Decisions To Make, Advice Appreciated

[Jeff Harris]

Decisions To Make, Advice Appreciated.

I have a 2 part plan to gain independence get started as an investor. 

Part 1) My company is being sold and I am getting a pension cash out of about 100k (the catch is I don't stay on with the new company (I don't want to, however this means income and insurance stops and I will need to live off the cash until part 2...

Part 2) I have a home on 20 acres which I am tentatively planning to subdivide.  Once (if they are subdivided successfully) I will sell the parcels to a builder.  The builder is local and has a fantastic reputation.  They are going to assist me in getting the subdivision done for a few (Around 10k) which will cover mostly every normal thing associated with the approval.  The deal should net me 350-450k.  Note on the house is 200k

I can then use the proceeds from the deal to buy an income property or two. (I would fix&flip but the market is not good for sales where I am)

Town approvals are never taken for granted so I am afraid somewhat that some strange unforeseen issue will cause the town to deny my subdivide or it will take so long it will exhaust my capital. 

I have some Decisions To Make, Advice Appreciated.  I don't have access to the 10k to do the subdivide without the pension cash out.  I have no cash reserves. so has anyone done something 'risky' like this?  Any guidance or horror stories? anyway to minimize my risk?

I did have another thought which was to try to find a multi unit ASAP around 75k, maybe a distress sale that is already rented and try to live off the income and leverage that if things take too long with part 2.

My wife is 'risk adverse' to put it mildly and is very nervous, I am too really.  so I hope I can find some supportive cases or some sound advice to help steady our nerves.

Thanks in advance for your input!

[Nathan Emmert]

If you're risk adverse, this might be a tough route for you.  Long term, I think the risk in real estate is defineable... but in the short term... well, knowledge doesn't come cheap.  If you're looking for healthy returns you'll need to do some things on your own and with that and being naive, well, it's definitely more risky.

A lower risk approach would be to go with a reputable turn key company... obviously your returns are substantially lower but so is the risk.  You can still get a nice solid return, but don't be dreaming too big.

Why are you waiting to do the sale of your property until after the cash out?  Why isn't the developer funding the $10k to sub-divide as part of the sales agreement?

I would personally try to get that money now, while employed... while employed you can get mortgages and use leverage to increase the returns on your investment.  Once you become unemployed you'll likely have to buy in all cash which will reduce your returns.  

Lets look at quick numbers... $250k can buy you 10 $100,000 homes with leverage... 2 without.  Lets say each house rents for $1,500 a month and we'll use the 50% rule for expenses to simplify things.

Lets assume your mortgages are 30 years at 4.75%... your P&I payment would be $391.24 on the $75,000 you mortgaged (25% down payment).

With 50% expenses, you're left with $750 a month on each of your 10 properties, paying $391.24 leaving NOI at $358.76 * 10 properties = $3,587.60 * 12 months = $43,051.20 (pretty hefty return on your $250,000 investment of 17.2% annually).

Or you buy 2 properties in cash leaving $50k in reserve. You still get $750 a month but no mortgage... so $750 NOI * 2 properties * 12 months = $18,000 which is a 9% return on your $200,000 investment. In 3 years you'll be able to buy a 3rd property in cash.

Those numbers are pretty stark huh?

Now add in equity.  Those mortgage payments aren't all interest.  Your first year you're paying about $100 a month towards principle... times 10 properties... times 12 months equals about $12,000 of additional equity.

And then there's appreciation.  Lets say the home prices rise 3% a year.  With leverage, you own ten $100,000 properties for $1,000,000 in real estate.  If that goes up 3% that's an additional $30,000 of equity you now own.  With 2 houses, you're at $6,000.

The benefits go on and on and on... :)  Leverage = good... buy with a job!