What can I do with $140K cash?

[John K.]

Hi, 
I want to get into real estate but don't know how and where. I have a remote job living in Austin and $120K cash and $20K on my employer 401k. If you were me, what would you do? My goal is to work for myself and stop my 8-4 job at some point. I am willing to relocate to anywhere in the US. I think my best option is to relocate to a cheap market, buy land, build a cheap house, and sell and once I gain more experience I can come back to Austin. Another option is to buy foreclosures but then I am scared that I mess up since I don't have any experience. Another option is to flip a house. But like I said I am very confused about which route to go. What would you do? I am single and can save around $4000 each month. 

[Randall Alan]

Quote from @John K.:

Hi, 
I want to get into real estate but don't know how and where. I have a remote job living in Austin and $120K cash and $20K on my employer 401k. If you were me, what would you do? My goal is to work for myself and stop my 8-4 job at some point. I am willing to relocate to anywhere in the US. I think my best option is to relocate to a cheap market, buy land, build a cheap house, and sell and once I gain more experience I can come back to Austin. Another option is to buy foreclosures but then I am scared that I mess up since I don't have any experience. Another option is to flip a house. But like I said I am very confused about which route to go. What would you do? I am single and can save around $4000 each month. 

@John K.

Hi John,

I probably wouldn't recommend foreclosures as a starting point.  While you have enough money to probably buy into and repair one foreclosure, your money would go farther by financing properties and putting as little as possible down.  The short version of that is if you can buy 4 houses financed, it will make more money than 1 free and clear house;   especially when taking into consideration all the benefits that come with each house - your tenant paying down your mortgage, 3.3% depreciation on 4 houses, market appreciation on 4 houses, plus the rental income on 4 units.  

Foreclosures also come with A LOT of inherent risk - you don't know the condition of what you are buying until after you have bought it.  We have bought 4 foreclosures - 3 went great - the other one literally wreaked of cat urine so strong we had to wear respirators to walk into the house.  We ultimately sold that one to a handyman and only made about 1/2 the profit we could have made on it - but we were worried about being able to sell it on the open market with how bad it smelled.  So point being - you never know what you are buying there.

I also probably wouldn't touch the money in your 401k.  That has a different purpose in life and you should leave it alone to be there for you down the road (especially since you have other money and income available).

Just know that the whole "stop working my job" thing is a long term goal.  We have gotten to that goal post - but we were at 20 units when we decided to do it where we were replacing about $200k worth of W2 jobs.  We are now at 37 units and our full time job is managing those properties.  It's not quite a passive as the RE world makes it out to be (we self manage our own properties)... but it is a very nice lifestyle.  No alarms to wake up to and as many vacation days as we want in a year! 

So presuming you are on the "add one rental a year plan" after maybe buying 4 with the money you have, I would think it would take a number of years to achieve that retirement goal - but your mileage could vary depending on how much income you need to live on. 

Flipping houses is good for big chunks of cash... but it comes with lots of questions - Who is going to do the work?  You while you are working?  Do you have the skill set to do that?  If not, managing contractors and not getting exploited in the process is a whole different set of skills as well.  It's really hard to pay retail prices on renovations and come out ahead on a flip.  We went the "Do what we can do ourselves" route, and then worked with more handy-man type people for the things we didn't know how to do.  But we never had a shiny truck show up with people in monogrammed shirts.  It's was all about maximizing every dollar spent and minimizing every expense we could to have as many dollars left over for profit for us. 

All the best!

Randy