If I want to profit 100k/yr, how much would I need to invest?

9 Replies

I would want to buy decent-good apartment buildings, nothing that will be a complete headache to manage.  In my area you can find buildings like this at a 1.4% or 1.5 % return on the total investment fairly regularly.  If you are patient and shop around, you reach 1.6% or 1.7%, sometimes higher if you are lucky.  Overall it is a good market to own rentals, not amazing but you can get a decent return.

I am working out of the area where I would want to buy properties and live so I'm not starting in real estate yet.  I'm just saving up as much as possible and will be for the next few years.  

I would be buying at 20% down with a 30 year mortgage on each property I buy.

Obviously there will be a million other factors to consider and at best a rough estimate is all that could be made.  With that being said, how much cold hard cash would I have to invest to reach the goal?  

John,

If you want 100K/yr and you can achieve 10% cash-on-cash return you need to invest $1M - that's your down payment. If you can find a way to make, say, 20% cash-on-cash, then $500K is enough. 

That's all simple math and it does not take into consideration your market conditions and how you may be able to achieve that 10% or more cash-on-cash return. It also does not account for any appreciation. 

What are these 1.4%, 1.5% numbers? What do they represent? If this a cap rate in your area - fuggedaboutit - look elsewhere.

Nick

@Nick B.  

Good straight forward answer. That's probably what he was looking for. I think the 1.3%'s he's referring to are like the "2%" rule where you want your monthly rent to = 2% of the purchase price. Something that is normally more applicable in SFR or even multi but not normally commercial.

Medium head icon colorRyan Dossey, Call Porter | http://Callporter.com

I don't think you're gonna get a 30 year loan on anything more than 4 units.

There is an old rule of thumb. You can live comfortably on 10 SFR that are completely paid for. You can probably do better in apartments but that would at least give you a starting place. Say a middle of the road SFR costs $250,000 in you area. You would need to have them paid for so $2.5M invested. You can leverage and let them pay for themselves but then you need to wait for them to be paid off to realize the income.

Medium rre 1to1 small sizeBill S., Reliant Real Estate, Inc. | 720 207‑8190

@John Richardson  

Part of the problem may be that your area's cap rates may be skewed to the low end. That happens in a lot of areas with a limited supply and a lot of investors. Since I do not know your area, you'll have to decide if investing in other areas can be more prudent for your goals.

Medium tetra homes update 50Bill Pohl, Tetra Homes, Inc. | [email protected] | 513.988.3700 | http://www.tetrahomes.com

Find a value add project in a good to great area.

Build up the NOI through lease up and repairs and then either suck the cash back out tax free in a few years at the new 75% ltv with a refi or 1031 exchange into one or more properties tax deferred and do it again.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Make sure the loan you get DOES NOT have a pre-pay penalty attached on a turn around value add property. If it does it can hurt your resale potential. Being able to assume  the loan for the eventual new buyer is important as well.

If you increase the equity value a lot then likely the balance owed versus the asking price will be substantial such as 35,40,45% down. In that case you either have to hold a second to give the buyer the COC they want which kills most of the equity you gained and want to use elsewhere OR you want the loan to not have the pre-pay penalty so the buyer can place their own new debt with 20 to 25% down so COC is good. Sometimes a commercial lender will also let you substitute a loan. So if you didn't want to get hit with the pre-pay then they let you transfer the loan from that property to the new one you want to 1031 to with the lender approval of the new asset you are buying.

Hope it helps. 

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Many of these commercial loans are CMBS and are sliced up and sold for investments on Wall-Street. When the loans are securitized the buyers of the investment notes are promised XX percent for XX number of years. If that doesn't happen then the pre-pay penalty comes in or else they wouldn't buy the notes for investments. In the beginning when the loan is first originated the pre-pay is much larger and when the note gets closer to the end to maturity and the note investors have received most of their return the pre-pay starts getting smaller and smaller as the years wind down.

Medium allworldrealtyJoel Owens, All World Realty | [email protected] | 678‑779‑2798 | http://www.AWcommercial.com | Podcast Guest on Show #47

Originally posted by @Mike M.:

I don't think you're gonna get a 30 year loan on anything more than 4 units.

 Mike,

I see 30 year terms on loans above 5 million.  Rates are higher than ten year terms, but not totally out of line.

Mark

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