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Plan debate - which one would you choose?

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Sid23

Bronze Contributor
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Aug 9, 2007
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A question arose last night when I friend and I were discussing plans with each other. I thought this would be the perfect forum to post the basis of the debate and see what everyone here thinks.

A few assumptions we decided on for arguments sake:

1) Money is tight on a day-to-day basis; lots of credit card debt and day job barely covers all life expenses for the family.

2) You own no real estate (live in apartment), but have worked for several (4-7) years for apartment developers and investors, so you understand real estate more than someone just starting to think about investing in real estate and have already worked on several big deals, just on behalf of someone else.

3) The ultimate goal is to own 500 units of apartments, spread out in 2-3 buildings in 10 years time.

4) You would leave your day job the day you were financially able.

Option 1: Partner with financial backer and buy ~6-10 unit apartment complex. You are responsible for everything – the acquisition, closing, management of the building. Partner just puts up the money and is the balance sheet the bank needs to see. Build up from there. We assumed would take 2-3 years before you have any meaningful cash flow. Means money would be tight until then and it is sometimes tough to think big when dealing with daily cash flow issues.

Option 2: Start with smaller deals – flipping homes, rehabs (like JScott), etc. Benefits of this option include if successful, would see profits sooner and could potentially leave day job sooner. Once you have saved some lump sum capital, you can then buy a 6-10 unit apartment building (or larger) and not necessarily need financial partner (i.e. could qualify for the comm. Loan yourself).

Which route would you choose and why? Which route would you argue would get you to your ultimate goal sooner?
 

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Knightsman

New Contributor
Read Millionaire Fastlane
Sep 14, 2009
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South Carolina
Id say option one, if money is tight now, it probably will be in 2-3 years. So thats a null point. If he can get the backing do it. See if he can get more than normal for "payroll" and use that to get his personal finances on track.
 
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Sid23

Bronze Contributor
Speedway Pass
Aug 9, 2007
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Id say option one, if money is tight now, it probably will be in 2-3 years. So thats a null point.
Why is it a null point? What if he chose option 2 and worked it well? We both assumed you could make money quicker with option 2. What do you think?

Thanks to both of you for your thoughts.
 

kwerner

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Oct 4, 2007
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I like option 2, but I think you would probably need to be fairly active in the management of the projects (managing contractors / buying / selling / etc.).
I love JScott's business model - if I had access to the capital and the experience, I would follow his model to a T.
Okay, I should probably say that WHEN I gain the experience and earn access to enough capital, I WILL follow his model to a T. ;)


On small apartment investing:
Someone at the '09 B&P (might have been SteveO) mentioned that they get better results buying apartment buildings that have a minimum of 20-30 units. By investing in buildings that have at least this many units, you can afford to pay for a full-time manager / staff.

Otherwise, you run into the scenario of working as the building manager part/full-time (with minimal pay) OR your management expenses (from hiring it out) eat up all of your profit.
 
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Sid23

Bronze Contributor
Speedway Pass
Aug 9, 2007
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81
I attended an Urban Land Institute "Economic Outlook" this morning. The economist said this is the best opportunity in any of our life times to buy residential real estate. It will NEVER be a better time in his opinion. He said focus on residential SFH in good areas and then in 1-2 yrs start buying apartments.

He also said inflation is coming. His strategies to deal with it were:

1) borrow, borrow, borrow to buy wealth creating assets
2) savers are losers during times of inflation
3) lock in fixed rates for as long as possible (said people getting 5% 30yr fixed rates are "geniuses."
4) exchange your US currency into Australian, New Zealand or Canadian dollars and then buy international stocks in those countries.

I chatted with him afterwards and told him about this discussion. His answer was to buy as many homes as possible over the next 3 years, hold them for 7-10 years then sell. Do the same process with apartment buildings, but wait 1-2 years before buying until that market bottoms.
 

Knightsman

New Contributor
Read Millionaire Fastlane
Sep 14, 2009
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South Carolina
Why is it a null point? What if he chose option 2 and worked it well? We both assumed you could make money quicker with option 2. What do you think?

Thanks to both of you for your thoughts.
Its a null point because there is no reason to worry about money being tight when he gets his backing because money is already tight with his current situation.
 
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Sid23

Bronze Contributor
Speedway Pass
Aug 9, 2007
696
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bump for more thoughts...
 

tchandy

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Aug 16, 2007
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Kansas, for now
Option 1: Partner with financial backer and buy ~6-10 unit apartment complex. You are responsible for everything – the acquisition, closing, management of the building. Partner just puts up the money and is the balance sheet the bank needs to see. Build up from there. We assumed would take 2-3 years before you have any meaningful cash flow. Means money would be tight until then and it is sometimes tough to think big when dealing with daily cash flow issues.
I like option 1. BUT... the commercial market looks like it will take a hit in the next year. We may see a drop in commercial RE like we have with single family homes. Once the commercial market hits bottom it may be time to get into that area. So as you said, focus on SFHs for now and then once you are ready, make the jump to the next level.

Tom
 

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