Another question requiring expertise far beyond a broker’s license. Fortunately we have two great investment writers, three off-the-charts lenders and a readership of very prosperous people. Here’s the problem:
I have come into a situation, and was wondering if you could give me your opinion. I have recently come into an inheritance of about $200-$250,000 from a family member who has passed away. I decided that the best use of this money is to invest in real estate. I have narrowed down my choices to four options.
- A foreclosed house which needs repairing, however it can be bought for past due mortgage payments and past due real estate taxes, legal fees, etc. for $200,000. The fair market value is about $300,000.
- A housing project which has HUD financing of $1,750,000 and a fair market value of $2,000,000. Rental is locked in for $150,000 per annum, plus certain adjustments. Expenses are the mortgage with interest at 8% and operating expenses of $25,000.
- A shopping center with tenant rentals on an escalating year-by-year basis. The center is currently 80% rented and receives $200,000 cash flow and operating expenses are $50,000. The seller wants $2,000,000 and he is willing to take back a second mortgage of $250,000. I feel like I can get a $1,500,000 mortgage from the bank at the current rate on a 20 year basis. The second mortgage will probabably be a 2% higher interest rate.
- A shopping center with tenants who are all NYSE companies. All the leases are triple net with rental income of $500,000 last year. Sales price is about $6,000,000 and I feel I can get a favorable mortgage from an insurance company at a good rate. If I would proceed with this option I would probably cooperate with friends to get around $1,000,000 and get a $5,000,000 bank loan. I feel the property will appreciate at 8-10% per year.
Who has a good answer for this?
Technorati Tags: investment, real estate, real estate marketing
Jeff Brown says:
I’ll get back to you, but it sure smells like a late 4/1 effort.
April 3, 2007 — 3:14 pm
JeffX says:
I would take you on as a client 😉
There is some long math and too many other variables to consider to render decent advice…
April 3, 2007 — 3:29 pm
James Klobasa says:
Get a great accountant, then great some great rei advice in the form of more knowledge…do the homework yourself, then go with your gut.
Basic approaches, not greed, often reap great results…
check out…http://real-realestateinvesting.com/blog/flipping-houses/flipping-houses-2/
for a little advice on greed and how to move on.
April 3, 2007 — 3:51 pm
Michael Cook says:
Most of the people above are right, understand the commitment and risk of each investment and determine what you can handle. Triple net properties with A+ tenants are very easy to manage, but the upside will be limited. The 80% retail property probably wont be a hassle to manage, but might be a real headache to rent. The other two have an even greater time committment. Unless you know how to deal with HUD and section 8 tenants or have a good management company, that could be a real hornets nest. Finally, the rehabber could be a quick win if you know a good contractor. It might be easy to flip that quick and get 1.5x your money, then do one of the other projects. There are all good options, but you need to make sure you are ready to commit to what they entail. I would certainly be willing to talk to you more offline, but like everyone said above you have a lot of homework and self-reflection. Good luck!
April 3, 2007 — 5:41 pm
Stacey M. says:
So much more additional information from the investor would be needed to evaluate the prospects and to determine whether if any of these final four choices would make the cut.
This is an exceptionally broad range of choices. A foreclosed home or a shopping center? With the limited information provided, a qualified real estate professional would not offer any more advice other than to suggest the seeking of a qualified real estate professional, tax advisor and a good attorney in your area.
Or, you could rent a limo to Vegas, put it all on Black-12 and hope for the best.
April 3, 2007 — 5:49 pm
Dave Luton says:
At the risk of getting myself beaten up by the realtors on this site, I might even suggest none of the above.
Part of my conservatism comes from the fact that I am a Canadian located east of Toronto, Ontario. From my perspective in the great white north we play things more conservatively then you guys in the United States.
As an older guy, I can’t believe some of the newer US investment norms of the last 3-4 years and I am concerned that we may be reverting to more historical practice in financing. This in turn may have some rather drastic effects on prices.
In Canada to finance a commercial investment currently the banks want 35% investment by the owner. Thus based on the rule we face up here you are limited to an investment of about $700,000 by our (conservative?)rules. Yes I know our party up here has been a lot quieter in relative terms, then in the US but our hangover may also be less. (Subprime mortgages at 4% of all residential mortgages in Ontario make up about 1/5 of the corresponding level in the United States.) Yes I can get high ratio private financing but it comes at a price.
Ignoring all the financial ratios etc of which there are many explanations on the web, my concern is that we may be reverting to financial norms. 3 of your 4 investment opportunities pose an interesting financing problem in Canada. The first one I don’t have enough information to evaluate, because it depends on rental or resale potential.
In Canada if the mortgage lender declares bankrupcy all outstanding mortgages become IMMEDIATELY legally due and payable. This is why we are conservative. Earlier today I read that another big US (subprime) lender bit the dust. If all of their mortgage holdings and those of their fellow companies in trouble, become immediatley payable, we might be in for some interesting times. May be someone can explain comparable US rules.
Of course not all real estate investments require a big capital investment even in Canada. My best ever was a rental and required only a limited down payment, but gave me a better return then any of those you mentioned or I have ever seen. It can be seen on Active Rain at the following URL for the doubting Thomases.
http://activerain.com/blogs/dluton
Whatever you do I wish you the best of luck
Dave
April 3, 2007 — 6:23 pm
Austin Realtor's Wife says:
Today’s investment advice (that would make Socrates proud): http://www.bawldguy.com/addicted-to-cash-flow-when-growth-is-the-prescription-a-common-investment-mistake/
Most recent stat report from NAR:
http://www.realtor.org/press_room/news_releases/2007/ehs_feb07_existing_home_sales_rise_again.html
Knowing who’s at the top and how they got there might inspire any investor (new OR experienced): http://nreionline.com/mag/real_estate_watch_3/
Food (or words) for thought… 🙂
April 3, 2007 — 9:07 pm