Extremely Debt Averse, What Are My Options?

Question

My husband and I were in massive amounts of consumer debt for almost 10 years of our marriage and recently paid it all off in 2013. Since then, we've enjoyed the debt-free life. It's awesome.

The only issue we've run into is the staggeringly slow process of building up wealth. All the time we were in debt we didn't invest much.

Since being out of debt, we've supercharged our 401k contributions and have been getting matches like a champ. We also have other investments in non-retirement brokerages. But, unless you have $500k+ for compounding our next egg is slow. Don't want to be eating cat food in retirement.

Anyway, we think we might we ready to invest in real-estate, but the thought of debt has scared us. What would you do?

We actually live in a C/D neighborhood that is getting better (just got a WholeFoods, Starbucks and Chipotle development done last year.) You can find move-in ready homes for $30k-$40k....but you better know the block you're dealing with.

We are inclined to either:

1) Buy cash and rent here for a BRRRR. We know the place block by block but also know that this could be SUPER risky. Upside, we could get a home cash and wait for our ideal renters and not be killed on a mortgage payment. Downside, that's the cash we would have used for flipping :(

2) Flip here, but again, no guarantee you'd get a profit. The appraisers tend to give low low valuations here even if a home is nice or on a nice block. This would require hard-money....scary, scary,scary.

3) Flip in the burbs. We were raised there and know places with good school districts well. Right now, a hotbed of activity.We have already seen some great deals slip away and believe there is potential to make $15k-$35k on these deals (how can a newbie be sure though) Again...looking at hard money...scary, scary,scary

What would you do? I know people say debt is a tool because it introduces risk. But in each scenario, there seems to be risk no matter what. We could get a home cash and wait for 15 years for that perfect renter. We could also use hard money and foreclose on that loan b/c we underestimate repairs, ARV, time it takes to market, etc. There's risk all around. But I can't say which risk is more plausible than the other.

Any ideas or thoughts?

Austin Fruechting · Answer

Congrats on getting out of the consumer debt!!! I would recommend reading Rich Dad Poor Dad and re-framing how you look at money and certain types of debt. There is an enormous difference between credit card debt and "good debt" like that on a rental property... the type of debt that puts money in your pocket every month and lets you compound your earning capabilities. Everything you do, and everywhere you put your cash involves a certain amount of risk. Cash in investment accounts, cash under the mattress, cash used as down payment... there is risk to all of those. Study, study, and study some more. Maybe you could BRRRR a property and buy/fix up in cash. Then after you rent it out you could refinance it at a level you feel comfortable at knowing the rents you will get from it.

Linda S. · Answer

@Aja McClanahan,First off, major props for getting out of debt, and bumping up the 401K contributions! To have the right answer-- you need to determine what you want-- passive income, quick money, appreciation for later? All are great strategies and will build wealth, but as others have said, it's apples to oranges so until you know what you want-- we can't help you what's the best course of action. Personally, we only do buy/hold rentals, it's not sexy, not glamorous, but it's dependable income and the money isn't going anywhere--- it's just locked to the house now. I always say... would my $20K be better invested in the stock market, or is it better getting me $10k/yr for the rest of my life? It's a different mindset when you accept debt as a business tool, and not the horrible credit card debt.. you have to realize it's a means to get you from step 1 to step 1.. it's a good thing, to use someone else's money to make you wealthy in the long term.. also-- you need to develop a strategy-- what's the most important thing to you guys-- paying off debt, or expanding and buying houses? Again-- it's all about a strategy, you need a road map of what you want, to determine the best path to get there!Lastly, one of my absolute favorite quotes from my mentor "Look at dollars, not dimes!" It might cost you a little in loans/fees, but the amount of money you can make will be tenfold!

Thomas S. · Answer

Congrats on getting out of debt.If you are debt adverse do not invest in real estate. It is very high risk. You are far better off staying conservative and keep putting money in a 401K. A mutual fund will produce higher returns than buying real estate with all cash.To make worthwhile returns you must use leverage.

Ali Boone · Answer

Hey Aja! Well, a couple points worth pointing out. There's a huge difference in good debt vs bad debtBuying a rental is extremely different than flipping, so you're comparing apples and oranges for options.For debt, you're smart to be leery about it. But 'good' debt is different than the debt you were in and can be very strategic for making your money work for you. Here's information on how/why it's strategic-https://www.biggerpockets.com/renewsblog/2015/04/1...The context of that article is different than what you are asking about, but it still has some info on there for you.For strategies...#2 and #3 don't have to be scary, as that can still be done using good debt, but the biggest red flag there is not knowing how to do that. Things get progressively less 'scary' when you know what you are doing. If you don't have a good handle on things, then yes, it should be considered scary because it could tank very easily. And then again, investing in rentals is extremely different from flipping, mostly in that you are comparing active income vs passive income. I can give you more information on those, but in short- what is required for each is very different and with very different risk levels. My advice would be to really research a few things before you make any decisions:Thoroughly comparing different investing strategies and understanding eachWhichever one you pick, get lots of education on it before pulling any triggersUnderstand good debt vs bad debtUnderstand how to buy smart investments (to then lessen the risk)Hope that helps!

Bob Okenwa · Answer

@Aja McClanahanFear can be a good thing and a bad thing. The good thing about fear is that it typically prevents one from entering into a dangerous situation. The bad thing about fear is that it typically prevents one from taking risks. If you plan to invest in anything, there is always the risk of losing your money. When I first began investing in stocks, that was the 1st thing I learned: never invest anything you're not willing to lose. Yes it can be scary, but if you let fear dominate your thoughts, you're never going to get started. Depending on how much you have saved, the BRRRR strategy might suit you tastes as you'd basically only need the seed capital once and then keep re-using it to acquire and rehab more homes and keep getting your money out provided you bought at a price low enough to get it refinanced and pull your money back out.You can't score unless you get in the game. Fear is natural, but if you let it dominate your thoughts and only focus on the negative side of things, you'll never accomplish your real estate goals. Look at all of the successful people here and around the sports or business worlds and you can bet just about every person had enough belief to bet on themselves that they'd be able to get where they wanted to go. There is no such thing as a perfect scenario or risk-free deal in real estate. Just gotta get out there and get things done.