What are some options for funding a rehab project?

Starting Out
11yFollow

What are some options for funding a rehab project?

Karen M.
Hales Corners, WI · Member since 2013 · 229 posts · 80 votes

Dear BP friends --

I am thinking of buying a property for cash.  However, I am concerned about using up all of my non-retirment money on a property deal.  It's just scary.  We obviously need to have an emergency fund for our family, and it feels good to have some cash around, so I can't throw every last cent into 

So, I'm trying to think of options to scratch up money for a rehab.  The property I am considering has a good interior, but definitely needs a new roof and may need a new air conditioner, furnace, electrical updates, etc.  

Option 1 -- run up a credit card?  Ack!

Option 2 -- take a Home Equity Loan on my primary residence?  Ack!

Option 3 -- beg  encourage family members to loan or invest (aka the Brandon Turner method -- see podcast #92)  Ack!

Option 4 -- find a partner or a hard money lender  Ack!

Option 5 -- cash flow the rehab through a monthly budget --- maybe I'm not going to say Ack to this one -- maybe this is the right idea here. 

Option 6 -- 401k loan??  Ack!

What am I missing?   What would you do if you had enough to buy the home but not enough, or maybe not quite enough of a comfort level to self-fund both the rehab plus a cushion?  

(Note: I am a daily Dave Ramsey listener, but I get very torn about where Dave Ramsey meets up with real estate investing.   I am OK with some debt, but I don't want to put myself in a risky place, so I need to be prudent and very conservative about managing the money.)

I am not sure if this is the house, but I might make an offer and see what happens!  But, I'm scared and not sure about stretching the budget.

Also, let's talk about exit strategies -- Ack!

1.  Sell it for below market value

2.  Fix it and sell it for market value

3.  Rent it out  

My main idea is to keep the property and rent it out and hold it,  or to sell it.   It might actually be a good flip (I need to run the calculators), but I desire to own a rental and it might be a very nice rental too.

Thanks for any conversation. I appreciate it!!

Karen

3Reply
236 views

Most Popular Reply

Will BarnardPro Member
Moderator
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
11y

Karen, I detect a lot of fear and skepticism on your part and perhaps Dave's teachings have made you too conservative when it comes to leverage. The most powerful tool in RE I know of is leverage, of course tools must be used responsibly, however, when that happens, good things come of it.

You said ack to almost every option in your first post. While I agree it applies to a hard money loan or even a private money loan when your strategy is buy and hold, I think the HELOC or just a low LTV bank loan at what are currently historic low rates are both EXCELLENT options. I 100% disagree with those who believe in owning free and clear homes as it is not much different than placing $100k (or whatever number you are working with) in cash in a safe deposit box.

Owning free and clear always gets the argument that your cash flow is greater and while that may technically be true, by applying leverage, you can increase your cash on cash return and obtain arbitrage from borrowing at lower rates than what the investment yields. What I mean is, if you were to simply borrow from a bank at 4% interest for 15-30 year terms for $50k (say 50% loan to value assuming purchase is $100k), you may have less cash flow as you have debt service, but if you place that $50k into another asset yielding above that 4%, you have just created arbitrage and additional cash flow. Certainly your buy and hold assets produce returns greater than 4%, so each asset supports having debt service and by using that option! you will have even more cash flow and even greater tax benefits and net worth.

Podcast Guest on Show #130
6Reply
See this reply in the discussion

53 Replies

Jump to latestLatest
  • Cal C.
    Investor · Peachtree Corners, GA · Member since 2014 · 1k+ posts · 1k+ votes
    11y

    Dave makes his nickle selling hope as in there is hope for people who are deeply in debt (tens of millions).  Much of what he teaches is (or used to be) common sense.

    0Reply
  • Christopher Leon
    Realtor · Schaumburg, IL · Member since 2011 · 289 posts · 118 votes
    11y
    Originally posted by @Karen M.:

    It is our intent to try land lording with an affordable first property.  How exactly did you stretch or go above and beyond the Dave Ramsey baby steps @Christopher Leon 

     Glad to hear you have the situation under control, meaning, your not emotionally attached and are just going to walk away. That takes a lot of guts considering your keeping your priorities in order. Nice!

     Being a landlord is rewarding if you run a tight ship and understand the market you're in. I would suggest going with a one or two bedroom condo in a desirable area. An area you know you can find a good qualified professional long term tenant, with good income, and good credit. It is a safe and conservative way to play landlord and get your feet wet.

     How did I go above and beyond the DR program? That's an awesome question. This is what I did: I followed his program to a tee and finished all the baby steps. Do know that when I started this program, I did not own a home, had no job to max out retirement options (401k and such), nor kids to send to college so the last few baby steps were not necessarily applicable to me. I did have the strong foundation of budgeting, spending less, and saving my money though; so, how I went above and beyond the program was leveraging those steps I learned to run the business of ME, INC. This is a fictitious company and it's how I decided to see my life, as a business, after all, that's essentially what we all do is run a business for ourselves - it's just that no one views it like that. I kept balance sheets, profit and loss statements, etc.  At this time I was also a Real Estate Investment Broker and was working with clients to fill vacancies. Naturally, I am a loud talker, and was conducting some business in a McDonald's one day and an older man stopped by my table cause he overheard my business calls. Long story short, I was able to raise a $175,000 off that sit-down with this guy in a McDonald's to buy real estate and begin my own portfolio. This person, out of no-where, became my private lender (bank) and I have been buying cash flowing property ever since. Although, this is not what Dave recommends, his program and tools helped me become a sound investment from my private lender's POV. 

     Bottom line, you can view Dave's program as what it is, or you can expound on the program and take it further. Even though I did this, and went the opposite direction of what Dave teaches, it has worked for me and I still remain debt-free (other than mortgages that pay for themselves) That's the only way this works, is having property that can pay for themselves. I have ample amounts of reserves for my property (because of what I took from FPU) and, thus, I see my strategy into investing, and going forward to be conservative. Furthermore, I got real lucky to be able to find properties very distressed and under market value and now, today, as up and running investment properties with long term tenants in place, they're value is much much more than what I have a mortgage for. This is how I went above and beyond the DR program. You may not be in the position to do this how I did it, but, I guess it may help you to think outside the box a bit while keeping DR's principles at heart. Good luck

    0Reply
  • Tyler Bardwell
    Gilbert, AZ · Member since 2014 · 6 posts · 0 votes
    11y

    if your credit card limits can handle it and your rates are low... that is a great way because the money is immediately available. This method assumes you make a profit and turn around and pay the credit card dept as soon as the deal is done. Just my opinion

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y

    Thank you everybody for taking the time to help with this conversation, it's wonderful and I appreciate all your insights!  :)   I love this place!   I'll go through and respond to each post a little at a time.   

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y
    Originally posted by @Mike Hurney:

    @Karen M. I feel like I know this guy Dave already..... Sorry but at best, we're only interested in your plan and you if you're on this forum.

    1. What's your current home mortgage rate? and based on your Principal and Interest payments you may only want to make an extra Principal payment only.

    2. Just like a Turtle, you only move ahead when you stick your head out a little. with minimum calculated risks of course.

     Good points, Mike.  I believe in listening to smart people, and getting great ideas from people who have figured things out and made it work.  Thus said, I regularly listen to several sources of investing and personal finance information -- Dave Ramsey (personal finance podcast),  Jim Cramer (stock market podcast / email show recaps),  Bigger Pockets (podcast and forum community) and the Motley Fool (paid stock services and paid forums).  I also have collected a small library of business books, mostly real estate titles (because it is such an intricate and detailed topic).  So, I take it all in and let it roll around my brain. I love learning, it has been a wonderful time to take in all these ideas and, on the stock market side, put things in to practice.   

    I am still hatching a plan for Real estate investing -- the vision is starting to come together, but I'm not there yet -- just last week I flip-flopped on what parts of the city I should focus on, and I'm also struggling with the question of how much money is appropriate for an initial experimental investment, and whether I can realistically handle property management, or should I have a manager right away.  These are all big questions.  As much as I love the encouragement to get started, don't fall into analysis paralysis, etc, I want to feel GREAT about the first investment. 

    I was thinking the other day that it might be like having kids -- you're never really ready to have kids, and there is always risk and unknowns.  But it is good to have reasonable expectations and a long term commitment to what you're getting into!  :)  

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y
    Originally posted by @Steve Babiak:

    So, why not get the HELOC and only use it for emergency purposes? Then you can invest using your cash without as great a worry about covering an emergency.

     Hi Steve, i think you have a good idea.  I need to read up more about exactly how HELOCs work, and how they might work for us compared to a regular Home Equity Loan. 
    I'm just not up on the terms of these types of loans and how they compare to other types of loans and lending.  Good to investigate, thank you!  

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y
    Originally posted by @Robert Leonard:

    @Karen M. 

    I have to say, I love Dave Ramsey.  I think he offers some of the best personal finance information available today with one exception; he is way too extreme toward debt. Of course it's prudent never to overextend yourself, but to do everything with cash as he recommends is extremely limiting.  Can it be done, yes, but if you have the discipline to follow all of the basic fundamental ideas he teaches to manage your personal finances, you have what it takes to use debt responsibly. 

    I know you have to do what allows you to sleep well at night, but it is a totally missed opportunity when you give back (payback early) the extremely cheap money available to you when you have a mortgage at today's rates.  It makes perfect sense in a higher interest rate environment, but if you are young and need money to invest for the future, we have a huge advantage.  You can find plenty of arguments here on BP about this issue, so I'll drop it and let you read through those conversations rather than stir it up here.

    You've already decided against this deal, so I'll offer some food for thought on the next one you consider.  Two options come to mind: crowd-funding and Home Depot's "Project Loan."   Dawn Anastasi mentioned using a Lending Club.com loan to fund a rehab of one of her properties in her podcast.  I think they offer up to 35k?  This one requires a first lien position, which would work if you buy the property with cash.

    http://www.biggerpockets.com/renewsblog/2013/08/01/bp-podcast-029-peer-to-peer-fix-hold-dawn/

    The other, that I have used (I'm on my second time now!) is the Home Depot "Project Loan."  It is based on your personal credit and not a loan against any specific property.  You go to their service desk and you can get approval in 5-10 minutes if your credit is in order.  It is extremely easy and the terms are awesome!

    http://www.homedepot.com/c/Credit_Center

     Robert, thank you so much for that info!  I had never heard of a Home Depot project loan, and that is very interesting.  But -- is it different from a basic HD credit card?  I will have to look at your link.  Thank you for sharing that. 

    I am so impressed with how Dawn used Lending Club and Prosper and those are also very interesting and creative options too.  

    It is true, there is money out there and if the property will make money, then borrowing conservatively should not be a problem, at least, I hope.  I am very curious about the worst-worst case scenarios.  (I will start another thread to chat and brainstorm about that.) In essence, I think it's those worst-worst case scenarios that Dave Ramsey is trying to protect people from.  We are very blessed and feel like we have some safety but I don't want to take our financial security for granted either.  

    Thank you for the conversation! 

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y

    Bill B., Thank you so much for your detailed, emphatic and encouraging reply.  Great suggestion to work with a mentor.  To be honest, it takes me a while to get to know people, and it might take as much time for me to develop a relationship as it is to find a property -- BUT!  It doesn't have to take that long,  but I need to get out there and work on relationship building and really have some substantial conversations with people in our local investing community.  I've been to REIA meetings (which are difficult to get to with my family schedule) and I can't connect with people that fast, it's way too quick.  I should put more effort into getting out there, and getting to know more of the local people who participate here at BP.   Great point.

    Available time is a big thing to consider.  Really.  I have this romantic vision that I will have a perfectly organize filing cabinet with leases and things, but in all honesty, it might be a total disaster for me to take it all on.  One property to learn on is a good idea, I think, but it could get complicated.   I think I am more of a tortoise and I enjoyed Marcia Maynard's podcast where they buy a rental every 5 years.  I am not sure what our pace will look like (and it will depend GREATLY on how the first one goes!)

    Our home mortgage is cheap at 3.5%.  Most of the arguments I'm absorbing for paying off the home mortgage are emotional rather than math-y.   #1)  When your mortgage is paid off, your security is so much higher -- paid off homes typically don't get foreclosed on.   #2)  not owing anybody anything is liberating.  There is a Clark Howard research piece about how retirees with paid off mortgages are happier than ones with mortgages.  I think about how my husband's job really becomes optional rather than a requirement if we dig in to pay this loan off. I think that would be a tremendous burden lifted off him.   Dave Ramsey often quotes the Bible verse:  "The borrower is slave to the lender."   It's good to be mindful of the obligations.  

    I have been a bit obsessed with personal finance and investing planning lately, and it is because I'm viewing all this investing and planning and saving and financial stewardship to be an act of love for my family. :)   @Bill B. 

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y
    Originally posted by @Ben Leybovich:

    Hahahaha - this is the problem with BP. People come here, read, and are often misled into believing that REI is not Ack! Karen - it's real estate - it's investing - it's risky and it's messy. If you are looking for Not Ack, mutual funds is your huckleberry...

    It's a great post, though, from an entertainment stand-point.  Also, you appear to know full well what the answers are.  You know what the pill looks like.  And, if you are honest with yourself, you know that everything about it is Ack!  Are you in or not?!

     You're so right, Ben,  I'm not ready yet, not in yet.  Maybe I will discover that it's not the right fit for me, but I'm not giving up on the idea just yet, either.  :)    I'll admit that my pace is on the slow side….  it is what it is!  

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y
    Originally posted by @Will Barnard:

    Karen, I detect a lot of fear and skepticism on your part and perhaps Dave's teachings have made you too conservative when it comes to leverage. The most powerful tool in RE I know of is leverage, of course tools must be used responsibly, however, when that happens, good things come of it.

    You said ack to almost every option in your first post. While I agree it applies to a hard money loan or even a private money loan when your strategy is buy and hold, I think the HELOC or just a low LTV bank loan at what are currently historic low rates are both EXCELLENT options. I 100% disagree with those who believe in owning free and clear homes as it is not much different than placing $100k (or whatever number you are working with) in cash in a safe deposit box.

    Owning free and clear always gets the argument that your cash flow is greater and while that may technically be true, by applying leverage, you can increase your cash on cash return and obtain arbitrage from borrowing at lower rates than what the investment yields. What I mean is, if you were to simply borrow from a bank at 4% interest for 15-30 year terms for $50k (say 50% loan to value assuming purchase is $100k), you may have less cash flow as you have debt service, but if you place that $50k into another asset yielding above that 4%, you have just created arbitrage and additional cash flow. Certainly your buy and hold assets produce returns greater than 4%, so each asset supports having debt service and by using that option! you will have even more cash flow and even greater tax benefits and net worth.

     Hi Will!  -- thanks for the comments. :)   I decided I just can't try for this auction property because it's too much unknown and too much money and it's close to being the right fit, but not close enough to really be the right fit.  That is OK.  There will be other properties and I have time to be choosy.  It was a fantastic exercise though -- I like looking at the possibilities and I like the mental work of trying to figure it out.  

    Before I got into Dave Ramsey, my first exposure was, like so many BPers, reading Robert Kiyosaki.  (It's been over a year now and I should go back and re-read Rich Dad, Poor Dad and some of his other books.)  So I had taken in all the ideas of using other people's money, but I've somewhat lost touch with that concept and all the benefits of it.  In addition to the benefits, I want to make sure that I absolutely, completely understand all the risks. (The big fear:  if I should screw up horribly, or if we have unexpected disasters, will our family lose our own home?)  Then I'll need to make a firm choice about what path to take.  Right now I'm in flux (and flux sucks).  Real estate is appealing as long as I can effectively manage risk -- everything in life has risk, I get it.  It's about taking the right precautions -- what are those?  Things like not getting upside down on your investments and maintaining an investing emergency fund -- what else?

    Thanks for defining arbitrage :)  I get the concept, the big objection that Dave Ramsey makes is that -- your higher return #s aren't guaranteed.  There is risk.  The main reason for having that cash or 100k locked up in your home or buried in your backyard (not recommended) or whatever, is that you *have* it. LOL.   

    Thanks!

    Karen

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y
    Originally posted by @Darren Budahn:

    Karen, 

    Why not buy a property in Milwaukee for like $50,000 or $60,000 that you can rent out for $1,000 or so a month? You can buy move in ready houses like this in average neighborhoods all over the city. You can get any local bank to give you a 75%LTV on these kinds of houses. You only need to come up with 12 to 15k cash out of pocket still leaving you with plenty of cash reserves. And you can get a 30yr fixed rate mortgage for only 4.5% or so. You will get a taste of how comfortable you are using leverage. Very low risk. It will cash flow and you can use that money to either pay down the mortgage faster or to invest in other properties.

     Hi Darren!  This is exactly what I thought I was going to do for a first property -- and then I got a little freaked out about a) not knowing all the neighborhoods in Milwaukee that well, and b)  crime reports, meaning shootings and lastly c) schools.  

    At first I was looking at the $30k properties and didn't find as much as I had hoped for in the areas I as looking at, mostly NW side and bordering around Wauwatosa.  Then I figured OK, $50k - $60k -- and that might work out -- but then I started to freak over the shootings.  There are many more shootings around the city than I realized, it is so, so sad.  It is possible to find a gem though that is located well, I should keep looking. :)  

    Now, my Zillow save homes is full of properties that are also closer to $80k - $100k, and I am looking in neighborhoods where there are zero shootings. I am also looking back and forth between schools with 1 and 2 ratings and schools with 4 and 5 ratings, and sometimes the cheapest properties in neighborhoods w/ schools with 8 and 9 ratings.  (Added:  I wouldn't expect a lot more rent from an area w/ lower crime and higher school scores, but the properties should hold value or gain value more easily.)  The home prices in the different school areas and PROPERTY TAXES are very related.   I don't know if I can afford some of the property taxes -- it may wipe out most of the cash flow of properties near highly-rated schools.  Sad.

    This is just all MLS and Zillow searches. I don't have the cash to purchase all -cash from a wholesaler. I haven't been trolling Craigslist.

    I am also having an inner debate about cash flow v. appreciation and asset quality.  I am also debating about self-management or hired management and I am conflicted over how close to my home I should invest.  If I self-manage, it would be so much easier to be close to home.  (I loved the auction property because it's like a mile from my house and 2 miles from the home improvement store -- good school ratings, sleepy community -- almost perfect…..  but high taxes and I can't see the home before biddding, have to pay cash and it needs a new roof.)

    When I invest in stocks, I care a lot about asset quality because appreciation is a big part of being successful.  My stock portfolio has some speculative investments, but they are also good companies, they are just more volatile.  

    For real estate I could envision having a mix of properties, or at least, trying out some of the different neighborhoods and price points. 

    It's always nice to talk to someone local, thank you for your insights!!  

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y

     Hi Wendell,  I'm still discerning whether real estate investing is "right" for us.  Thankfully there are more options than a savings account.  I have been investing in the stock market, and learning about / practicing generating income through stock options strategies, and mitigating risk through selective hedging and shorting.  It's been fun and fascinating and convenient.  Some advantages:  lower $$ levels than real estate, lower transaction costs, fast transactions, and I can do it in my pajamas with a cup of coffee -- no tenants, toilets and trash.  :)   Not bad!   I use paid advice and belong to a community of stock investors who are really very cool people, much like the cool people at BP. 

    Kiyosaki chose real estate, but in some of his books he mentions stocks as a valid option. He does say though, that if you're investing in stocks, you had better learn about options, and that is exactly why I sought out a great options education and advice service. It's been a very good experience and I will be a stock market investor for life. 

    So this is great, and I can transfer a lot of the concepts I'm learning and practicing in stocks / options to real estate.  I am still interested in real estate investing -- for diversification, for leverage (ack! / just kidding…)   for tax benefits, and all that other good stuff.  :)   

    But I'm not sitting around earning 0.1%.  One of my criteria for real estate is that it should be comparable to what I can do in the stock market, with less hassle.  However, they are different -- and I'm still forming my opinions on what I want and should expect from real estate -- is it cash flow? (My first instinct is that I want cash flow, but maybe there's a better answer)  The stock market is fascinating, and real estate is fascinating too.  What a great world we live in! 

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y
    Originally posted by @Dawn Anastasi:

    I think being comfortable with your decisions, being able to sleep at night, and making sure that you are 100% in agreement with your spouse is more important than the stress it might cause you to try something new.

    Have a long discussion with your husband and brainstorm together.

     I was *so* happy that my husband went over to peek in the windows at the auction property with me.  Although he has said something like "sure, fine, go buy a house, but I'm not going to be your handyman" (which is perfectly fair) -- he is reluctant, and I truly don't want to drag him into a property -- that is wrong.  

    He's a smart guy and I think when I can show him a good prospect and plan, he will be on board.  And if he's not 100% on board, then we don't have to do real estate.  It's OK.    My toughest client! :)   Correction:  the kids are the toughest!  

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y

    Hi Jerry,

    Good points.  I often feel like, the hardest part is knowing what you want.  When you know what you want it's actually not that hard to go out and make it happen.  But, these decisions!  I might be over-thinking some of it, waffling. 

    What does a great life look like?  I would say I already have it in many ways.   But we could make it even better. 

    I totally agree and hope to find the right property that can sustain it's own mortgage and also be affordable for us to get started with.   Thank you for the encouragement

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y
    Originally posted by @Account Closed:

    What about finding a deal with seller financing on the buy.  Say you find a property where the seller will take 10% down and the rest in 6 months.  Use your cash for the down and the rehab.  Sell for market value in 6 months and pay off seller at closing.

    Sounds to me like you don't have a plan if you are thinking that your exit is sell OR rent.  Buy to rent.  Or buy to sell.  The numbers are crunched differently.  One is for cash flow and return on investment.  The other is return on your invest, typically short term.  Don't buy to sell and then rent because it wouldn't sell.  That's a last resort option, not a plan.

     The plan is 100% to be a landlord, unless we try it and find out we are horrible landlords, then we would sell or need a plan B.   This property is not the one, even though it is cute and I like it! 

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    11y
    Originally posted by @Karen M.:
    Originally posted by @Steve Babiak:

    So, why not get the HELOC and only use it for emergency purposes? Then you can invest using your cash without as great a worry about covering an emergency.

     Hi Steve, i think you have a good idea.  I need to read up more about exactly how HELOCs work, and how they might work for us compared to a regular Home Equity Loan. 
    I'm just not up on the terms of these types of loans and how they compare to other types of loans and lending.  Good to investigate, thank you!  

    A HELOC is basically a checkbook against the equity in the house; you only pay interest on the portion that you have drawn, whereas in a home equity loan you draw the full amount at closing and have to pay interest on the full amount. A HELOC has a variable interest rate, whereas a home equity loan MIGHT have a fixed rate. A HELOC will usually be interest only during the draw period so the monthly payment is smaller, whereas a home equity loan is usually amortizing so principal and interest are included in each monthly payment.

    Of course there is more than that, and each lender will have their own variation on how they do these. 

    0Reply
  • Bill B.Pro Member
    Camarillo, CA · Member since 2013 · 217 posts · 86 votes
    11y

    @Karen M. 

    At the risk of adding to your angst; if you enjoy the stock markets, lower entry $$$ for investments that stocks allow, and rates of return that consistently dwarf stock market returns, you may consider notes as your REI vehicle. The grossly over simplified summary of note investing is that it is landlording without the toilets or the tenants. More accurately, you become the bank. So, you get the monthly income without the hassle of screening tenants or maintaining the property. You still have the security of the real estate securing your investment. And, if done properly, your rates of return can be well into double digits annually......WELL into double digits. @Jeff Brown is the oracle of investing in notes in ways that can pyramid returns with relative safety. Jeff will also say that you should know REI from a fix and flip or LL vantage before investing in notes (Jeff, forgive me if I'm incorrect and excoriate as required....I never want to put words in others mouths) but, if you can evaluate the underlying collateral accurately, and are willing to learn about notes and buying notes at a discount, then REI note investing may be the perfect blend between stock market-ish and REI returns that fit your lifestyle and goals.  It would fit perfectly in your geographic area for entry points and also allow you to "keep an eye" on the underlying collateral.  (i.e. the drive by)

    I want to revisit the Ramsey thoughts.  He and you are correct.  Personal finance, done correctly is a force for good.  I think (without having read Ramsey, but knowing "of" him) that he is trying to swing the pendulum back away from debt for those who lost control of their financial lives.  THAT is probably why he seeks "zero".  For fiscally responsible individuals and families like yours, "zero" (I believe) is actually hurting your family. 

    Stocks, managed well, are OK, but include risk. (especially in the last couple of weeks!!! who needs to waste money at an amusement park to ride roller coasters??!???!) REI, managed well, is also OK, but includes risk. AND the key sentence is that if you have money in the bank that will pay off the mortgage on your home, investing that at a return higher than your mortgage rate (easy when you stated your interest rate is < 4%) is actually enhancing your family's position instead of weakening it. Keep the underlying point made by Ramsey, that "out of control and imprudent debt" is a dagger pointed at the jugular of your family's security. Controlled, well managed, and prudent debt (that generates a return greater than the cost of the debt), that is kept at appropriate levels on your family Balance Sheet is a positive good for your family.

    I'd suggest that you take a look for Jeff's posts in the forums and his blog entries.  Prepare to have your horizons vastly expanded.

    0Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    11y

    Karen, there is risk walking down the street just as taking on some debt has risk, but done correctly, responsibly, and prudently, you can mitigate most of that risk. It is also "risky" to do nothing an have your money sitting dong and earning nothing, that net result is a loss when you factor in the devaluation of the dollar over time.

    There is nothing wrong with being patient and finding the right deal, if the last one was not the fit, so be it, but don't let fear or some unknowns detour you from the goal, having your money work hard for you! As another pointed out, Dave's advice of zero debt is by and large for those who got into too much of it and mostly irresponsible debts for your situation, you have been prudent, responsible, and advice to be free and clear on everything for you would be poor advice in my opinion.

    Podcast Guest on Show #130
    2Reply
  • Mike HurneyPro Member
    Real Estate Investor · Boston, MA · Member since 2009 · 2k+ posts · 542 votes
    11y

    @Ben Leybovich Hahahaha - this is the problem with BP. People come here, read, and are often misled into believing that REI is not Ack! Karen - it's real estate - it's investing - it's risky and it's messy. If you are looking for Not Ack, mutual funds is your huckleberry...

    It's a great post, though, from an entertainment stand-point. Also, you appear to know full well what the answers are. You know what the pill looks like. And, if you are honest with yourself, you know that everything about it is Ack! Are you in or not?!

    Ben Freud - You ought to be shrink!;-)

    0Reply
  • Jeff Brown
    San Diego, CA · Member since 2008 · 59 posts · 46 votes
    11y

    Whether you're a flipper, long term investor for retirement, or both, notes can be both a turbo charger and a catalyst for shortening the time to retirement and/or increasing ultimate retirement income. The combining of multiple strategies is what can and does work wonders.

    3Reply
  • Darren Budahn
    Investor · Milwaukee, WI · Member since 2014 · 811 posts · 420 votes
    11y

    I think you need to decide if you are wanting to go for cash flow or appreciation first. I would choose cash flow since there are tons of Milwaukee properties straight off the MLS that cash flow well, even if you are paying retail price.

    If you are looking at SFH's in the suburbs, you will be lucky to cash flow period, but you will have a greater chance of future appreciation, although it's certainly far from a guarantee. You would also use up all your available funds on the downpayment for one property making it difficult to scale your business.

    Also, if you buy a property that cash flows, you will have enough left over to pay a property manager if you don't particularly like the neighborhood.  Looking at crime maps is fine, but the neighborhoods in the city change very quickly and they change literally from block to block.  If you want any advice about a particular neighborhood or address, feel free to PM me.  

    I also agree 100% that not using leverage would be a big mistake.  Good luck to you

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    hahahaha @Mike Hurney ...or, perhaps a Rabbi...?!  

    Seriously, what do some of my friends think - @J Scott ,@Brian Burke ,@Serge S. , @Joshua D. ,@Brandon Turner ?  I am not much of a real estate investor.  I am an even worse guru.  Perhaps a Rabbi is what the doctor ordered - I'd get to continue being a prima-dona...

    Thoughts?

    1Reply
  • Orion Walker
    Investor · Ukiah, CA · Member since 2014 · 196 posts · 83 votes
    11y

    one option I haven't noticed on the thread so far would be to do a renovation loan. 203k loan or lesser known Homestyle loan. I'm in escrow on a fixer right now where I'll finance the purchase and the rehab. Basically I see it as the bank gives me the money to get a great deal on a place, my contractor bids the repairs, the bank covers that, the bank covers payments while renovating... So for very little down (5% for owner occupy, 20% for non) I get a rehabbed house ready to rent or sell. To me that seems a lot less risky than buying a place for cash and then trying to survive through a remodel while paying the mortgage. That's my two cents. Great thread. Wish you the best. Getting over that fear factor will be step one.

    1Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y

    @Bill B.  -- Notes are interesting as a concept, but to be truthful, I don't feel that I "get" them.  I understand them big-picture but when it comes to buying them, the dollar amounts are still on the high side for my comfort level.   I should read up on more of the notes conversations, BUT, I'm trying to stay focused (when I decide exactly what to do) Focus!  There is a blog by a guy who is doing Milwaukee notes.  I am more interested in performing than non-performing, they seem complicated (for me).   I do like the idea of carrying a note on a property sale with a buyer down the road.

    Jeff is great! I enjoy his perspective and passion for investing. 

    0Reply
  • Karen M.
    OP
    Hales Corners, WI · Member since 2013 · 229 posts · 80 votes
    11y
    Originally posted by @Ben Leybovich:

    hahahaha @Mike Hurney ...or, perhaps a Rabbi...?!  

    Seriously, what do some of my friends think - @J Scott ,@Brian Burke ,@Serge S. , @Joshua D. ,@Brandon Turner ?  I am not much of a real estate investor.  I am an even worse guru.  Perhaps a Rabbi is what the doctor ordered - I'd get to continue being a prima-dona...

    Thoughts?

     Thank you for calling in the support team Ben!  :)   Perhaps this whole conversation should be in Investor Psychology.  Where's the couch?  

    Here is a video that is one of my favorite from Charlie Brown.  You just gotta love Lucy:
    https://www.youtube.com/watch?v=-NJGRiV8jGM

    I *was* considering arguing with you that real estate is not Ack!
    Then, I read the thread about the bloody body and eyeballs at an apartment building.  Gah!!!   You win!  

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free