Wednesday, March 24, 2010

When asked "What to do with $500k I just received"?

Hello all, I am a frequent contributor to real estate websites like Trulia, Activerain and Zillow. These sites are great for the general public to ask real estate related questions without fear of being hounded by zealous agents with bad manners. Someone posted on that they had $500,000 in cash and wondered if they should pay off their existing mortgage or invest the money. It's a good question, and hopefully some of you reading this will one day find yourselves in this situation. This was my reply to the person:

"If it were me, I would go pick up one or two multi-unit properties in Los Angeles that will rent quickly. I am particularly fond of Section 8 Properties in the lower income areas of the city. Before you wince and disregard this answer, let me explain why. The ghetto is feared by many thus the prices are lower and the Cap rates are higher. (Cap rate is annual rent/purchase price-usually I advise to go for 8 or higher but most multifamily properties on the west side or Pasadena are 5 or less). Section 8 is an LA county program that subsidizes rent to people, so you have the government paying most of your tenant's rent. They always pay on the 1st of every month. The downside is that your unit has to pass a Section 8 inspection once a year, but that's best practices anyway to keep your rental property in good condition. With larger units (3 or more bedrooms) you tend to get families with lots of stuff. We all know that moving is a pain when you have alot of kids and stuff so they tend to stay put. A multiunit building with section 8 tenants is a cash machine. The tenants will never give you any problems because if they do, you just contact their section 8 adviser and they lose their benefits.

I would advise putting 50% down and getting a 30 year fixed mortgage so that you can leverage your funds a bit and also take advantage of the very low interest rates at the moment. When the rates rise, and they will, your 5% mortgage will be just peachy. I know of several buildings right now that are above a 10 percent cap rate and are under $300,000. All you would have to do is sign the loan docs and you would make about $3000 a month income from each. That's a no-brainer IF you have the stomach for the hood.

If not, rental properties in nicer areas are also a solid investment, but they won't spit off the tremendous income that you can get in less desirable areas. For more on this concept, please contact me."

Serious buy and hold for cashflow investors already know about the rough areas and section 8, perhaps some of you reading this may venture down there. If so you'll probably see me, evaluating another potential building. We can meet up and get some really great Tacos on MLK. See you in the field?

-Sky Minor, Not-afraid-of-the-slums broker.

No comments: