AMA - If You Had Only $100,000

Anthony asks

Real Estate is a game of big numbers. Amassing enough capital can be challenging and time consuming. If you only had $100,000 to invest, how would you do it?

Anthony,

This is a great question. Rather than answer the question directly, I’m going to give you some things to think about. I’m going to raise more questions that I’m going to answer. Before we even talk about what to buy, you need to answer the first question which is whether you want to be investing actively, or investing passively. In the case of an active investment, you’re doing the asset management, which means you’re overseeing the construction management by hiring a general contractor, you’re overseeing the property management by hiring a property manager, you’re performing all the analysis on the property and securing any debt on the property.

The other option is for you to invest passively in someone else’s project. In that case, you’re likely going to be part of a syndication, or perhaps you can invest in someone else’s project either through a joint venture or a tenants in common structure. From a legal standpoint, you probably want to ensure that if you’re going to be investing in someone else’s project, that they are following the securities regulations that prevail for where the project is located, and for where you are located. When there are multiple jurisdictions involved, the syndicator may need to be in compliance with multiple sets of rules.

If you’re going to be investing passively, then I would recommend that you spread your cash between two projects that meet your criteria, and that you don’t deplete your cash position down to zero. Always ensure that you keep some cash in reserve. These projects could be strong cashflow projects such as a self storage project, or perhaps an apartment syndication. But more important than the deal, you need to perform significant due diligence on the sponsor.

If you’re going to be a more active investor, then you want to pay attention to the kind of asset you intend to buy. That means the location, the profit potential for the deal, and the risk of the deal going sideways on you.

In today’s market, there’s very little of quality that you can buy for $100,000 that will create a significant income stream.

The key to accomplishing more in real estate is leverage. Leverage comes in several different forms. The traditional form of leverage is to go to a bank, borrow funds, secure the funds against the real estate and bring your equity to the table. If you do that, you might be able to use your $100,000 along with, say, $400,000 of the bank’s money for a total of $500,000.

Then the asset you’re buying has a cost of $500,000. The problem is that you’re out of cash and if the property has a problem, you need to find more money somehow to solve the problem.

A small project of only $500,000 has the drawback of being a small project. It’s not large enough to attract the kind of top talent that you want to be managing your real estate investment.

So my recommendation is that you find a partner who has sufficient cash to bring the majority of the equity to the table. Let’s say that you bring $100,000 and the other partners bring $900,000 in equity to the table. You’re leveraging your equity. Then let’s plan that the equity will also get leveraged with some debt, where you bring $4,000,000 in debt to your $1M in equity. Now you’ve purchased a $5M asset with your $100,000.

You might only own 10% of the $5M asset instead of owning 100% of a $500,000 asset. Why would you choose to do one versus the other?