First Time Investor At 18, Leveraging My Home Or Annuity?

Question

Hello, BP! I graduated High school only a couple of months ago. I have been wanting to become a real estate investor for the last four years (Since I was 14!). Which is around the time I discovered BiggerPockets. Since then I have read over 20 books, listened to over 200 podcast episodes and talked to a couple of local investors. I recently found a 4-plex for 359,000$ which I have been looking to buy. I have talked to the owner and told me he'd sell it for 335,000. 3 of the 4 units are rented currently. After all units are rented, it will bring in 3600 a month gross income. I estimate that the expenses should be around 900 a month (Not including the mortgage). I went to a local bank today and my only option is an in-house loan. I have a paid off house which I currently live in that would probably be worth around 400,000$ to 500,000$. I also have multiple annuities that would cover 100% of the purchase price. My father, who was also a real estate investor, left me this after his passing from cancer in 2017. This is my first post and I figured I would ask the BP community for their thoughts on which would be better. Your feedback would be great. Thank you BP.

Todd Anderson · Answer

Drake,  Welcome to the BP community.  You sound like a very smart young man with a bright future.  Thank your father for teaching you to think this way, I'm sure he would be proud.

Going forward with a relationship with a local bank is a great idea.  I have worked with a few local banks to build my portfolio and have never regretted it.   Get some experience with this quad and you will be ready to go back for your next deal.  Then you will have a track record, and the annuity can fund the down payment for the next venture.

Make sure in your diligence that you account for any upcoming maintenance and make sure that there is enough cashflow to cover the payment on your current equity.

Best of luck to you.

Drake Cole · Answer

House hacking was my original plan. But after talking with the bank, I would not meet the debt to income ratio. So in house loans would give me less restrictions for me to be a little more creative. With using my home or annuity’s as collateral, I can purchase the property with no money down and all four of the units would be able to be rented. With the loan on the home however, I would take out a HELOC and purchase the property outright, then take a loan out and on the HELOC to pay off it off. This would give me a lower interest rate and give me a longer term.

Benjamin Aaker · Answer

Looks like you are in a better financial situation than most at your age. The equity you have will go a long way to getting you a loan. Have you considered house hacking the 4 plex and living in the vacant unit? This way you could get an FHA loan and rent out the primary residence.

William Gordon · Answer

Howdy,

I would use borrowed money vs. cash, for a couple of reasons. 1. As you gain experience on what you really couldn’t learn from books or podcasts, you will have the fallback of the annuities to bail you out. Books and podcasts are full of survivorship bias, since we don’t hear about the folks who, with hard work, effort, and grit, failed and left, only the survivors get to tell their story. The annuities could be a life line that could bail you out if you didn’t do your due diligence well enough.

2. The annuities could be used for your second or third investment property, if you can’t get a second loan. Because of age/job history/whatever criteria a lender will use to not lend you money. By using borrowed money first, you free future you to have the option to use the annuities for your next purchase.

Lastly, if a bank is willing to consider loaning you money, with your age/job history, at even a slight reasonable rate, pounce on it. Also, for your consideration, instead of cashing out the annuities, can you use them as a collateral for future loans?