Although I’ve been doing this “semi full time” for 6 years I still consider myself as “starting out”. I am still a very small investor (3 rentals and 1 flip). I followed the classic advice from this site and several RE investing books: find distressed properties in decent neighborhoods and contact the owners to see if they want to sell. Offer a price as cheap as you dare and see if they bite. Put out bandit signs in my target area and waited for calls. Advertise “WE BUY HOUSES FOR CASH” in the local “Ad-Lines” weekly newspaper. Driving for dollars looking for distressed properties. I initially did almost all my own rehab work but came to realize that employing one or 2 cheap but talented all around construction workers to work with me actually made financial sense in that every man-month of salary resulted in roughly one additional month of rent and the 2 were approximately the same price (salary vrs rent). Additionally, I am a hands on manager of my properties. I see no reason to employ a management company to call a repair company when problems arise. If I can’t personally fix a problem I am perfectly capable of calling someone who can.
In my area (southern NJ) REAL deals are tough to find, and rent is low compared to purchase price when compared to many other parts of the country. If I don’t buy cheap, I don’t make a reasonable return. I buy for cash and do not leverage with borrowed money since my goal is income, not rate of return. (If you borrow 100% of the purchase price and make a $1/month profit you have an infinite rate of return but are still only making $1). Financing is not my (or your) problem, income is my problem.
Lend $2M at 12% and you’re making $240,000 a year in interest, and someone else is taking all the risk. namely all the people on this site trying to think of ways to convince you to give them your two mil.
Becoming a hard money lender yourself requires very defined real estate skills and a lot of experience as your making those decisions and defining whether a property and the collaterol make sense to make the loan, it also could become at least a part time job just to handle the individual loans made from your $2m dollar fund.
Check out the Vanguard REIT ETF (NYSE: VNQ) it gained 24% in 2011.
Also Try: I like these two as there paying cash dividends each year!
Annaly Capital Management (NYSE: NLY) This is also a REIT fund, it paid dividends of $2.56 per share in 2011 a yield of 14.5%
American Capital Agency Corporation (NASDAQ: AGNC) This REIT fund has a multi year history paying a dividend of $5.60 per share or a yield of 19.5%
Hell, with $2m I might even consider thinking about taking your capital into gold mining and opening a mine or two with you, you could make 25 to 30 percent or more a year!
I didn’t mean to imply to place the entire 2 mil into IRA accounts. My main point is to diversify your portfolio. You don’t want to put everything into real estate, let alone one property or one financial vehicle.
It’s not FDIC insured, but you can purchase an additional policy in which it will guarantee that your initial investment will not be loss. If you are in California, I can hook you up with someone that can walk you through this. Also, you are correct. A lot of financial planners do not look into real estate as a viable option. Diversify your assets to make you money is the key.
Diversify. You could try a combination of lending money to others (be a bank!) (lendingclub.com) and real estate. Don’t forget the old cliches, cash is king and don’t spend it all in one place! I’m jealous! You have a great basis to start and if you don’t move too quick, which you seem to know already, you should be able to make that $2m grow huge. You are smart for getting advice from this board, I read it every day and have learned so much from everyone. I’m a rookie too but all these bosses on here had to start somewhere and I look up to a lot of them (GoldRiver, fdjake, furnishedowner, $Cash$, Bluemoon, motivatedceo, etc) Please keep us all posted! I would love to know what you decide to do and how you go about it.
@davewindsor, thanks for the show of true colors. Now we all know what kind of person you are.
Oh you mean I’m not the kind of person that kisses people’s assess and points out their weaknesses so they can sell them thousands of dollars worth of coaching and mentoring they don’t need. You’re right, it’s not my style. So, you’re welcome.
Above is a nice big bond fund. Pays about 7.5% dividend broken up monthly. Thats $140k per year income. Do some wholesaling to learn the business. Or whatever these guys that know way more than me say to do. Then slowly move the cash from the dividend producing bond funds, you and your financial advisor pick, and start investing in RE after a few years of experience without using your cash.
Congratulations on having $2m in capital to invest! That makes it VERY EASY to find properties that can generate enough rental income to cover most of the property expenses.
You certainly are on the right track when you wrote: My current goal is to begin buying cash flow generating multifamily properties. My short to medium term goal would be to generate enough cash flow to cover my living expenses. I tend to live below my means so this would be about 50K a year at this point. In the long term I would like to build up enough cash flow and equity accumulation that this could be a full time career.
Just keep reading the best books you can find on real estate and go look at as many properties as you can to get an idea on what’s a great deal and what’s over priced. The $2m in capital should give you great leverage since you don’t have to get approved for a mortgage if you decide to buy with cash to get a great price in return.
I have found my first investment property and the deal will close next week.
3 Unit Multi-family
Purchase price: $419,000 (Paying cash, will finance when necessary)
3/4/4 bedroom
Gross monthly rent: $5,100
3700 sqft
Just about everything has been renovated as of 2005 or later. I will be using a professional management company to manage to property. I am already searching for my next property and will be ready to start making offers as soon as this deal closes. My plan is to continue being a cash buyer, but using a line of credit instead of my own cash for the 2nd property that will cost about 3.7% until I can get a mortgage.
At this rate you may become "Wino on the street" if your not careful.
$5,100 per month gross
$61,200 gross
$6,120 10% vacancy factor
$55,080 adjusted gross income
$27,540 50% of adjusted gross income (Your expenses may not be truly 50% but your certainly going to run at least 25 to 30% for expenses.
Expenses
_________ Property Taxes
_________ Property Insurance
_________ Property Management (Usually figure 10% of adjusted income.) (Watch the type of contract you sign to not pay management fee’s based on scheduled gross income.)
_________ Initial rent up cost (Could be 25 to 50% of first months rents.)
_________ Landscape Maintence
_________ Snow Removal
_________ Advertising
_________ Legal
_________ Water, Sewer and Trash
_________ Your location could require a business license
_________ Common Electric
_________ Maintenance
_________ Appliance Reserve
_________ Long Term Replacement Reserve
What’s left is returns, figure your gross closing cost, take remaining money and figure your percentage of returns! I figured roughly an effective yearly interest rate at 7.2% returns at 50 / 50. This is a cash on cash return for total investment at $419k.
You realize this is a 6.57 cap rate at 50 / 50 split of adjusted gross income? ($27,540 debt service divided by $419,000 = 6.57)
$41,900 cash per year would be 10% cash on cash returns!
I could put your funds into development where you would make 12 to 15% a year on your money!
This is a rough way to start, but who am I to question it as I am just the 1000 pound gorilla in the room!
GR, your roi figures may be exact, but that’s pretty good for a triplex.
The CAPs on small properties like this usually suck drain water.
I would have taken the GSI and divided it by half, and then divided that number by the price to come to a 7.3% CAP. It’s not a big difference, of course, but it’s still a great CAP rate for something this small.
Free and clear properties give owners an opportunity to be enormously lazy and slow to act in maintaining rents, if not keeping the property marketable.
The urgency to maintain an optimum operating temperature on the project dissipates fast.
This is one reason I originally suggested that thedonaldjr buy his first project conventionally and leave his cash in the bank. It necessarily requires discipline to maintain and manage the project, despite having professional management in place (which I recommend anyway).
When we’ve got a nut to crack every month, we’re going to pay closer attention to the operating numbers, if not manage our managers, more faithfully.
This is one reason I originally suggested that thedonaldjr buy his first project conventionally and leave his cash in the bank. It necessarily requires discipline to maintain and manage the project, despite having professional management in place (which I recommend anyway).
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The decision to use cash was purely financial. I had cash on the sidelines earning exactly 0% and it was enough to cover the full purchase of the property. So not only do I get at least some return on that cash, but I save the 4% or so interest (not to mention mngmt fees to my FA). This is not how I plan on financing future properties and when I feel that I have an opportunity to put the $$ to better use I should not have any problems pulling it out of this property. Bottom line, it is saving me about 20K/year and I have cash generating income that was doing nothing before.
If you’re going into deals with a ~7% CAP rate, it will be a long time before you are able to reach your goal of making REI a full-time career. You mentioned having the $400k sitting at no interest… Why would you do this? It would be much better to put the cash into short-term investments such as tax liens earning ~12% interest and mortgage the property for a very low interest rate due to economic factors and cash reservces.
You should be able to find much better deals than this with your personal POF. I don’t understand why you’re tying up such a large amount of money in a mediocre investment. From your last post I infered that you simply wanted to invest this cash because it was earning 0%… and it appears you rushed into this deal.
You’re very fortunate to have been handed $2m at such a young age, but I would hold off on making account names like “thedonaldjr” until you start showing some investing prowess like The Donald. I apologize if I’m coming across as harsh, but others have already broken down your first deal for you and implied that it was an average deal, at best. I wish you the best of luck in your endeavors!
Also: Just because “everything” was renovated in 2005 doesn’t mean the property will have the same level of expenses as a home built in 2005.