What do I do with my money?

Question

Here is my situation:

In 2009 I bought a hurricane damaged house and rebuilt it. It has been a vacation rental since. I put the house on the market Monday so I can free up some money to reinvest.

In May of 2012 I purchased another house (long term rental) using a hard money lender. I am in the process of refinancing the house through a bank.

Here is my question: What do I do with my money?
A: Use the profit from the vacation rental (around 50K) to pay off the house I bought in May. ( there will be a balance left over on my note and it will take 1.5 years for me to own the house free and clear).

B: Take the vacation rental profit and buy another distressed property.

Other information: I can use my hard money lender (very low interest rate) to buy another house and refinance after the rebuild. Cash is a concern of mine, I don't have a lot of money to float home mortgages and rebuilds. I don't want to get in over my head in case something were to happen.

I am leaning towards my first answer. If I can own a house free and clear it will provide me 1300 a month in rent revenue (minus expenses) to reinvest in the near future. With the sell of the vacation rental it will free up my cash that I spend on the note (900 a month). All while I am rebuilding another house using hard money.

Thanks.

J Scott · Answer

Every time I read a question like this, my first thought is that one day someone is going to post: "I'm going to a wedding this weekend and need to choose between the chicken and the fish for my entree. Which one should I choose?"

Sorry, only you know whether your preference is chicken or fish, and which one is more suitable to your diet...

Mike H. · Answer

Playing it safe means not getting much of a return on your money.
You can balance the two. But I just don't see any reason to have all that cash sitting in a house. You're getting a nominal return and you aren't really growing much.

You're better off sticking it in a mutual fund if you're really that risk averse. You'd probably get better returns there and won't have to deal with any tenant issues.

To me, if you understand the numbers in real estate, put the money back in to more properties. With 50k, you should be able to buy at least 3 more houses if you use your hml.

And with your other rental property you bought earlier, the 4 houses should kick off some really good cash flow - a lot more than one rent house paid off would do.

If you want to stay conservative you can always put more of a down payment from the 50k into the 3 rental properties. That will still give you plenty of the benefits of leverage but a higher cash flow/equity for your peace of mind.

To me, I'd keep every penny of cash you can though since thats going to help you qualify for loans more than anything. And continue buying more properties provided the numbers make sense. You're not going to be able to get the kinds of deals you're getting today forever.

At some point, the music is going to stop and the deals you're picking up with $300 to $400 a month cash flow will drop back down to $100 to $200 and you'll wish you'd have bought more during the bust.

As it is, I think some of the better areas might only have a year or so left anyway.

Lynn McGeein · Answer

Chad, We decided to take a portion of our cash and pay off our first property over 2 years ago, and, quite frankly, all we have done since then is think about a cash-out refi as we have cash on hand for emergency fund but not enough for a big enough down payment for the 25% down required for our next property as we're looking at a more expensive purchase in a specific area next time. It sounded like a logical, responsible thing to do with our circumstances at the time, but now, we've learned it just tied up money we could be using elsewhere.

Chad Trueheart · Answer

Mike,
This is the answer I think I am looking for. Stack as much property as I can handle as soon as I can. What are your feelings about flipping a property here and there to build cash? Or are we going down the same road as before… why flip when I can leverage?

Thanks

Chad Trueheart · Answer

Jeff, Yes the homes are increasing in value.

I buy very distressed homes. My first two are $100,000-$125,000 bought for less than 50% market value. I do 99% of the work myself, so it takes me 4-6 months to rebuild them. I have a full time job so I can only physically do 2 houses a year until I can make real estate my full time job.

Ross,
I don’t mind the risk, I just don’t have the ability to do more than 2 homes per year. Growing up I worked my summers helping a real estate investor rebuild his rent houses. Well 10 years later he offers his help in getting me started in the real estate world. He provided me the cash for basically free and lends me the big tools I don’t have to for the rebuilds (commercial paint sprayer and such).

Ross Schneider · Answer

It is all about what you are comfortable with. Do you want to take a risk and buy another investment home with hard money? Or do you play it safe and go the free and clear route? Like Nathan said, today's interest rates are so low you will have a less risky approach and will be able to pay the loan off easier. What lender are you thinking about using if you do the hard money approach?

Jeff S. · Answer

Chad, it also has to do with growth. If you are content going at the speed not leveraging affords you then go with cash. If you are dealing with very low cost properties dealing with cash can make sense.

Are the properties you are buying increasing in value? If so, leveraging makes more sense, if not, not so much.

Nathan Emmert · Answer

I would encourage you to read through the forums... leverage versus free and clear properties has been discussed at length in these forums. Quite simply, it's risk versus reward. Leverage at today's interest rates provides far better returns but there's risk in that... free and clear provides a great night's sleep.

What do I do with my money?

What do I do with my money?

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