$200k to invest. Considering my options to maximize returns
Hi guys, so I have about $200k in funds at the moment and am looking for a place to invest. Whatever I invest into can be active as I am looking to replace my day job essentially. I've been looking at buying businesses, residential real estate, and now commercial real estate and want to get a sense of what kind of returns I can expect on average. So far, the asset classes that provide the most return seem to be businesses. I can park $200k as 30% down payment on a business that cash flows \~$180k/year effectively making my money back within the first 13 months of ownership while still holding the asset. Are there similar returns available in commercial real estate investing? And is $200k enough of a start?
[{"id": "iz2baft", "text": "$200k is enough to start. No way you\u2019ll get nearly 100% CoC in REI and I\u2019m suspicious of any business that promises that right at the start.", "replies": [{"id": "iz5la0u", "text": "If the business were that profitable, why would they sell it for so cheap? Or, rephrased- if it sounds too good to be true, it probably is.", "replies": [], "depth": 2}], "depth": 1}, {"id": "iz2bivw", "text": "I would not invest in either residential or commercial real estate right now. Give it 6-12 months and reevaluate the market. \n\nI read a great quote the other day, \u201cinvesting right now is like licking honey off a razor blade\u201d. \n\nYes, there are opportunities out there but unless you have a ton of experience, I would not invest right now.", "replies": [{"id": "iz2mbh2", "text": "I kind of agree with this, but I\u2019m curious as to your reasoning. For me it\u2019s mostly shot where rates are right now compared to where they should be 1 out 2 years from now and lack of buy demand, but prices haven\u2019t really come down\n\nI have a build project on vacant land currently on hold for the next year for that reason.", "replies": [{"id": "iz2oq1m", "text": "Interest rates have skyrocketed but the drastic increase has not fully baked in to property values yet. \n\nMost buyers are sitting on the sidelines until either 1) rates come back down 2) sellers start dramatically lowering their price. \n\nIf interest rates are 6%~ then you should not be buying a property at a cap rate below that, unless you are confident you can somehow increase the value.", "replies": [{"id": "iz2p7sb", "text": "Got it, thanks. We\u2019re on the same page.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iz2g83a", "text": "I can\u2019t speak to businesses but you\u2019re not going to find anything in CRE with your returns and cash. If you can get that kind of return by buying a business (I\u2019m skeptical) I\u2019d take that route, but there is nothing in those return and capital parameters in CRE", "replies": [], "depth": 1}, {"id": "iz2iwao", "text": "What type of businesses? I\u2019m curious.", "replies": [{"id": "iz2ngon", "text": "Probably really far from what you\u2019re expecting. These are Liqour stores / gas stations and C-stores. These businesses are great returns but are active which is probably why not a lot of folks consider them.", "replies": [{"id": "iz2o5u6", "text": "Interesting. So you would be buying that actual business and running it, or hiring someone to run it, not buying the building as a single tenant triple net asset.", "replies": [{"id": "iz2oel9", "text": "Depends on the cash flow available. Ideally I want to be an owner operator which is actually running the business so payroll expenses are low and you take home more but have the option/enough cash flow to hire a manager so you can scale.", "replies": [{"id": "iz2oome", "text": "Nice. Good luck!", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "iz2qvs4", "text": "Have extensive experience in c-store, fuel &amp; car wash industry. Own just under 10 some by myself and some with partners. Not sure where you are at but very skeptical you can buy one with $200k down. Where I am at the strong ones are going for minimum $3-5m. To give you an idea im building a nice one now and I am putting $1.5m down payment in. Fuel is all about location and you need the best corner so land can be $1m plus for C2. \n\nThe fuel tanks are expensive to put in but also cost a ton for insurance, permitting and inspections. Bank financing is highly contingent on experienced owner/operators so how would you even get financing? \n\nAlso on-top of the bank financing you need about $150k minimum for initial inventory depending on price of fuel. You will need large cash reserves as well as fuel trucks can be $30-40k depending on fuel price and you will need several deliveries a week. Most of the sites are small businesses but the oil company will not just work with you and you will have to work through an intermediary partner who will also charge you for the fuel, branding etc.", "replies": [{"id": "iz2rlnm", "text": "If I take this route I\u2019d be partnering with family as they are established in the space. They\u2019d cover any capital deficiencies. Going the CRE route I\u2019d be alone since that\u2019s not their space-for context.", "replies": [{"id": "iz2sisq", "text": "Good luck! Your family will be covering a lot. Its a great business just highly capital intensive. You are right about being a low labor business one of the the perks.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "iz30tj7", "text": "I like multi tenant retail with infill locations. Anything anchored by liquor or cannabis really gets me going. Easy to manage, chance for growth, endless uses for 700-1500 SF unit with parking", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iz2lvpl", "text": "CRE is mostly a passive investment. You can get better returns on an active investment like buying and managing a business.", "replies": [], "depth": 1}, {"id": "iz301kx", "text": "Active CRE will suck that money up and more. And you'll probably need reserves/repair money. You may need to leverage into bigger deals via funds or syndications.\n\nPassive investments into syndications, with moderate risk profiles typically throw off net cash flow in the 5-9% annual yield (CoC) range and 14-20% average annual returns, slightly lower on an IRR basis. Multifamily with solid value add operators have been kicking off a 1.5-2x multiple in 3-5 years..keep in mind many multi deals have experienced the luck of a very low interest rate environment.", "replies": [], "depth": 1}, {"id": "iz30x3c", "text": "You should look into some net lease QSR stuff. You can find newer builds for less than a $1m. As long as you do your due diligence and make sure sales are strong it can end up being a pretty safe investment regardless if it\u2019s a franchisee or corporate. \n\nWith net lease real estate, the tenant pays for all taxes, insurance, repairs, ect. It\u2019s completely hands off. If you factor in depreciation you can ROI 7-8%. You also can write off depreciation and number of other things to make it worth your while. \n\nShoot me a DM if you want more details", "replies": [], "depth": 1}, {"id": "iz33sm4", "text": "You\u2019re dreaming if you think you can make your money fully back in real estate, or any other business for that matter, in 13 months.", "replies": [{"id": "iz37py2", "text": "I\u2019ve seen it, the only asset class I\u2019ve seen it in is a business acquisition deal. The question isn\u2019t if it\u2019s possible, it\u2019s if it\u2019s possible in CRE", "replies": [{"id": "iz4hi7r", "text": "Where have you seen this?  The sales listings put together by the current owners or the brokers trying to sell you the business?  How far did you get in your DD?  Is the 13 month return based on 2021 numbers - which weee an anomaly - and are no longer to be expected?", "replies": [], "depth": 3}, {"id": "iz5lqxs", "text": "Have you actually seen it? Or have you heard it/assuming financials shown to you are actually happening. \n\nThis could be true with a 10-20k investment, but 200k to buy a business in operation that is also making 200k+ in a year? I don\u2019t know if any owner who would sell a business that healthy before hiring someone else to run it for them.", "replies": [{"id": "iz5mfvq", "text": "Yes, my family is in that space I\u2019ve seen it first hand. Typically businesses trade at 3.5x their discretionary earnings so if discretionary is at 200,000/year that business is worth roughly $700,000. If books are clean that business can be financed using an SBA loan at 25-30% down. Assuming the deal is good, right now I\u2019m hearing the market is inflated just like everything else-but that\u2019s where the market should settle once we normalize.", "replies": [{"id": "iz5pyym", "text": "Fair enough. Be sure to do full due diligence on the financials.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "iz3cvy1", "text": "I would be wary of anyone saying you can put down $200k to buy their business, take a loan for the rest, and generate a take home profit of $180,000/year.", "replies": [], "depth": 1}, {"id": "iz6ov1m", "text": "200k is nothing relative to replacing a day job... quality assets yield a 4-5% unleveraged.\n\nYour suggesting you can earn the money back on this business in 13 months but the part your not sharing is what the interest rate on that loan will be because of course you need to pay interest which comes off of that 180k first.  The person you are buying it from... do they currently spend 40-80 hours a week in their business working?  Do their relatives work there as well?  Are you including the cost of rent, insurance, and everything else?  There is an absolute 0.00% chance they are selling you a business for 625k that yields 180k/yr with no work on the part of ownership.", "replies": [{"id": "iz6s5mp", "text": "That\u2019s in seller discretionary earnings which is cash flow available to an owner operator. The owner is working in the store, family is not. Businesses doing under $5mm in rev are valued based off SDE, the true value of a business doing these numbers is about $650k-$700,000 and that\u2019s typically what they trade for in a normal market. 3-3.5x SDE. I\u2019m not saying this is a passive investment, I\u2019m fully prepared to become an owner operator if it means getting those kind of returns. I know this maps out because I\u2019ve seen it first hand-that\u2019s not my question. My question is if there is something similar in the CRE space that can offer similar returns assuming I\u2019m active in the investment.", "replies": [{"id": "iz6uhcn", "text": "Maybe in a dinky motel you could get 10% unlevered return but it would require significant work to manage and you would probably need more capital from a partner.  Maybe only worth it if you are handy with tools and can handle maintenance or something yourself.  \n\nIt sounds like your family has experience in the liquor / c store space so you should stick with that.  Also keep in mind how much lease term is remaining on the store and what market rent for a similar space would be before you buy because once the lease and options are up the landlord can change you whatever rent they want or just lease it to someone else and their discretion.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}]