BROADCASTS.com

b'

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\\u2019m going to give you some things to think about. I\\u2019m going to raise more questions that I\\u2019m 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\\u2019re doing the asset management, which means you\\u2019re overseeing the construction management by hiring a general contractor, you\\u2019re overseeing the property management by hiring a property manager, you\\u2019re 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\\u2019s project. In that case, you\\u2019re likely going to be part of a syndication, or perhaps you can invest in someone else\\u2019s project either through a joint venture or a tenants in common structure. From a legal standpoint, you probably want to ensure that if you\\u2019re going to be investing in someone else\\u2019s 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\\u2019re 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\\u2019t 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\\u2019re 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\\u2019s market, there\\u2019s 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\\u2019s money for a total of $500,000.

Then the asset you\\u2019re buying has a cost of $500,000. The problem is that you\\u2019re 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\\u2019s 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\\u2019s say that you bring $100,000 and the other partners bring $900,000 in equity to the table. You\\u2019re leveraging your equity. Then let\\u2019s 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\\u2019ve 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?