Spend my cash on Investment Properties or owner occupied home?

General Real Estate Investing
1

Hi-
We recently moved to the San Francisco bay area with my husband and kids where the average home price is about 2 million. We don’t have a lot of cash yet but my husband has a good job while I currently stay home with the kids. We do own one rental property in MI (one of those “became underwater in 2007, couldn’t sell, so have been renting it for 8 years situations”.) The Michigan situation has been going well though and I like the idea of having some properties for long term passive income. I have realestate and property management contacts in Arizona and Montana where there are much cheaper home purchase options in good rental areas near universities. I need some advice between my current options:

  1. spend 150K (down/closing) to buy a “cheap” home that we would live in for a while here (it won’t be very nice, probably will need some gradual update work but at least I won’t be paying thousands in rent every month and it’s not like property values are going down any time soon around here!)

  2. Spend 150K to buy 3 or 4 long term investment properties in Arizona and/or Montana and stay in our Bay Area apartment for the next few years until we see where we are financially.

Any opinions or advice would be great!

2

Having been an out-of-state investor with single family houses, with enormously strong management skills, I can tell you that it’s a huge risk of loss, if not an abject mistake to do what you’re proposing.

Single family investing already carries with it, the highest risk of loss, all things being equal, than does say, investing in ‘units.’

It’s about amortizing risk. And with a house you amortize the risk across exactly ONE roof.

If you’ve got $150K to invest, and that’s not all you have, you should consider investing in units instead of singe family houses.

Management is necessarily more professional and easier to attract and keep. You’re ability to raise rents across a large number of units at once, can dramatically increase your cash flow and equity profits.

Of course, you haven’t told us what you are investing for; cash flow, appreciation, forced appreciation, parking your money, or what.

If this were me, I would be looking for both cash-flow, forced appreciation, and leverage. That is, I put my $150K into, at least, a value-added, C-class, apartment building, where the rents were under-market, and the seller is willing to carry back whatever was necessary for me to get financing.

With $150K to invest, this would mean I would look to leverage myself into something that costs less than $52K a door. This would be at least a 30-unit project, valued at around $1.5M.

Look at it this way, regarding leverage, and compounding-wise…

**2% appreciation on a $1,500,000 building is $30,000.
After five years, you’ve theoretically made $150,000, or doubled your investment (excluding cash flow and tax benefits). The costs of any hiccups have been spread across all your units.

**2% appreciation on one $150,000 house is $3,000.
After five years, you’ve theoretically made $15,000, or 10% on your money (excluding cash flow and tax benefits).

That is, if you’ve had no hiccups, skips, deadbeats, roof leaks, stolen air-conditioners, or vandalism, of which costs you spread across exactly one house.

One thing to remember, the numbers used to analyze an apartment complex vs a single family house are the same.

You have to assume 50% total overhead on both types of investments. The advantages of apartments over houses is that you have all the units in one place, but you also only have one roof, one yard, one plumbing system (a big one for sure), etc.

With single family units, each has its own roof, plumbing, yard, etc. to maintain, and they’re not necessarily close to each other. Not to mention, houses normally have more square feet to maintain per unit, than apartments.

I could say a lot more, except that what I’ve suggested does take additional sophistication in analyzing a particular deal. I analyzed more than 100 operating data sheets before I bought my first apartment building. Analyzing that many deals, gave me enormous confidence in my negotiations, and enabled me to hit a grand slam on my first time at bat with apartments.

Just challenging your vision a little, since you’ve got some money, and some management experience going for you.

3

Investing in ‘debt instruments’ might be another good alternative. Although I’ve flipped hundreds of homes, I still spend most of my investment time creating high yield secured debt instruments.

If you invest $5k cash on a mobile home and then resell it for $9900 with private owner financing and terms of $600 down and $220.22/month for 60 months at 12%, what do you end up with? 56% yield on the $4400 you leave in the deal, security of your investment with the title registered through motor vehicle, no management or broken toilets to deal with, limited liability with your cash invested, and opportunities for higher yields in the event of a default.

This can be done with many things other than mobile homes…I’ve done cars, trucks, business equipment, roofing and home improvement contracts, medical equipment…the list is endless. If you do so with items that do not have titles, then you might consider getting consent to a commercial lien and UCC filing from the one you finance your sold item or perhaps get agreement to a lien against real property in exchange for no credit check financing.

If you understand the rule of 72’s and manage your cash flow, your $150k could become 7 figures in a very short time.

Hope this helps.

Rob

4

If you are planning on staying in that area for more than 5 years, then perhaps buying a home there may make sense. But remember that you are going to spend the first 5 to 8 years paying almost 100% interest to the bank. When you are ready to sell, your in pocket cash is going to be only appreciation. So, the reality is that buying a home in a high priced market is more for peace of mind rather than financial gain.

5

Thanks for the input… I understand that a multi-unit apartment would probably have a bigger profit margin with less maintenance per door cost, but frankly that is a little intimidating for me as our second real estate purchase ever! I am not concerned about making a lot of money fast, I am thinking about long term. I also feel like if for some reason we needed to rearrange our finances later it would be easier to sell one or two houses than a whole building? I would also think it would be harder to come by apartment buildings where as single family or duplex homes would be much easier to find and purchase.

I have seen some lots properly zoned for multi family… is it even crazier to think about building something?

Is it bad to just start out with a few smaller properties, see how things go and then move on to bigger investments?

6

Well, you asked if you should invest, or buy a house to live in.

I answered, invest. I said invest in apartments for better returns, and lower risk.

You’re telling me the risk is higher.

No, it’s not. I own both types of investments. Single family is much more apt to create negative cash flow.

The issue is, buying big enough to overcome the cash flow risks, and amortize the overhead to the point where you’re not personally babysitting the project, but “babysitting” the manager of your project.

The management overhead on a single family unit is usually prohibitive, unless you’ve put up a giant down payment, or paid cash.

Anything you invest in needs at least a 60-month gestation period. Otherwise, you’re not investing, you’re gambling.

Trying to figure out what kind of investment you can easily bail on, tells me you might as well buy a house to live in, because you’re not quite serious enough about your investing goals. This is just a lark.

It sounds too, like your husband/spouse isn’t on board with this altogether, and so you’re hard-selling this proposition to yourself first, in order to gear up to a sales pitch to your husband.

You both need to decide together what’s gonna happen, for sure, over 60 months, and stick with that decision. If your investments are well-analyzed and well-considered, you won’t be ‘stuck’ with them.

Otherwise, trying to keep the trap door propped open, is just an amateurish approach to investing, and you’re likely to make a terrible decision here, because of that mindset.

From experience I say this.

Good luck.

7

OK. I get it. Go big or go home. REI is not for the weak. :slight_smile: Going to start running numbers and see what I can find for a multi-unit place.

Thanks!

8

You’ve got two advantages that few investors have at the get-go.

You have PM experience and one hundred and fifty thousand dollars to “play” with.

The problem I’m seeing is that you’re not really committed to an outcome. You’re just trying to figure out which gamble you want to take.

Real estate investing should not be treated, or regarded, as a gamble.

Ignoramuses will certainly regard RE investing as that, but you shouldn’t be an ignoramus.

At the same time, I’m really not saying ‘go big or go home.’ I’m saying “commit to an outcome.” That way you can plan around that commitment, and thereby force yourself to be serious about the outcome you’re after.

Dabbling is for dumb butts, and I don’t think you’re one of those. Especially coming here and asking great questions.

I’m out.

9

You need to invest in what you feel comfortable. Yes, there is good money in large MF. But, if you are nervous about it or unable or unwilling to take on that kind of risk and time commitment, do not feel like you are a failure as investor if you concentrate on SFR. There is money there as well.

MF makes very good long term investments. You will get reasonably steady cash flow. Once an operating budget is established and stuck to, it is a great income builder. But, they can be hard to liquidate. The percentage of buyers that are willing to buy a large MF are much less than SFR homes.

SFR often do not have a comparable high per door income as a large MF but they can appreciate faster and can be liquidated quicker. Also, in most markets, the demand for rental homes is high. Many renters would seriously be interested in a lease option, rent to own or land contract. These options allow the investor to make a higher return off the interest (especially in a land contract or subject2 deal).

Something to consider.

10

Pay attention to what Javipa is saying. He is giving you some of the best advice to be found anywhere.

Personally I got out of the rental business and went into tax liens.

I enjoy the no deadbet ttenants, no bad checks. no stopoped up toilets, etc. get a nice check each month from the local county government…so far…none have bounced.