For analytical types who like helping newbies reach goals...

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

9y

Soon as you state your were adverse to debt you lost me. Debt is your biggest friend with investing. Cash is far too valuable to have it sitting around dead not earning it's keep.

Cash sitting in a rental property does not increase cash flow it decreases it. Equity is extremely expensive.

OP

San Antonio, TX · Member since 2016 · 240 posts · 163 votes

9y

@Thomas S. I'm listening. I just don't love tons of debt. I'm confused - when I run numbers on a non-leveraged property, my cash flow doubles. What am I missing?

OP

San Antonio, TX · Member since 2016 · 240 posts · 163 votes

9y

@Bill Gulley thank you for taking the time to read my narrative. I guess I wasn't clear about my intentions. I don't want to start a business per se, I basically just want to figure out where to invest my $200,000 after I sell my house. I like the tip about the SBA providing guidance. I'm going to investigate.

Hongbing K.

San Diego, CA · Member since 2016 · 46 posts · 13 votes

9y

Betty Cruz it is great to hear that your current home have $200k in equity. I am just wondering if you are married. If you are not then just be aware that you can sell a property that you lived in for 2 year and have your equity be tax free up to $250k. If married it is $500k.

Brian Gibbons

Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes

9y

@Betty Cruz

You can do well to be a private lender in San Antonio, find successful rehabbers at REIA meetings, receive 10 percent in 3 months, this is what I offer to private lenders.

Look into self directed IRAs, traditional and Roths

See sense financial @Dmitriy Fomichenko, a good teacher

Wendell De Guzman

Investor · Chicago, IL · Member since 2013 · 2k+ posts · 1k+ votes

9y

Originally posted by @Betty Cruz:

Here's a hypothetical scenario... :-)

I am not experienced enough nor numbers smart enough to figure this out with confidence but I am devising a plan and would be very grateful for input from some of you who are so brilliant at figuring out what I call real estate puzzles. I have read hundreds of posts and it always seems like the people with really great answers still ask for more info from the poster so I will try to write down as many details as I can think - sorry for the lengthy post...as the subject line reads, this is for analytical types.

1. GOAL - to have at least $1200 passive income and a place to live that is paid for by renters. I want to be able to achieve this within 2 years and sustain it for 10-12 years after that. Basically, I am trying to find gap funding for a pseudo-retired life as I wait to be able to tap into my 401k retirement savings.

2. Current situation. I have a day job and I'm completely debt free except for my personal home. I have sufficient savings/credit and pre-approval for down payment on up to $200,000 worth of rental property. Additionally, I have $200,000 equity on my current residence that I will definitely sell within 18-22 months. It is way too much house and I'm just waiting till I'm an empty-nester to dump it. I don't think it is a desirable house to rent out because it has high HOA fees and a swimming pool (which I don't wish to maintain).

3. My idea. I have tossed around many ideas and am open to any other options, but this is my working plan...

a. Purchase a rental now (or as soon as I can find something good, which seems difficult) and set it up to cashflow at least $300/mo. This would get me started, get me learning how to be a landlord and get me building up some equity as I'm not a huge fan of a lot of debt.

b. After selling my personal home in about 18-22 months, use the cash ($200,000 equity) to buy a duplex or multifamily that I can house hack. I'm thinking that with no or very low mortgage, I could easily live in this for "free." This also gives me the flexibility to live elsewhere if I want (I'm thinking out of state/out of country, etc).

As I analyze deal after deal, I feel the combination of rental property earnings from one leveraged property and one non-leveraged property could give me the desired passive income. What am I not thinking of? What would be a better plan? Any help would be much appreciated!

Betty,

You can "house hack" by buying a 4-unit - live in one of the units rent-free because you have the three tenants paying for your mortgage. Then, when you sell and cash out $200,000 from your current house, you can then do private lending with it (you can lend it to other real estate investors). It can earn 12% p.a. or 1% per month - generating an income of $2,000/month.

For the meantime or until you sell your current residence, you can rent it via Air BnB to generate even more rental income.

3 Reply

OP

San Antonio, TX · Member since 2016 · 240 posts · 163 votes

9y

@Wendell De Guzman. That seems scary to me...I have no idea how to start looking into something like that. I do like the idea though. I can't house hack yet as I have my last child still living at home but I could use your idea to buy the 4 unit and get started until I am ready to move in. Then I could use the cash after selling to make my next move. I have rented my current house - did it this summer while I traveled - made tons of money. I think the AirBnB/HomeAway was what started me thinking more about real estate...

@Brian - I did speak with Dmitriy two days ago! He is very knowledgeable. I was working with him in terms of setting me up with a solo 401K but it didn't make sense for me because of lack of self employment. I don't understand how he could help me. Are you suggesting he would help me set up the vehicle to be a lender? I have no idea how that works. As you can see, I've been a good saver but don't know much about money other than saving and investing in mutual funds.

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

9y

I'm listening. I just don't love tons of debt. I'm confused - when I run numbers on a non-leveraged property, my cash flow doubles. What am I missing?

What you are missing is the knowledge to understand the opportunity value of cash. You do not fully understand how valuable cash actually is. Your numbers place zero value on cash which is why you mistakenly believe your cash flow doubles when in fact it is reduced. Investors value cash as a opportunity to invest. When cash sits dead in a income property it generates a return separate from the property itself. Remember the property receives the same income (rent) whether it is 100% financed or purchased 100% with cash. If you have equity in a property it is generating part of the cash flow and therefor that income must be attributed to the cash not the property. It must be deducted from the rental income first. This in effect reduces the income from the property itself.

As a example suppose a property is valued at $500,000. $500000 @4% interest is $1666/month in interest deducted from the income. If you had $100000 in equity then $400000 @4% is $1333/ month interest plus $100000 @10% which is $833/month totalling $2166/month deducted from the income. Having equity in the property reduced the income generated by the property by $500/month.

IF you pulled the equity out the property would generate more cash flow and the equity could be invested in another property to generate additional cash flow as well. That is the opportunity value of cash.

To look at in simpler terms if mortgage rates are at 4% and equity is valued at 10% then having equity in a property we see a investor loss of 6% per month.

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

9y

Well written post and you appear to have a good plan based on your goals and debt tolerance. I like how you described getting started and learning how to landlord. Your house hacking strategy is another great one. Just be prepared to live next to your residents...that living arrangement is not for everyone. It would be great if you could flip your debt as well...have it on your primary residence which has better terms than investment property...but this may not be feasible due to your timing.

I'm not a fan of purchasing un-leveraged properties, especially in a market with values propped up by low cost debt, but that's a topic for another post.

OP

San Antonio, TX · Member since 2016 · 240 posts · 163 votes

9y

thank you @Mike Dymski I'm trying to wrap my mind around how debt is good. I have always done my best to stay away from it so the concept of it takes some time for me. I had always planned on selling my house, buying something smaller for cash and then putting the rest toward retirement. Let me ask you this...if you were in my shoes, a clean slate of any real estate other than your 2/3 paid for home and knowing all the details I outlined but also knowing all the nuances of real estate, what would you do?

Anyone who reads this...feel free to reply.

Zayyaf Woodward

Real Estate Investor · Kalamazoo, MI · Member since 2016 · 5 posts · 1 vote

9y

Greg I didn't follow how equity decreases your cash flow. Can you please explain a bit more clearer for a newbie?

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

9y

Best way to understand debt...you can buy one $200,000 property for cash or four $200,000 properties with 25% down each. If property values go up 3% per year, option #1 generates $6,000 in increased value and option #2 generates $24,000 in increased value...all yours...don't have to split that with the bank even though they funded 75% of the purchase. Over 5, 10, 20 years, that's a big difference in value and your net worth. That's the power of debt. I'm ignoring the cash flow differences for simplicity but you have 4 instead of 1 property and can do the math there as well. There is a trade off here...managing 4 properties is more work than managing 1. Timing in life matters too as some investors, as they near retirement, work towards less debt and/or fewer properties. Lots of variables and strategies.

I think your plan is a good one. Maybe the middle ground is partial financing on your house hack and/or pay the mortgage down faster than the amortization schedule. You could purchase an extra property or invest the excess funds in an asset class outside of real estate.

Ben Zimmerman

Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes

9y

Originally posted by @Betty Cruz:

@Thomas S. I'm listening. I just don't love tons of debt. I'm confused - when I run numbers on a non-leveraged property, my cash flow doubles. What am I missing?

Hi Betty, I think the easiest way to look at it is like this. A non-leveraged property will have roughly double the amount of cash flow (your analysis) as opposed to a leveraged property. However, that property took 5x the amount of money to purchase than a leveraged property would have cost (assuming a 20% down payment on the leveraged properties as opposed to 100% on a paid in full home). So instead of having one property fully paid off earning double cash flow, you could instead buy 5 leveraged properties each earning single cash flow. 5 > 2.

In addition to this you have all of the other wonderful things about real estate, such as appreciation on 5 houses instead of 1, tax benefits, equity paydown ect.

With historically low interest rates it makes fiscal sense to use as much debt as you can. If you can borrow $1M at 4% interest rate, and invest it into something that returns 10% dividends, then you are not only able to pay off the monthly interest, but also have 6% left over earning you 60k a year in profit.

However, no amount of statistically proving 'this is the most profitable way' can make up for the stress that some people have over large amounts of debt. If after you realize that debt is the quickest way to make a profit, and you are still scared of that high of debt, then don't do it! Finding an amount of debt level that you are comfortable with is the important thing.

Ryan Cameron

Investor · Philadelphia, PA · Member since 2014 · 351 posts · 80 votes

9y

I think what @Thomas S.

FYI, I am not a REI Guru talking. I am actually a part time investor working on my business system now (to transition to full-time eventually)

OP

San Antonio, TX · Member since 2016 · 240 posts · 163 votes

9y

@Ryan Cameron @Ben Zimmerman @Mike Dymski - y'all have helped me understand what you mean about how debt works for you. I get it now. And I agree with how Ryan put it that understanding it logically still may not make it the right avenue for me and my goals. You've given me great ways to think about this and I thank you for your input.

Bill Gulley

Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes

9y

Betty, investing in real estate is or requires a business approach, maximize profits from your assets, land labor, the capital and your entrepreneurship, just basic economics of investing and business.

And, no, you're not ready to take on lending risks as a hard money lender may, IMO. :)

Amy A.

Portland, ME · Member since 2012 · 616 posts · 550 votes

9y

You don't give yourself enough credit. You are certainly smart enough to understand the numbers. The very fact that you are thinking about this topic shows your intelligence. Buy Frank Gallineli's book "What Every Real Estate Investor needs to know about cash flow..." Ignore the advanced math at the end if it frustrates you because you can succeed without it.

The confusion here about cash flow is that, yes, you will have higher cash flow in one property if you have no debt. What the other posters are talking about is spreading your equity out among more properties to achieve greater global cash flow.

When I first started out I paid cash for a 5 unit while I learned the business. The next year I bought another 5 unit at 75% LTV. Now I have 36 units and everything is leveraged as much as the banks will allow. I plan to buy more. I cash-out refinanced the first 5 unit a few years ago and only have $15,000 in it and make over 100% return on that $15,000 EVERY SINGLE YEAR! That's the power of leverage.

As for private lending, I wouldn't want to lend on anything that I wouldn't want to own. I'm sent many deals by private lenders and wholesalers with numbers that just aren't correct. They over-state the potential rental income or resale value and understate the repair costs. I know my numbers in my area and they are either foolish or dishonest. So, if you decide to try private lending, make sure you know your numbers, use a company that you trust, and are prepared to own the property if things go bad.

OP

San Antonio, TX · Member since 2016 · 240 posts · 163 votes

9y

Thank you so much @Amy A. I really appreciate the encouragement and book suggestion. I'm understanding that your goals, as so many of those who have responded, are large scale. My initial ideas and goals were just to invest my savings wisely. This has made me contemplate the bigger picture. Still, I envision me starting very small to see if this is my cup of tea. What I have gleaned from the comments has been very insightful.

OP

San Antonio, TX · Member since 2016 · 240 posts · 163 votes

9y

Thank you so much @Amy A. I really appreciate the encouragement and book suggestion. I'm understanding that your goals, as so many of those who have responded, are large scale. My initial ideas and goals were just to invest my savings wisely. This has made me contemplate the bigger picture. Still, I envision me starting very small to see if this is my cup of tea. What I have gleaned from the comments has been very insightful. I'm loving the discussions.

[email protected]512-888-9122

Jordan MoorheadBusiness Member

Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes

9y

@Betty Cruz I love your line of thinking about debt being bad for you. Consumer Debt (debt that doesn't make you money) is awful and should be avoided at all costs. Debt that allows you to gain leverage and make money is great. You rates of return get much higher when using OPM to invest.

In this case you are partnering with the bank. All they get is their money back + interest, which is a great deal for them. You get to use your initial 20-25% down payment to eventually control 100% of the property + get all of the cashflow from the property. You could easily turn that $200k into $1MM after a period of 15-30 years and live off of it in the meantime. This means you could leave your family with a tremendous amount of money, rather than whatever is left in your retirement account and still live a comfortable life in the mean time.

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OP

San Antonio, TX · Member since 2016 · 240 posts · 163 votes

9y

@Jordan Moorhead That's exactly what I want to do. I just don't know how to do it. I've been a saver all my life and now feel like I am poised to strike. Just don't know where or how - haha!

[email protected]512-888-9122

Jordan MoorheadBusiness Member

Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes

9y

@Betty Cruz read every book that they have published here and read all of the rich dad books. Go to REIA meetings in your area. You'll be ready to go in no time!

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[email protected]512-888-9122

Jordan MoorheadBusiness Member

Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes

9y

@Betty Cruz

https://www.biggerpockets.com/renewsblog/2013/04/14/best-real-estate-books/

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Account Closed

Landing, NJ · Member since 2016 · 6 posts · 2 votes

9y

Not relevant to your real estate question but google "Roth Conversion Ladder" if you want to tap into your 401k early. It's essentially converting traditional contributions into Roth conversions and then being able to withdraw them after 5 years. Using this strategy could change your real estate strategy.