Investing after you are a Financially Independent Real Estate Investor

sunset-494544_1920-PDI am a financially independent real estate investor, and always in the market for new investments.  The secret to finding great deals is to be observant, understand what you are investing in, and understanding the risks.  And a bigger key is to be able to actually get into the deal.

If all your capital is used up, you will have to watch others get into deals.  So I have a choice coming, additional investment, or ride off into the sunset with what I have – which is more than enough already.

The Investment Opportunity

I have an opportunity to invest, as a 50% partner, into an additional 16-unit apartment deal, it is a property I am familiar with, and the price is close to market.  That is to say, I am buying it at a decent price, and not getting a big discount, and not over paying either.

The property is already professionally managed, and has been for over 30 years.  The same management company that was part of the initial development is going to continue to manage it.  The pro-forma numbers are decent, and assuming the net distributions to the partners are the same as prior years, the numbers look like this, based on the investment amount I would be putting in.

2011 – 13.67%
2012 – 15.98%
2013 – 14.15%
2014 – 21.20%
2015 – 17.64% (projected)

These numbers do not include any real estate sales price appreciation (or potential losses).  I think the building is solid and valued reasonably, so any loss of building value is minimal, other than normal selling expenses.

The building is already being managed as a partnership, and will continue to do so.  The old partnership will be dissolved, and a new partnership created.  The same management company will be maintained.  Old loans will be paid off, and new loans will be created.

Advantages

  • It should provide a minimum of 10% return, likely more, based on previous years.
  • The rental market is strong, for the next few years apartments should be good investments
  • Rents are generally inflation protected. They rise with wages and inflation.
  • It will be mostly hands off; one of the general partners will continue to manage the property as he has done for about 30 years. His fee will be 6% of rents collected.
  • It is a large investment, but not really that large. It is a investment to put up 10% of cost.  The other partner will come up with his investment for a total of 20% down.
  • It is a property I am familiar with. I know the potential and know the area.  It is a class B building, in a class A area.

 Disadvantages

  • I will be involved in a seven figure loan deal. If the thing goes bad, I could be on the hook to owe seven figures, along with the partner.  If he goes bankrupt, I owe the entire amount.
  • We will be taking out a commercial loan. It will reset in 5 years to a market interest rate.  What will that do to the cash flow, and ultimately the value of the property?
  • Partnerships are always more risky than individual properties, but there are thousands of successful partnerships for every one that goes bad. And a partnership does spread the risk, so that is less risk.

 Risk Mitigation

  • The odds of me owing seven figures is almost nil. The building is worth something.  I could lose my initial investment, but likely not much more.  If the building is priced right, and is maintained, it should bring in what was paid for it.  Subtracting selling expenses would not even eat up all of the initial investment.
  • I will be investing not as myself, but as a LLC. That will help insulate me from any issues resulting from lawsuits, etc.
  • There are a lot of details still to be uncovered and flushed out. If this happens, it will be a long time to get covered with the financing and may take 4-6 months to finalize.  And even then it may not happen.

What do you think?  Have you ever invested in a partnership?  Or looked at deals in partnerships?  Is it worth the risk?  Or should I just keep what I have and ride off into the sunset?

 

image from http://bma-wealth.blogspot.com/

 

 

 

 

 

 

 

22 Replies to “Investing after you are a Financially Independent Real Estate Investor”

  1. I was trying to get my siblings to look at a house for me as I wasn’t near by. They’ll do the managing to get extra income. They didn’t have any motivation to do so.

    I remember buying my first car, it was a used car, I asked my siblings to check it out for me. They “liked” it. But I somehow didn’t even get a test drive, and be stucked with it. Hehehe the point is it’s very hard to delegate. Partnership is hard.

    Now create an LLC for your rental biz is great idea. I want to do that, but the bank says it’s requires a different loan. I haven’t looked into it yet. Please let me know how it goes if you started your LLC.

  2. I wrote a long response and cell died. LET me try again. OK, I too am financially set. I am even going to pay my house off in full because I want that peace of mind, it’s conservative move, but any good investor does both, risky and conservative moves. With age I’d like to say CONSERVATIVE , ok I have 2 big answers REGARDING when to invest when lifes cozy already. I am very serious about both. FIRST. if I can’t control it in all aspects, I won’t buy. What if the partner wants upgardes he thinks are worth doing, what if he fixes what’s not broken. I mean we all are different. I must control it , trust me this can be a massive source of stress. I”m even dealing with it now, I have all these single family homes I own and or finance and I have one single unit at the beach that’s a tiny 3 owner HOA and I have to deal with 2 other owners and one wants to go on and on about gardening when the lots tiny and for 14 years a gardener twice a month works, I put more energy into this damn beach townhome than I do owning a 9 plex. so CONTROL, and be proud to say it, CONTROL every aspect of what you get into. I don’t need more money and I surely don’t want more undue headache. SECOND… wait for the deal. I can’t tell you how lucky I was getting in on 3 different real estate bottoms, YES 80 percent discounts. It must be a steal for me to add to my already comfy life. A steal, so my cash can sit and wait and trust me if you look and do things like set up Realtor.com for automatic updates if a 3 or 4 plex comes out in your price range, So buy when everyone else is in panic or uncertainty.
    CONTROL and wait for deal. that’s my stress free, retired, don’t need it approach.
    I bought in vegas at 23k per unit in 2012, they are now going for 80 to 90 k each unit. that’s a 300 to 400 percent return in 30 months. SO hold out for the deal and again Control every aspect of your purchase. ENJOY, and thanks the this BLOG, I talk about this BLOG to friends and people, it gives me food for thought, it gets the mind in motion and you feel you have a real inside scoop of how a true investor thinks. I THANK YOU FOR THIS ! ! !
    P.S. a little more information. I live in a very expensive area in surburbs of los angeles, Brittney Spears and many stars live here because it’s rural yet 30 minutes to the studios and Hollywood. I am paying 368k cash to blow out my home loan, home is worth 1.1 million or a tiny more. I simply pay too much in interest. Over 17k in last year. Also that’s not even half of what I have saved. In these uncertain times I am guaranteed to not have a 2k month mortgage by doing this. It’s the most conservative move I’ve made, but also I had one year of bad health and 5 surgeries. so I’m getting back up again. If we don’t have health we don’t have anything. I believe in debt reduction and LIKE the blogger, no car payments and no credit card debt. If you are in debt, get out of it before you invest, at least high interest credit cards. Look at the big picture. Smart money moves across the board equal success, it’s not one choice, it’s a LIFESTYLE.

    1. Thank you for the comment Cheri. You always have great insight.

      All great things to consider. I am about 50/50 on the deal, as I too like control. I also worry about a partner failing and I get stuck with 100% of a mortgage and only 50% of the equity.

  3. Cheri brings up a good point about control. I personally am not a fan of partnerships, but some deals (like this one) may not be possible or even desirable as an individual investor. It seems like it could be very lucrative and if things go south with the partner (which I’m assuming is very low risk or you wouldn’t even be considering the deal) perhaps you can buy out the partner? It sounds like a great deal on paper and honestly this is the kind of deal (multi-unit apartment building) that I hope to make a few decades down the road.

  4. It was briefly mentioned, but when is Enough? Does this get you to retire earlier? Does this buy a yacht instead of a boat? I think many of the questions that need to be asked are internal. Much of this is risk, if the worst case scenario happened would your financial future still be in good hands?

    1. Thank you for the comment!

      That is the age old question… Barring a swindle or issue with embezzlement, the risk is there, but the properties should be able to be sold for at least the mortgage amount, worst case. If they run for a 7 years, I will have gotten my investment back, without interest. Of course that assumes that they run for 7 years.

      I go back and forth on it. Stay tuned.

  5. It sounds like a very interesting deal. I don’t personally have experience in this but have been checking out RealtyShares.com that allows you to invest with as little as $5,000 in deals like this. The only problem is you have to be an accredited investor which I don’t qualify for yet.

    If you put it in an LLC, that should really mitigate a lot of your risk. It sounds like a deal is at least looking into further and doing your homework. I guess my biggest concern would be whether I trusted my potential partner.

    Looking forward to see what you decide.

    Cheers!

    1. Thank you for the comment!

      I agree the largest risk is the partner issue, not the property. It is a bit more property than I would want to take on while still working, so this comes with a built in property manager. It is still a very solid return.

  6. Well its been almost a month since the last update on this deal (I just found this post now) and I am wondering what you have decided? It sounds like a scary, but potentially game changing investment. If the valuation on the building is 7 figures each, roughly a million a piece that means you are buying apartments for $125000 a piece. I am very envious that these opportunities present themselves in your area, looking on the net, it costs $70000 for an empty lot in our old trailer park in the town i am from.

    I really hope to hear how this goes down. It would scare the…well you know out of me to be putting up $1m as an investment but it is so exciting. I would love to get into the rental game but the only other property i have is my first home that I bought before the housing bubble bust, it costs me $400 a month plus repairs to have it rented out.

    Good luck!

    1. Thank you for the comment and follow up!

      I am still working with the partner to come up with a fair partnership agreement. Either of us needs to be able to bail out of the partnership if the investment objectives are not met. If one of us is on the recourse mortgage, the only way out of the partnership would be to sell, not remove the individual from the partnership. The Bank would still want both partners liable.

      So, I am making sure my interests are covered, as I do not want to be in any investment that I wind up losing.

  7. I’ve found an investment property, duplex in a high demand area. The landlord hasn’t raised rent for several years. Total is $1400 per month. He want to sell at $210k. Houses in this area goes for $260 to 2 millions. This type of house goes for $350k. I’m hesitated to cash out my stock investment to make this deal. What are your thoughts?

    1. Assume 20% down. Without going into all the details, assume 50% of rents go to expenses. Then, pay the mortgage. How much is left for your return on investment? If it is 12%+, it may be OK.

      If you negative cash flow, stay away.

  8. property cost: $210K,
    down payment $42K,

    Income assume not raising rent: $16.8K
    Misc expense, low estimate $1K
    mortgage, taxes, insurance/year $13K
    Profit: 2.8K

    ROI: $2.8K/42K = 6.6%
    If I count the principle gain from tenant paying, ROI will improve.

    The house is priced a bit below the market, I don’t like to buy and sell, flipping is not my thing.

    1. That is not too bad, I prefer higher. Everyone has their own investment risk reward ratios. If you can get a REIT such as ‘O’, at ~5%, plus appreciation, is that better? A REIT is much more liquid and has ZERO work.

      The $1,000 for maintenance is low. I would assume closer to $1700 a year. What about management? Are you managing it for free? Did you include at least 5% for vacancy?

      I am not saying you should or should not buy it, but I have listed a few things you may want to consider.

Leave a Reply