Where/ how to start with limited available cash

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Where/ how to start with limited available cash

Lacey N.
Investor · Bellevue, WA · Member since 2016 · 15 posts · 6 votes

Hi Everyone,

While not new to real estate, I am relatively new to real estate specifically as an investment.  My question(s) are around how to start (or is it even possible) investing in real estate with small amounts of cash (talking about $10k or less).  Some of the thoughts and options that have run through my head -

  • Other investors have mentioned the possibility of working with a hard money lender.  This scares me somewhat because I'm new.  At a high interest rate that I'm paying the lender, it sounds like a good way to lose everything while getting hung up on newbie stuff with the property.  I have a full time job that funds the savings I use to invest, so I can't be at the property 24x7 (or even half that), working on it, if its a flip or fix up.
  • Would investing with a partner be a good idea?  My husband thinks this is risky - different people have different goals, different ideas, etc.  You're no longer in control of your investment.  If this is a good route, are there tips/ ideas in how to identify a good partner, where to find them, what details to work out before hand?
  • Invest in a cheaper part of town (or a different state) - I've definitely thought about this and read the various posts about it, but cheaper part of town, I weigh the heightened risk of getting lower quality tenants, slower appreciation in value of the property or DEpreciation of property value when a market crash hits.  Different state, I anticipate having a lot more costs since I would have to pay people to help with everything from property management to minor fixes, etc.
  • Invest first in the stock market since you can invest smaller chunks of money.  My husband has talked about doing short or long on stocks.  I don't know enough about this, and it sounds like a gamble to me.
  • Use equity in my existing home to invest in a rental property (but this sounds like a scheme where I would take a HELOC for a down payment on an investment, to be able to take out MORE debt, meaning I have to rent or sell the investment property for even MORE money to cover increased debt costs).

So, are any of these options better than the others?  Is there something I haven't thought of or am I thinking about something incorrectly or not all the way through?  Open to any thoughts/ advice, etc.  Thank you!

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Frank Jiang
Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
10y

I'm not exactly suggesting house hacking.  I'm suggesting to increase your balance sheet and acquire more houses through owner occupancy.  You would trade your current house for a similar house and move into that one instead, converting your current into a rental.  Then rinse and repeat either once a year or every other year if you want the tax benefit on capital gains.  You buy each house with the intent of turning it into a rental later and you do your analysis as if it were an investment property.  This is a good way to build a portfolio with limited funds since financing on owner occupied loans don't require as much money down.

That said, $50 a month after expenses is pretty tight (I hope it's $50 after accrual for repair and capex and not before).  You're risking running into a liquidity problem if a few things go wrong together.  This strategy in general is risky for liquidity since you're taking out a bunch of 95-96.5% loans on your portfolio, but on the flip side it's a game you can play with a relatively small amount of capital.

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  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    10y

    It's awesome that you've actually thought these scenarios through.  I would say your assessment of the risks that come with each method are pretty accurate.  Which strategy you choose should be dependent on your personal goals.

    Would you be able to cash flow if you rented out your current primary? I personally believe now is a good time to lever up and inflate your balance sheet. From my perspective, the best way to do this in your situation would be to rent out your current home and buy a new home using either a 3.5% FHA or 5% conventional using your available cash.

    1Reply
  • Lacey N.
    OP
    Investor · Bellevue, WA · Member since 2016 · 15 posts · 6 votes
    10y

    Hi Frank! Thanks for the input! If we rented out our current condo, we *may* make a profit of $50/ month, after accounting for HOA dues (there aren't any current comps in the area, so I'm using a rent rate I recall seeing about a year ago).

    For the new home, are you talking about doing a house hack?  That is something we've also thought of, but the issue is, duplexes/ triplexes, etc. are selling for sometimes as much as $150k over asking right now in Seattle/ Bellevue, making it difficult to have the rent from the other unit pay our mortgage.

    If you mean just a regular condo/ SFH, the same is true, they are largely selling for $100-150k over asking, and possibly a bit inflated at this time in our market. Though I've read a lot of articles trying to explain how this market is different from the bubble back in '07 in that the property values are real, and not over inflated. I'm not sure I completely buy into that. I think there are certain pockets that are over inflated.

    Our primary goal is to begin building an investment portfolio that generates positive cash flow for us, and allows us to continue growing that portfolio.  Right now I feel like we're stuck in an endless cycle, and I don't see us getting out if we remain status quo until we retire at 65.  :-/

    0Reply
  • Frank Jiang
    Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
    10y

    I'm not exactly suggesting house hacking.  I'm suggesting to increase your balance sheet and acquire more houses through owner occupancy.  You would trade your current house for a similar house and move into that one instead, converting your current into a rental.  Then rinse and repeat either once a year or every other year if you want the tax benefit on capital gains.  You buy each house with the intent of turning it into a rental later and you do your analysis as if it were an investment property.  This is a good way to build a portfolio with limited funds since financing on owner occupied loans don't require as much money down.

    That said, $50 a month after expenses is pretty tight (I hope it's $50 after accrual for repair and capex and not before).  You're risking running into a liquidity problem if a few things go wrong together.  This strategy in general is risky for liquidity since you're taking out a bunch of 95-96.5% loans on your portfolio, but on the flip side it's a game you can play with a relatively small amount of capital.

    2Reply
  • Lacey N.
    OP
    Investor · Bellevue, WA · Member since 2016 · 15 posts · 6 votes
    10y
    Originally posted by @Frank Jiang:

    I'm not exactly suggesting house hacking.  I'm suggesting to increase your balance sheet and acquire more houses through owner occupancy.  You would trade your current house for a similar house and move into that one instead, converting your current into a rental.  Then rinse and repeat either once a year or every other year if you want the tax benefit on capital gains.  You buy each house with the intent of turning it into a rental later and you do your analysis as if it were an investment property.  This is a good way to build a portfolio with limited funds since financing on owner occupied loans don't require as much money down.

    That said, $50 a month after expenses is pretty tight (I hope it's $50 after accrual for repair and capex and not before).  You're risking running into a liquidity problem if a few things go wrong together.  This strategy in general is risky for liquidity since you're taking out a bunch of 95-96.5% loans on your portfolio, but on the flip side it's a game you can play with a relatively small amount of capital.

    Thanks Frank. I definitely do see your point, and completely understand regarding the more flexible lending guidelines on something owner occupied. While the $50 does account for accrual for any repairs and time to get tenants in (though, right now, the rental market is so tight, I am being conservative on my vacancy estimates), like you said the $50/ month on our current place may be a little riskier than we want. Our HOA raised the dues since we've been living here, and it hasn't helped from a prospective cash flow perspective.

    0Reply
  • Justin O'Kelley
    Investor · Holdenville, OK · Member since 2016 · 11 posts · 6 votes
    10y

    Lacey,

    It may depend on your lender/ local lending laws, but I just put my first property under contract for $52,500 stipulating in the contract that the seller pay all closing costs and fund the down payment (roughly $10,000 total).  I checked with my bank and they are ok with this, so it may be an option you can explore.

    0Reply
  • Lacey N.
    OP
    Investor · Bellevue, WA · Member since 2016 · 15 posts · 6 votes
    10y
    Originally posted by @Justin O'Kelley:

    Lacey,

    It may depend on your lender/ local lending laws, but I just put my first property under contract for $52,500 stipulating in the contract that the seller pay all closing costs and fund the down payment (roughly $10,000 total).  I checked with my bank and they are ok with this, so it may be an option you can explore.

     Thanks Justin!  Just curious - is the property that you're doing this for in Oklahoma?  I'm not sure what the real estate climate is there, but here in Seattle right now, you would not get away with those types of terms with the seller.  Its very much a seller's market.  I'm starting to think I need to look outside of Seattle, though I understand that comes with its own risks of me not fully understanding those other markets.

    0Reply
  • Justin O'Kelley
    Investor · Holdenville, OK · Member since 2016 · 11 posts · 6 votes
    10y

    Lacey,

    I think we are a little behind the bigger markets as far as climate, it still seems to be a buyers market here, but picking up as of late.  The seller was pretty motivated also, as the house was left by her parents as an inheritance to the grandchildren, so they wanted to turn it into cash pretty quick.  Hope you can use this strategy in the future!

    0Reply
  • Evelyn Roper
    Investor · Oklahoma City, OK · Member since 2016 · 98 posts · 51 votes
    10y

    I don't know what type of loan you have on your primary or how much equity you have in it, but I think it is an excellent time to refinance if your equity is substantial.  We bought our house in 2010, made extra principle payments each month and by 2016, we had a good bit of equity.  When we refinanced, our credit was better than it was in 2010 and interest rates were lower.  We went from paying an interst rate of 5.75 to 3.625.  We were able to pull out 20,000 in a cash out refi and our payments increased a whopping $50 a month!  We did "restart" a 30 year loan though.  This new payment is still less than the amount we devoted to paying before (with extra principle payments) We used that cash out refi to purchase our first rental.  It might be worth looking into.  I would suggest having cash reserves set aside for closing, insurance and incidentals though!  It was a good option for us.  It may be for you too!

    1Reply
  • Seth Larson
    Wholesaler · Kansas City, MO · Member since 2015 · 41 posts · 13 votes
    10y

    The HELOC idea for a down payment or cash purchase CAN be good if used correctly.

    If used for a down payment it would be wise to funnel all or most of the cash flow from your investment property to pay down the HELOC balance. But this has the affect of you not seeing any of the cashflow until the HELOC is payed off

    A better way IMO is to buy a fixer investment property in cash with the HELOC, BRRR strategy it (buy, rehab, rent, refinance)

    when you do the cash out refi, you pay off the HELOC and your able to use it for the next property.

    hands down the cheapest money out there if you have equity to work with.

    Ive been researching this strategy for months and plan to use it as soon as my HELOC closes, let me know if you have any questions.

    1Reply
  • Ryland Taniguchi
    San Francisco, CA · Member since 2015 · 786 posts · 717 votes
    10y

    Having acquired 80 rental properties all in partnerships, I can tell you the good and the bad of partnerships.

    Like your husband said, different people have different goals. I can't tell you how many partnerships I have done where we hit our the stated goal on the transaction and yet different people have different goals, different perspectives and different tax situations.

    I have found many partners want to see quick profits like in a flip and that often comes with high transaction costs and high taxes. But that maybe bad for me if my goal is to reduce my tax basis and increase my depreciation write-offs.

    Also, people simply have different values. Partnership is likes marriage and it is very difficult to find the right match. Just like in a marriage a partnership requires very good communication.

    Sometimes the partners have different experience levels. I can't tell you how many times a partner is expecting permits as an example to be done quick. Often times things like permits is out of one's control but it is a frequent point of contention.

    Biggest problem I have with partnerships is that when anything goes over budget, it is often me paying for it even when it was originally agreed to split the costs per the agreed on split. Seems like there is always one partner always doing more.

    Nevertheless, I still build my investment Portfolio through partnerships but I know that 4 out of 5 partnerships will not likely be a match.

    1Reply
  • Lacey N.
    OP
    Investor · Bellevue, WA · Member since 2016 · 15 posts · 6 votes
    10y
    Originally posted by @Ryland Taniguchi:

    Having acquired 80 rental properties all in partnerships, I can tell you the good and the bad of partnerships.

    Like your husband said, different people have different goals. I can't tell you how many partnerships I have done where we hit our the stated goal on the transaction and yet different people have different goals, different perspectives and different tax situations.

    I have found many partners want to see quick profits like in a flip and that often comes with high transaction costs and high taxes. But that maybe bad for me if my goal is to reduce my tax basis and increase my depreciation write-offs.

    Also, people simply have different values. Partnership is likes marriage and it is very difficult to find the right match. Just like in a marriage a partnership requires very good communication.

    Sometimes the partners have different experience levels. I can't tell you how many times a partner is expecting permits as an example to be done quick. Often times things like permits is out of one's control but it is a frequent point of contention.

    Biggest problem I have with partnerships is that when anything goes over budget, it is often me paying for it even when it was originally agreed to split the costs per the agreed on split. Seems like there is always one partner always doing more.

    Nevertheless, I still build my investment Portfolio through partnerships but I know that 4 out of 5 partnerships will not likely be a match.

     Good confirmation of my husband's (and mine, to be honest) suspicions.  Do you recommend a specific list of questions or checklist of things to work out when deciding on a partner?  Or a way to better protect yourself against these downfalls?  It sounds like you recognize the downfalls, yet still choose to partner, so I'm guessing you feel the benefits outweigh the challenges.

    0Reply
  • Ryland Taniguchi
    San Francisco, CA · Member since 2015 · 786 posts · 717 votes
    10y
    Originally posted by @Lacey N.:
    Originally posted by @Ryland Taniguchi:

    Having acquired 80 rental properties all in partnerships, I can tell you the good and the bad of partnerships.

    Like your husband said, different people have different goals. I can't tell you how many partnerships I have done where we hit our the stated goal on the transaction and yet different people have different goals, different perspectives and different tax situations.

    I have found many partners want to see quick profits like in a flip and that often comes with high transaction costs and high taxes. But that maybe bad for me if my goal is to reduce my tax basis and increase my depreciation write-offs.

    Also, people simply have different values. Partnership is likes marriage and it is very difficult to find the right match. Just like in a marriage a partnership requires very good communication.

    Sometimes the partners have different experience levels. I can't tell you how many times a partner is expecting permits as an example to be done quick. Often times things like permits is out of one's control but it is a frequent point of contention.

    Biggest problem I have with partnerships is that when anything goes over budget, it is often me paying for it even when it was originally agreed to split the costs per the agreed on split. Seems like there is always one partner always doing more.

    Nevertheless, I still build my investment Portfolio through partnerships but I know that 4 out of 5 partnerships will not likely be a match.

     Good confirmation of my husband's (and mine, to be honest) suspicions.  Do you recommend a specific list of questions or checklist of things to work out when deciding on a partner?  Or a way to better protect yourself against these downfalls?  It sounds like you recognize the downfalls, yet still choose to partner, so I'm guessing you feel the benefits outweigh the challenges.

     For me, I think 1 out of 5 partnerships have worked in the past. The main thing is to try to maintain as good of a relationship that you can even it doesn't work out. Extra challenging for me since I am more direct and to the point and this can hurt people who are more sensitive.

    But for the one partnership that works like a lifelong marriage that is a wonderful thing when you find that. I have several of the most amazing partners in my real estate brokerage, in a book being published, in a hard money fund, in co-organizing a self-directed IRA group, and in some real estate deals. I can do 5 times more with a great lifelong partner. The partnerships allow me to get so much done and that is why I choose this route. One can't be good at everything. For me, a great partnership brings a ton of stability and lots of cash flow.

    I still have 4 partner areas needed that did not work out this last year and that is in the areas of construction, wholesaling, flips/development and BRRRR. Because I haven't found the right partner yet, these area of my business have not been stabilized and seems like a roller coaster. Hard to build sustainable systems without the core people in place and I have been doing these things for 16 years.

    The way I do things may not work for most people. I succeed through lots of failure. My mindset is to fail frequently, fail fast and fail forward. I have made millions by making way more mistakes than everyone else.

    0Reply
  • Ryland Taniguchi
    San Francisco, CA · Member since 2015 · 786 posts · 717 votes
    10y
    Originally posted by @Lacey N.:
    Originally posted by @Ryland Taniguchi:

    Having acquired 80 rental properties all in partnerships, I can tell you the good and the bad of partnerships.

    Like your husband said, different people have different goals. I can't tell you how many partnerships I have done where we hit our the stated goal on the transaction and yet different people have different goals, different perspectives and different tax situations.

    I have found many partners want to see quick profits like in a flip and that often comes with high transaction costs and high taxes. But that maybe bad for me if my goal is to reduce my tax basis and increase my depreciation write-offs.

    Also, people simply have different values. Partnership is likes marriage and it is very difficult to find the right match. Just like in a marriage a partnership requires very good communication.

    Sometimes the partners have different experience levels. I can't tell you how many times a partner is expecting permits as an example to be done quick. Often times things like permits is out of one's control but it is a frequent point of contention.

    Biggest problem I have with partnerships is that when anything goes over budget, it is often me paying for it even when it was originally agreed to split the costs per the agreed on split. Seems like there is always one partner always doing more.

    Nevertheless, I still build my investment Portfolio through partnerships but I know that 4 out of 5 partnerships will not likely be a match.

     Good confirmation of my husband's (and mine, to be honest) suspicions.  Do you recommend a specific list of questions or checklist of things to work out when deciding on a partner?  Or a way to better protect yourself against these downfalls?  It sounds like you recognize the downfalls, yet still choose to partner, so I'm guessing you feel the benefits outweigh the challenges.

    To answer your question here, I would recommend writing out all your values and then score potential partners on a value match. I have a questionnaire like this that I use to secretly score partners and employees. It helps to be clear on your purpose in life as that is an obvious value alignment. Your list maybe totally different from mine because you may have different values.

    Some of the things that I value:

    Ability to collaborate versus compete.

    Ability to communicate.

    Leadership ability.

    Integrity even when things go bad. 

    Ability to be accountable.

    Contribution to this planet over making money.

    Someone who renders more value and service than they get paid.

    Someone I can trust.

    Someone who is responsible and frugal with money.

    Someone who can put their ego aside and eschews politics. I hate political people who tell you want you want to hear to gain power.

    Someone who is a lifelong learner.

    Someone who is disruptive and wants to change the world.

    Partners and employees don't realize this but I score everyone I work with every quarter (March, June, September and December). If someone does not match, that is how I decide to diplomatically cut ties with them.

    Best way to protect your downside is through have very good legal documents that show the way during the worse case. In companies involving a brand that I have worked hard to build I always license the brand to the partnership just in case things don't work out.

    0Reply
  • John Culotta
    Investor · Boise, ID · Member since 2016 · 42 posts · 19 votes
    10y

    Hi Lacey,

    You and your husband are really thinking through the details which is a huge step with any investment - Great Job! 

    From our experience and what I've heard from many investors (especially from the podcasts here on BiggerPockets), you should always have an "Exit Strategy". If your short and long term goals are figured out, then you'll know exactly when to "exit" the investment (real estate, stocks, etc.) even after holding for 20 or 30 years. 

    Regarding real estate investing, you just can't beat the advantages over other types of investments. If the laws don't change anytime soon, RE investing is probably the best tax benefit there is for keeping more that you earn. My wife and I have chosen RE investing because of:

    1. The Cash Flow Factor 
    2. Tax Benefits (to help keep more of our hard earned money) 
    3. Wealth Creation / Net Worth 
    4. Security (well, more then most other investments anyway - because everyone needs shelter)

    If you notice, wealthy people always have real estate in their holdings (including politicians who want to impose higher taxes on the rich - funny how that works). Every wealthy family member and friend we know, have real estate investments.

    Regarding hard money lenders, the sooner you exit the loan and replace it with a conventional low rate loan, you'll be in a safer zone so to speak (didn't mean to sound like a poet with that comment).

    Regarding stocks, dividend paying stocks are a great way to diversify any portfolio. You get paid a dividend no matter what the market does (considering the company is not going under) and with compounding of interest and reinvesting the dividends you'll see significant returns. World dominators are the way to go when choosing a company to invest in due to long track records. I'm sharing from experience and understanding not as an advisor :)

    Glad you mentioned partnerships because that's one area that we are interested in as well. Look forward to seeing what others have to say about it!

    I'm sure you already know this, but the considerations you mentioned have different elements of risk, of which you'll have to decide how much risk you're willing to take on. But, then again, creating wealth will always have risk. 

    Hope this helps and have a great day :)

    1Reply
  • Lacey N.
    OP
    Investor · Bellevue, WA · Member since 2016 · 15 posts · 6 votes
    10y

    Thanks everyone!  All the feedback, encouragement, and ideas have been really helpful for me in further defining and detailing my goals and deciding on which direction to take.

    By the way, how does the voting work?  I had assumed its similar to the "like" button on fcbk, but I'm not sure.  There are some posts that biggerpockets won't let me vote on.  Anyways, kind of random, but I do appreciate everyone's comments!

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