Serious question, curious of your perspective.
If let's say I gave you $3mil in cash to invest into Real Estate, how would you allocate the funds?
Would you go NNN commercial, single family, or multi? I'm assuming all includes building value into the asset via renovation upgrades and increasing the rent.... but which sector of those 3 do you feel is best at this time with the current interest rate environment.
Also how would you structure the deals? Meaning like % down, term, etc.
Welcome to the class Mr Goodson. We’ve discussed this a little bit before privately thank you for having the courage to ask. lol
So single family is obviously the easiest to get into. In nyc obviously the barrier to entry is higher that 99% of the country but that would be a good option for starting.we can touch on that more in the future as I plan to move in 6 months and will
Be”house hacking” it into a long term hold rental
I will always recommend this to someone who is looking for simple cash flow and long term equity and tax benefits.
Get 10 that cash flow 1k a month after operating cost let the tenant pay your loans and have 5 million bucks in 30 years to retire on.
Multi family specifically -2-8 units are a great way to expand. And grow you prrofolio As you can get traditional financing by living in one of the units.
I don’t see the point in 10-25 unit properties after the headaches I had with a couple but again stepping stone for most to make the big jump to…
Larger multi family which I consider 25+ units is something I’m still new too but is great if you have the capital to make it cash flow. But it more hands on, or it cost more to hire out the right team, I wouldn’t jump (3million and some experience is good start though) I was right there about 6 years ago when I bought my first midsize apartment.. and to be clear this is technically commercial property but is not a nnn property but would still have to be funded with a commercial loan or a dscr. But like all housing rentalsX I get rent and that’s it. Then I have have to pay my operating cost before I get to what the cash flow is.
But the real place I would go is NNN commercial. Ie retail stores offices strip malls etc.
The reason for this is simple and I will use one of my favorite properties I own as an example.
I have owned this property for 13 years. I acquired it in 2012 when the economy was recovering, it was next door to one of my mentors property (which I now own, it litterly pays to have mentors)
I was told hoses are great but business always will pay there bills especially ones that are recession proof
So what is a nnn property. Specifically it is a triple net lease which is common in commercial properties. What it means is I own the property and I may or may not have a mortgage responsibility for that property but in the lease agreement my tenant pay for everything.
What is everything?
Market rent(in most cases, a good tenant that pays and won’t leave at a slightly lower rent is better than a risky startup above market)
Utility’s- I do not concer with them. If they don’t want water that’s on the.
Maintenance- only thing I’m worried about is the sewer and the roof. If a car drives through the window maybe I’ll let my insurance cover it but if it’s a break in that’s not my problem and that’s on the tenants. Getting the gutters cleaned is on the tenant.
Insurance- my tenants pay my insurance on the property in addition to market rent and carry there own policy.
Property taxes. My tenants pay my property taxes in addition to their rent
Then you take into account the standard real estate taxes advantages like writing off mortgage interest, the property taxes that others pay on my behalf my operating costs and of course everyone’s favorite word….depreciation.
So the property I bought in 2012 is in oakland California, for those in the e Bay Area. Not the ghetto. Think oakland hills. For those that don’t know. Million dollar homes and rich people.
This property was bought for 465k in 2012.
From 2012-2018 I paid off the 200k seller financing loan I used to buy it. By allowing the former owner to not pay rent over that time. He basically saved 216k over that time, at 3k a month. And got 250k cash from me and hen I bought its he’s now retired and lives in the Caribbean six months a year in the house he bought with that money it was a win win for us both at the time.
In 2020 I wanted access to the equity at 2% after writing up the proper leases with the tenants and getting the monthly income to a number I was happy with i barrow a million dollars cash as the property value in the Bay Area exploded and the building appraised for 1.9 million. My payment is 45% of the gross rent at that time and with the rental increase I’ve been able to allocate that money into paying off higher interest debt and buying back my equity in this property.
What I did with that million dollars is the real story though, I bought 3 other properties in cash tha cash flows more than double the loan payments on that property.
The number look like this
9k monthly rent at the time, 12 now
There are 3 tenants in the property currently 1 pays 6k 1 pays 4k and my mentors son is still at 2k a month because I’m nice and don’t raise his rent but require a little more from him as far as handling the property.
Payment is 3900 loan payment+escrow for tax and insurance of another 1300 but that’s all covered by my tenant in addition to the monthly rent.
This year I have brought in 132k off this property with about 90k net which is is paying down other debt like hard money and dscr loans on long term hold properties.
The 3 properties I hold under the same llc that I purchased are 3 duplex’s that I rent in Montana, they each bring in 1700 a unit or about 10k a month and the value of the all has doubled and because paid for these in cash I have 200k HELOCs on all of them so if the opportunity comes up, I can move quick by getting to that cash. Otherwise I let that money pay down bigger debts faster.
So why doesn’t ever have commercial properties?
we’ll simply put ARMs are scary if you don’t have the funds and income to survive high interest if you get with with an adjustment at the wrong time. You need to be smart and know what you’re doing frankly. Running the numbers isn’t good enough you need to master them. 11% interest only money with a 10/1 arm is stressful and you better be at a nice cap or better and if you don’t know wha that means it’s not for you.
But if you have the capital… say 3 million and a little experience I would absolutely look for a nnn lease that has a recession proof business or a long term tenant in place I would set 1 million aside in some funds take the other two million and find something that you could buy in cash. Multiple tenants so that you’re not dependent on one person paying you monthly, and then after aquiring the property and putting it into a trust get the proper leases in place in word have the trust take a loan against the property with you being the personal garentor.
I would avoid avoid an arm and find a 30year fixed , get back as much capital as you can. Accept the interest and the prepayment penalty as the cost of dying business. If it cash flows now it will cash flow even better when you raise rents yearly, its business and your tenants understand that don’t skip an increase like some would do on a residential property. And then I would look for another property. And when commercial intest is in the 5-6% ranges I would refinance into a lower payment and then prepare for a 1031 exchange in 5 years into a bigger property
