orange county, riverside. 

Lots of out of state and out of country investors buying in this area now.  SUper low vacancy rates. 

I agree with what others said, you should partner with them. They are your silent partner, you do the deals. If I had a silent partner with 800k I would buy a turnkey (TK) apartment complex in the Midwest. I personally invest in Kansas City so that’s a market I know but I’m sure there are many others. I’m suggesting the Midwest because it sounds like they want to turn that capital into cash-flow. Hire a PM company or hire an on-site manager. You’ll get leverage and you’ll get a ton of cash flow. Since it’s turnkey the rehabs and updates will be good for a while. I am usually very anti SFH TKs but if you have a ton of capital then I think TK large apartment complexes are awesome. You really do need to leverage that money and watch out for people who are just trying to sell you financial services or homes!

I would advise them to at least look into apartment syndication. Being international, passive investments with little to no required active management or sweat equity should be extremely appealing. Not to mention target equity multiples north of 2.0x, CoC easily reaching 10% and IRR in the 18%+ range. Provided that they're accredited, with that much cash, they could spread their investments around multiple deals and even multiple Sponsors, minimizing risk to an extreme degree. Check out my blog on some of the top reasons, in my opinion, why apartment syndication is a great option:

https://www.biggerpockets.com/blogs/10191/66365-8-...

I'd be happy to connect and discuss! Best of luck to them, and to you in providing them with sound advice, you've come to the right place.

You can barely even buy a single-family home around LA for $800k, and even if you buy one, it won't cash flow. I agree with @Manolo D. about going commercial. I don't know the exact financing requirements for commercial loans, but internationals may be able to get those because it's based off the property and not the buyers. Commercial would be more steady cash flow. But I also agree with @Lee Ripma ... are they insistent on LA? There's more cash flow....basically anywhere else, even on commercial.

@Brian K. , yes, as others have mentioned, $850,000 cash doesn't go very far in the LA real estate market. But then again, maybe that's okay, and it depends on their risk profile and what their expectations are. I really can't answer the question without knowing what their personal situation is, and thus the risk they are looking to take. For example, is this there nest egg that they are counting on for retirement in which case they can't risk any of it? Or is it play money and okay to speculate? Or somewhere in between? 

Ian Ippolito

@Michael Bishop Do you see those returns in a market like LA? My firm manages commercial syndication in the Kansas City area and our returns are exactly what you describe. However, the deals I have seen in markets like LA, seem to have a much lower expectation for both CoC and IRR. At the same time I AM NOT going to say I know the whole market! I would be very intrigued to see a deal with those numbers coming from LA. (With the right amount of risk!)

@Jared Kenealy I guess I should have specified that my experience, and these numbers, are in the DFW market. I've seen plenty of deals throughout the country with these same returns and better, but, like you said, I haven't looked at the LA market enough to speak to specific numbers.

That being said, my recommendation to @Brian K. was not specifically aimed at the LA market. In fact, I think that international investors are better served looking elsewhere.

Wow, thank you very much for all of your thoughtful replies! This community is great.

To answer some of your questions, I should have mentioned that their primary goal is appreciation, so they mentioned they wanted to buy and hold and hopefully be able to maximize their cash flow at the same time. They are aware that the LA market is pretty tough right now as many of you mentioned, so they are open to the idea of investing outside of LA, or even out of state.

The main reason they chose LA (and surroundings) is because they are looking to move to Southern California in the near future, so managing tenants would be easier for them if the properties are within driving distance. Thank you for the Temecula / Murrieta mention @Christine Kankowski , I will be looking into that area a bit more. Another BP member told me to take a look at Kent County, but I am not sure how good the market there is at the moment with high vacancy rates. It looks like you can purchase a few multi family units for a fraction of the price that you'd pay in LA/SD though.

I will also look into the Midwest market @Lee Ripma , but I have to admit I know nothing about that area.

Commercial is not something they'd like to pursue at this time. Lastly, I agree that using leverage is really the best way to maximize this, but I don't feel comfortable proposing to them a partnership when I am still very new at this game. For now, I'd just like to present them with the best options outside of using loans to invest their hard-earned money!

Personally I would pay cash for duplexes in OH or NY

Profit could be Over 250k/year

Appreciation would be approx 0 per year 

BUT then again if you bought all in one area you could actually fix them all up and force appreciation 

@Brian K.

Invest in an area that gives them aggressive rates of returns. That's what I did when I started out.  I live in NY and I didn't even bother investing locally, I went out of state and years later I am still out of state investing.  You want to impress these investors so they could come back in the future with more money so you can do more deals.  

Think bigger like @Manolo D. said.  Why don't you finance it using their funds as the down payment or if you can't qualify for a mortgage, partner with someone who can?  I would hands down do that over buying something in cash.  

@Steve Kontos Three hands in the cookie jar will usually end up in a lawsuit.

@Brian K. Just b/c they are foreign nationals doesn't mean they can't get financing. There are lenders willing to lend. LTV may be greatly reduced (usually 50-60%) but it can be done.

I agree with @Manolo D. You don't have 800K, you have 3.2 M. It's a mindset. It's intimidating but it can be done. Buy at that price in the right area of LA and your appreciation will be exponentially higher than a 500-8000K house. 

But I understand that its different strokes for different folks. My 2nd option would be to go with something like @Matt R. suggested. 

I'd stick in LA if you want appreciation. I'd consider Inglewood and I'd look at South LA near future expo stops. The area below Leimert Park down to Slauson is hot. It even has its own BP meetup now. Lots of flips going on. 

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