Tons of equity...where should I start?

Question

My goal is to build long-term wealth for my family, and eventually get out of my corporate job.  To be honest, I'm a bit tired of spending my days making money for someone else.  If it were up to me I would ditch this job tomorrow, but realistically it will likely take me a couple of years as I learn how to let our money work for us rather than work for money.

Here is the situation...we have around $900K in equity built up in our current home.  I have been spending the last few years rebuilding my credit and paying down debt.  About 10 years ago I lost my job, had a heart attack, and we almost lost everything.  Medical bills kept growing, and we essentially survived off of my credit cards.  I decided to take the hit to my credit to keep my wife's credit in good standing.  I am not on the home loan for that purpose as we wanted to keep our interest rate down.  I believe she is around 760.  I've fought back to 655.

With that said, I want to start using the equity we have to invest in properties that will create passive income streams through long and short-term rentals as well as potentially purchasing and flipping properties.

How challenging would it be to start utilizing the equity we have in order to start investing?

Thank you in advance!

Nathan Gesner · Answer

The best time to start investing was 20 years ago. The second best time is today.

I recommend you build a strong foundational understanding of real estate investing.

1. Start with BiggerPockets Ultimate Beginners Guide (free). It will familiarize you with the basic terminology and benefits. Then you can read a more in-depth book like The Book On Rental Property Investing by Brandon Turner or The Unofficial Guide to Real Estate Investing by Spencer Strauss.

2. Get your finances in order. Get rid of debt, build a budget, and save. The idea that you can build wealth without putting any money into it is a recipe for disaster and the sales pitch of gurus trying to steal your money. A wise investor will not try to get rich quick with shortcuts. If you can't keep control of your personal finances, you are highly unlikely to succeed in real estate investing. Check out my personal favorite, Set For Life by Scott Trench , or The Total Money Makeover by Dave Ramsey.

3. As you read these books, watch the biggerpockets podcasts. This will help clarify and reinforce what you are reading. You can hear real-world examples of how others have built their investment portfolio and (hopefully) learn to avoid their mistakes.

4. Now you need to figure out how to find deals and pay for them. Again, the BiggerPockets store has some books for this or you can learn by watching podcasts, reading blogs, and interacting on the forum. There is a handy search bar in the upper right that makes it easy to find previous discussions, blogs, podcasts, and other resources. Biggerpockets also has a calculator you can use to analyze deals and I highly recommend you start this as soon as possible, even if you are not ready to buy. If you consistently analyze properties, it will be much easier to recognize a good deal when it shows up. Find Brandon's videos on YouTube for the "four square" method of analyzing homes and practice. It doesn't take long to learn how to spot a good deal.5. Study the market. You can learn to do this on your own or get a rockstar REALTOR to lead the way. I highly recommend a well-qualified REALTOR that works with investors and knows how to best help you.

6. Jump in! Far too many get stuck in the "paralysis by analysis" stage, thinking they just don't know enough to get started. The truth is, you could read 100 books and still not know enough because certain things need to be learned through trial-and-error. You don't need to know everything to get started; you just need a foundation to build on and the rest will come through experience and then refining your education.

You can build a basic understanding of investing in 3-6 months. How long it takes to be financially ready is different for everyone. Once you're ready, create a goal (e.g. "I will buy at least one single-family home, duplex, triplex, or fourplex before the end of 2019") and then do it. Real estate investing is a pretty forgiving world and the average person can still make money even with some pretty big mistakes.

Ruchit Patel · Answer

That's a lot of equity, Anthony. Sorry for what happened to you in the past. It is in no one's control, but taking your financials into your hand for the future is!! Let's go.

The bank/lender won't allow you to cash out all, 900K. You can use the money to buy good cash flowy properties, where cash flow is more than the interest on money borrowed from your equity. That way, you don't have to sleep every night thinking about one new bill to pay.

It's not challenging if you have time to learn online, or you can find experienced people doing the same and let them lead you.

Now, these are just general suggestions, for specifics, a lot needs to know about you such as, how much money you need to quit your job, in how many years you would like that, and how's your risk tolerance. Do you have any other debt right now, etc etc?

Managing money is an art and I would be happy to hop on a phone to discuss details and also share how I invest out of state to eventually quit my job.

Jim Pellerin · Answer

@Anthony Huston You need to speak with a lenders/mortgage brokers to see how much of that equity you can actually pull out? This depends on your income and credit scores, etc.

Drew Sygit · Answer

@Anthony Huston whatever you decide to do, be CAREFUL you don't get in over your head!

We think the Midwest is a GREAT place for OOS investors to consider!

YES, we may be a little biased, but check out our blog here on BP comparing Detroit to other cities and Deep Dives on Metro Detroit cities & neighborhoods: https://www.biggerpockets.com/...

Your biggest question shouldn't be WHERE to invest, but HOW you will invest!

Many OOS investors set themselves up for failure because they don't truly take the time to understand:

1) The Class of the NEIGHBORHOOD they are buying in - which is relative to the overall area.

2) The Class of the PROPERTY they are buying - which is relative to the overall area.

3) The Class of the TENANT POOL the Neighborhood & Property will attract - which is relative to the overall area.

4) The Class of the CONTRACTORS that will work on their Property, given the Neighborhood location - which is relative to the overall area.

5) The Class of the PROPERTY MANAGEMENT COMPANIES (PMC) that will manage their Property, given the Neighborhood location and the Tenants it will attract - which is relative to the overall area.

6) That a Class X NEIGHBORHOOD will have mostly Class X PROPERTIES, which will only attract Class X TENANTS, CONTRACTORS AND PMCs and deliver Class X RESULTS.

7) That OOS property Class rankings are often different than the Class ranking of the local market they live.

8) Class A is relatively easy to manage, can even be DIY remote managed from another state. Can usually allot 5-10% vacancy factor and same for maintenance.

9) Class B usually also okay, but needs more attention from owner and/or PMC. Vacancy and maintenance factors should be higher than for Class A as homes will be older, have more deferred maintenance and tenants will be harder on them.

10) Class C can be relatively successful with a great PMC (do NOT hire the cheapest!), but very difficult to DIY remote manage. Vacancy and maintenance factors should be higher than for Class A or B. Homes will have even more deferred maintenance and tenants will be even harder on them.

11) Class D pretty much requires an OWNER to be on location and at the property 3-4 times/week. Most quality PMCs will not manage these properties as they understand most owners won’t pay them enough for the time required and even then it’s too difficult successfully manage them.
***Only exception is if an owner has plan & funds to reposition Class D to Class C or higher.

https://www.biggerpockets.com/forums/776/topics/960183-what-they-dont-tell-you-about-cheap-rental-properties?highlight_post=5562799&page=3#p5562799

Also, SERIOUSLY consider - do you really have the time to be a DIY landlord or should you hire a PMC?

Good luck with whatever you decide😊

Caleb Brown · Answer

Definitely speak to a lender about how much equity you have to tap into. I would look into STR's or try to do BRRR's(Maybe find ones that'd fit for a STR). BRRR's will help you recycle the equity you have

Nicholas L. · Answer

@Anthony Huston

welcome.  can you say roughly where you're located?  and do you have some cash in addition to your home equity?  real estate investing takes cash.  there's no way around it.

it's an interesting time to be investing.  prices are high and it's tough to find deals, but there are also a lot of different types of investing, as well as legitimate, investment-friendly loan products and options, like DSCR loans.

i'd start small and slow by buying ONE property, putting it under property management, and seeing what you think.  maybe you'll hate it.  maybe you'll love it.

unless you find a killer, off-market deal, your monthly net cash flow on any old LTR is likely to be at most a few hundred dollars.  but you will also be building equity.  so that's good.

hope this helps, looking forward to further dialogue.

Tons of equity...where should I start?

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