Would you buy some properties in a historically non or slow appreciating area at a 12% cap rate or lend out that money at 12%?
One is obviously less work, but what are the risks of both?
Let’s say I have $50,000 and I go purchase a house in the mid-west for $50,000 cash. It has a cap rate of 12% which brings in $6,000/yr. My PM would be handling all the leasing and tenant contacts but inevitably there will be some vacancies, repairs and maintenance that may eat into that 12% cap rate. Also, I’m looking at a 6% realtor fee hit when I go to sell, so if there is absolutely no appreciation, I will lose $3,000 at time of sale.
On the other hand, I lend my $50,000 secured by some property at 70% or lower LTV. This loan would bring in $6,000/yr also. I would have no property headaches to deal with but 0% chance of any capital gain.
Those are the simple pros and cons of both. There are many what-if scenarios in either case that can sway you to either side. I’m not sure which direction to go, but am thinking of doing a little of each.
I like the idea of cashflowing properties in decent low priced areas. I think that there will be some appreciation in them, maybe up to 3% a year. Furthermore, if I can purchase these properties at a significant discount (which is definitely possible in today’s market) then I can have some equity built in and cashflow even more.
My concern on hard money lending is what happens when I don’t get paid. Sure I can foreclose and get the property. But will I even want the property? What do I do with it? What if it’s in mid-construction?