What would you do with $60K?

Question

I'm in a unique position as far as REI: lots of head knowledge from reading and some real experience with 1 SFR. My long term goals are to grow a business with enough passive income to live on comfortably. Currently, I don't have enough extra cash to do anything else.  My SFR is at 90% LTV and is still recovering from the crash. My short term goal is to accumulate cash as quickly as possible.

My parents sold some family property and are ok letting the money sit in the bank at 0.1% interest. I asked to "borrow" $60K because I know I can get them more and help myself at the same time.  We've discussed 6% interest only loan.

I've thought up 4 options and I'll list them from less risk to most risk (and/or experience)

1) Invest money in an REI company. They give 12% paid monthly. My 6% is $3600.

2) Purchase a condo. I can find 2/1 condos or town homes for $60K that need minimal work. I can get $1200/m or more (my condo is a 2/1.75 and 1250 sq ft and I get $1300/m now). Estimated NOI is $3000 using the 50% rule. This is consevative since expenses are limited to inside the unit. A NOI of $4500 is more realistic. This area rents quickly; in the past 48 months at my other condo, I've had 3 tenants and haven't missed a month. This is the low end side of an A area.

3) Purchase a MFH. In this price range, I'm looking at C areas (one with promise as 2 large 500 employee companies are relocating there in the next 3 yrs.). Again using the 50% rule, I'm looking at NOI between $7000-15,000. Factors include if I use a property manager and 4 or 5 unit buildings.

4) I have an acquaintance who just shared with me his current investment strategy. He buys $10,000 bank owned houses (mostly in Gary) and does minimal work if any. He turns around and sells them with owner financing ($5K down and 10% over 10yrs). Assuming they pay over the 10yrs, his profit per house is $40K. He only does 3 per year per Frank-Dodd.

Thoughts on those 4 options and/or other options I'm missing.  I'm thought of flipping (I'm good at it and enjoy it but I make too much at my career to take the time off to do it)

Thanks

Shawn Holsapple · Answer

Adrien Schebott - Welcome to BP!

All good points above.

As mentioned - I would stay clear of Gary and any C class multi families.

For the past few years, I've been using family and friends funds [yes, we are all still speaking] to buy simple SFH.  I then do a light rehab [with their funds as well] then go to my local credit union and refi.  This gets all of my principle plus some profit for my lender back.  Most of the time I walk away with the property fully funded by the bank or maybe I have to put a few bucks into myself.  Sometimes I walk away with an equity check [which is tax free BTW].

So, pay your parents that massive 6% APR and start buying homes.  Rinse and repeat.

Your parents make $3600 per year and you get 7-10 houses per year all netting $200 plus for FREE!

Just a thought...

Justin Long · Answer

This is my current business goal and start paying them off after I get to my 10 limit, then rinse and repeat.

Ryan Mullin · Answer

Adrien Schebott

Personally I think option 4 is just to risky.  I would throw that one out all together. I have tried a million variations of that type of deal and I couldn't ever get it to work...  I know lots of people have, but that is just me.

Option 3 is a good option but I would want more than 60k to work with for anything over a couple of units.  And I would really be sure about the the C area becoming a B area / attracting those companies, etc.

Option 2 sounds great.

Is there a way to combine option 1 and 2 with out getting to complicated?

Could you get something for around 50k all in and use the remaining 10k to invest in (option 1) REI company?  possibly a crowd funding type of situation...

Wesley C. · Answer

No one has said this, but borrowing from family can be a very bad idea.  Notice I said can.  If everything goes as planned, it works for everybody.  If everything doesn't go as planned (rarely does) there is a lot of potential for fallout.  If I were to borrow from family, I'd budget very conservatively.  You are an adult and don't need a lecture, but I've seen this go wrong for so many people.  Proceed with caution.

David Nolan · Answer

@Adrien Chabot I am not sure your experience to date is sufficient for anyone to invest $60,000.00 with you. Would you lend someone of your experience $60,000.00? I know I certainly wouldn't. You clearly have a desire to create some money, although you are not yet able to prove you can.

I would suggest that given your family's desire to help you, which is great, that perhaps you find a JV deal with an experienced operator and provide advice or assistance to your parents to enter into a JV and perhaps share the profits with them. This way you can get some real life experience by working with an experienced investor who knows what they are doing and can possibly teach you. You also reduce the risk of losing your parent's money and both you and your parents will have a better chance of making some cash.

Alternatively, you could find a deal and ask your parents to consult with an experienced financial adviser if they should invest their $60,000.00 with you in that deal. If they say OK then you are good to go, if they say no then they will no doubt point out all the risks that you may not see.

I am not trying to put down your efforts just to share with you, from many years of experience, that investing other people's money is fraught with danger. Either you will not value it as much as your own and therefore take greater risk, or you value it so much that it will cause you great distress if you should lose it. Either way I don't see how you can win.

Another alternative is to run your proposed deal past a hard money lender and hear what they say. They charge more for a reason.

Ideas on paper are great, reality can be something else altogether.

Good luck with your project.

Happy investing!

Mike J. · Answer

@Vincent Crane Out of curiosity, in what market are your colleagues using BRRR?

Adrien Schebott Not trying to hijack your thread. Just wondering what market Vincent is referring to. Being in Southern California, the numbers that he mentioned are certainly more attractive than what we can get out here :)

Vincent Crane · Answer

Mortgage interest rates are 4%... Okay if househacking isn't an option, multi's are the best way to go. If you buy 2 multi's with the money, you can trade them up for a small apartment complex after 3 years by reinvesting the cashflow, appreciation and equity paydown. Or, you could use the BRRR strategy to get infinite returns. Honestly that's what I would do. You can buy a house for $80k, put $20k into it, rent it out for $1,500 a month, $400 a month cashflow, do a cash-out refi, and then repeat and use that same money over and over. I know several people who've done this and make $5k-$7k per month in passive cashflow after all expenses and all they had to do was save up the initial $40k-$50k to start the BRRR and it just snowballs after 3-4 years.

Scott W. · Answer

this is wrong on so many levels. no one is going to give you this cheap of $ with the risk involved. 6% interest only with no points is a great deal. ignore what he said.

Vincent Crane · Answer

First of all, 6% is too high of an interest rate. The economy is completely flat right now and even 4% interest is fair. The highest return on your money would be from househacking so instead of spending $10,000 a year on rent, it's going toward your mortgage and you gain appreciation and your roommates start building your wealth for you. But $60k is still a lot of money so there's more, buy a small multi, triplex or quad that cashflows $800 a month or so. Condo's have HOA fees and they don't hold their value as much when the economy crashes because the previous phase to the crash is.. hypersupply, which is usually in the form of large MFH like condos.

In short, house hack, buy multi's, give them 4-5% interest, 6 is too high. Stocks aren't even returning a positive return this year..

Mike D'Arrigo · Answer

I agree with @Ryan Mullin that #4 is very risky. Gary is an economically depressed market. What happens when you have to take that property that you did "minimal work" on back when the buyer defaults on the note you're carrying? What's your exit strategy then? I don't think #2 is a good strategy either. In my opinion, condo's don't make good investments and 2 bedrooms have limited marketability.

What would you do with $60K?

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