What to do with 100k in savings but not income

Question

Hey guys!

I would like to get an idea on how to go about starting up in the real state investment world with 100k in savings but no job/taxable income at the moment thanks for the amazing 2020.

Any ideas are greatly appreciated!

Thank you in advance!

Jody Sperling · Answer

Once you buy a rental you have income. Buy rentals.

If you want the best bang for your buck, devote ~$150.00 to getting an LLC (if you don't have one), and ~$9850.00 to direct marketing for leads. Within that roughly ten thousand dollar marketing budget you're going to find a house that costs between 60k and 90k that needs between 10k and 30k to rehab and have an ARV of between 140k and 150k.

You can get a hard money lender to finance the project (only if you have an LLC: they can't lend to people privately says Frank Dodd), Leave most, or all, of your money in savings. Once the rehab is done, rent it to tenants, and find a bank who will refinance your money out of the deal.

If it was a solid deal with no major surprises, you'll end the rehab having rented the house and making several thousand dollars. Repeat the process.

Because your houses will have tenants with leases that pay the monthly mortgage you should have no problem finding a bank to refinance. Because you use Hard Money and factor that into the cost of the rehab, your original 90k doesn't diminish. In fact it should begin growing, showing the banks that you can weather a storm if vacancy or damage occurs (It will eventually.)

At right about the point where the banks will start to shy from refinancing your projects, you will have a base of investment properties and a ton of knowledge. Along the journey, you'll have found someone with similar but complementary knowledge who will benefit from a business partnership. Shake hands and build the portfolio together.

Good luck out there!

Peter Mckernan · Answer

@Kevin Diesel I would be a little conservative on this answer. What's your living expenses would be the first question?

Let's say they are $50,000 for the year, and now you have $50,000. I would save a little for an emergency fund (retained earnings, or reserves that the bank will ask for). Once that is done you have some options to buy a property or two, however, the lender will have to be Hard Money or Private investor. The bank/lender will for sure need an income to qualify you as a buyer for a residential property, and that will be your biggest problem. The other item/topic is to hold a W2/1099 job as soon as possible and show that income to get qualified for the home.

There an alternative, and that is doing all that above, however, looking for a commercial property (5units and above). That would be a great option since they look at your property and the income generated off that property verse looking at a borrower's income. The drawback for you is that you're limited on the cash after saving the income to live off and emergency fund.

It can be done, you just have to get a little creative!

Joel Scarboro · Answer

There are areas in NC you can buy a home for 40k add paint,floors and fixtures and sell for 80-100k Dependant on location within the zips. Feel free to email me and I’ll share.

Kevin Diesel · Answer

@Jody Sperling

Yep, don’t get me wrong. I’m not looking to just lay down 24/7 and money come rolling in.

What I mean I guess is , how can I make this my main job with the money I have saved up and not going to another 9-5 job.

From what I see, rentals is obviously a long term solution. I would need at least 40-50 units generating $100-$200 each to make a living and not have to work anywhere else.

But if I wanted to make money from real estate properties now, flipping would be the best way I guess. I would think if one avoids big mistakes and loses, with a few flips a year you could make well over 100k, live off of that while keep doing the same and slowly throwing in a couple of rentals properties between those flips.

Im passionate about real estate and ideally would like that to be my main job by using what I have saved up and turning it into more $.

Jody Sperling · Answer

One way or another, you have to work. Even people who build enormous holdings of real estate have to work on the business, maybe a bit less than the rest of us, but they still have to be there.

I guess, for my time and money, buy, rehab, rent and refinance is the most powerful option. As for paying the bills, if you have the LLC, use a hard money lender and spend on marketing, after one or two houses, you'll have replaced your marketing budget. The rents will cover the marketing.

In the scenario you asked about, you have 100k saved. In most places, you could survive on 100k for around 3 years. In that amount of time, if you aggressively built your portfolio you could look to have twenty or more properties.

Yes, that would be a full-time job, but on your schedule, doing work when it fits your needs. With that many houses, it's fairly safe to say you will have replenished the coffers some along the way as well as built a cashflow machine that brings in a minimum of 4k a month.

You own 20% of 20 properties so if there's an emergency you do what you have to and fire-sale a house or two. Sure, you lose money on the deal, but you get access to cash. If you buy well, you'll never be underwater. The only risk is the pain of moving slightly backwards.

Jeff Cichocki · Answer

Hey @Kevin Diesel,

Glad to see you exploring your options. Couple of thoughts...

1. Most HML's won't lend to you personally. But, that's not because of Dodd Frank. Dodd Frank covers personal loans, not commercial (all HML's are commercial in nature). There is lots of misinformation on this topic. But, the biggest reason for not lending to you personally is that you could decide to move into the property. If you do, you could argue Dodd Frank in court. Lenders aren't in the business of taking unnecessary risks. So, it's a lot easier to avoid the issue than it is to deal with it. Currently, if I lend money in my home state of Wisconsin, I do still lend to investors in their personal name.

As to your rental numbers, everything varies from market to market, but the 1% rule is a decent basic guide to follow. Generally speaking, you need the rents to be at least 1% of the purchase price of the property. In you're case, if you're all in for 90k, you should cash flow. However, if you had paid full retail (which lots of people are doing today), at $140k, you would likely not cash flow. On the surface, it looks good. However, the only way to now for sure is to see the expenses that go with the property.

If you go with a cash-out refi, you will need to wait some amount of time (varies by lender). Most lenders will require you season (own/collect rent) for 3-6 months (6 being the more common number) before they'll give you any money out of the deal. Most lenders also cap the refi at 75% of appraised value for these. Using you're numbers above, if the property appraised at $140k, in theory, you could take out as much as $105k. Be care full taking too much out. This is how a lot of investors got burned back in 2008. They pulled out every penny of equity and then the market turned; values went below the loan amount (upside down). This is not where you want to be. My advice, get your cash back, but nothing extra.

Anyway, good luck.

Kevin Diesel · Answer

@Peter Mckernan

Thanks Peter! Yes it’s a littler right when you want to do this but don’t have taxable income for sure!

I do some freelance software development so I get buy. My overall expenses per month don’t go over $2,500, including rent. I’m just trying to see which way would benefit me best and which one would be the fastest to accumulate more capital in order to live more comfortably and to reinvest. And flipping seems to be the way at least for now, but let me know what you think.

Kevin Diesel · Answer

@Jody Sperling

Thank you for your response!

So let’s say I buy something and fix it, all for a total of 90k with 50k being hard money lender.

After rehabs it’s worth 140k, I do a cash out refi and that way I pay off the had money lender and take back what I put in. So now my monthly payment for the mortgage is $900 and I rent it out for $1100. That’s $200 cash flow ( unless more repairs come up along the way).

I could repeat this and try to get another good deal to get the same result using the same funds but and slowly get up to 400-600-800 bucks of cash flow in 2021 if I do it 3 times.

But if I wanted to make a good return doing this and not having to look for a 9 to 5 job, would it make more sense finding the properties and flipping them? Or do people just do cash out refis for the max amount possible, use half for reinvest and half to pay their bills ? Because that to me sounds like a huge risk . Higher interest , higher mortgage payment that could wipe out the cash flow from rent and out you in a negative cash flow situation.

So I guess in my mind flipping is the way to go if you have some money to invest but no 9-5 job at the moment. You would be making house flipping your job.

Let me know if I’m wrong and where. And thank you again for your input !

What to do with 100k in savings but not income

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