How would you leverage a 100k cash and a fully paid off 400K house to build wealth in this economy?

Question

How would you leverage a 100k cash and a fully paid off 400K house to build wealth in this economy? …and no current debt.
I am interested in diving into the multifamily market. I’m a newbie and plan on making my first acquisition before the end of the year. I have been doing my homework and have an idea on how to run the numbers to filter prospects. I also have been doing my market analysis for the area I’m interested in buying.
I’m interested in what others have done in regards to extracting equity from a primary residence to fund the purchase of an income property without going cash broke.

Jon Holdman · Answer

Before you invest in anything, take the time to learn the rental business inside and out. Too easy to be taken in by talk when you're new to the business and don't fully understand what you're getting into. I assume that $400K house is your residence rather than an investment. Lots of folks will tell you that's equity that's tied up and earning you nothing. True enough. But it providing you a place to live. Generally, I think its better to own expensive doo-dads, whether a car, a boat or the house you live in, free and clear. If you come to believe you have too much cash tied up in one of these expensive doo-dads, sell it and buy something cheaper. Applies just as much to houses as to cars. If you do decide to leverage your residence, be dang sure you can make the payments even if you lose every penny you invest in real estate. Its not at all difficult to do exactly that, especially if you start leveraging that money or you invest in any sort of leveraged private placement. If a 100% loss of your investment would leave you in dire straits, then ABSOLUTELY do not take that money out of your house. The answer to your question requires more questions. Are you 25 years old and have a good job bring in lots of income? Twenty-five and just inherited these assets and work in fast food? Sixty five and out of work with few prospects of finding something you want to do? Or, 65 with another million bucks in your retirement account? If you're young and unskilled, using that cash to gain the skills and credentials for a good-paying job would be a good investment, IMHO. For that matter, if you're older and have limited job prospects, the same advice would apply. Be very leery of the pitches for quick and easy riches if you just plunk down $10K for a mentorship or boot camp. Assuming this is only a small portion of your net worth, I would (and have) started small with SFRs in your area. Do spend some time reading and learning the business and don't believe tall tales like "cash flow = rent - PITI". I don't know the market that well in Colorado Springs, but I suspect its challenging to get a truly good deal, just like here in Denver. But with some work I think you can probably find a few deals. OTOH, I'm assuming you want to invest in real estate, which, to me, means buying some sort of income producing property. If you want to invest in a real estate business, like fix and flipping or brokering (in all its various forms), then you should (is this sounding like a broken record) learn that business inside and out. Linking up with someone locally who's doing that business would be a good approach.

David Wedemire · Answer

Marcello It's always good to plan before jumping in. You are right we are probably near the bottom. The choice is entirely yours and you don't need other pressing you to decide which area to go into. Some have done well with commercial and others with residential. Everyone has their likes and dislikes. If you favor commercial then ask for help from those doing commercial. And Thank You for your service for this country. Appreciation is never expressed enough for this sacrifice and maybe it is time for you come home.

David Wedemire · Answer

I would partner with a group of experienced REI professionals already in the busines of Multi-family investing to leverage your money to provide a better rate of return on your money. Why do all the heavy lifting by yourself.

James Hamling · Answer

Lots of great, very insightful, experienced advice in the replies, so I won't even try to play the parrot here. My advice, first step, go to a local smaller bank that is local (5 branches or less) and get a 50%-70% mortgage on your home, and roll that right into an account at the same bank. Also, shift 3/4 of the funds into a short term high yield CD account. Then keep doing this, seeking insight and knowledge, give it about 6 weeks or preparing. I say that all for 2 reasons: (1) see how you really feel after you have received and paid a mortgage payment again a time or two, that will test your comfort zone without risk. (2) by doing just that alone, odd's are you will be profiting quite a lot, between the new interest being earned and the tax break for the mortgage interest. It's easy to think you will be ok, but when the money is out riding on a deal, I have seen many people come loose at the seams with worry.

Dennis Tierney · Answer

Marcello: If you want to invest in your education I would consider getting some investing books. One I found helpful is "Dealmaker's Guide to Commercial Real Estate" by Ray Alcorn. I found it quite thorough but expensive. It will help you decide philosophically how you may want to proceed with your investments and how to do all of the analysis involved. I didn't start with SFR and don't regret starting with MFR so don't get discouraged. It certainly has been the best investment move I have made. Dennis

Marcello Di Gerlando · Answer

As a newbie I have more questions than answers and any answers I get seem to generate more questions. Thanks to all of you for your insight the combined knowledge on BP is a fantastic tool. With advice from some of you, it has been suggested that I invest in my education. I completely agree. I already have a BA in business admin with a concentration in entrepreneurial management. And at some point I will pursue my masters. Here’s a list of options for newbie education in REI (from a newbie’s point of view). In your opinion what set of skills would aid a newbie the best for buy and hold investing? What license or formal training should be considered as essential to success for REI? Here is my short list, what would you suggest? • Real Estate license • Appraisal skills • Home inspections I am not interested in get rich quick seminars, but rather a more formal approach to education. So if you have opinions about the correct path for REI education please share.

Marcello Di Gerlando · Answer

Thanks for all the comments. I have to say I am little discouraged. I have known a few folks who have been very successful with commercial real estate and multifamily properties. And I am eager to give it shot for myself. Like many others, I believe we are hovering around the bottom of the real estate market and interest rates are very appealing. So if I’m going to pull the trigger I think now would be good time. To answer your question Jon, I just turned the big 40 I have a stable job, I’m an my Officer and I’m currently deployed in Afghanistan. I tired of multiple deployments it puts a huge strain on the family. I have a serious choice to make when I get home. Stay 10 more years to earn my retirement or find another gig. I really want to find another gig. I’m willing to go out on limb and take some risk here for the benefit of the family. Any other assets I have are tied up and can’t be liquidated easily and definitely wouldn’t cover our retirement. I do have the option of borrowing from a hard money lender, but truthfully I would rather not go there until I can prove to them and myself that I can do this. Thanks again.

Jeff S. · Answer

Your question is a little broad. A couple of the investors on here have mentioned keeping business separate from personal assets so if business goes sour, you still have a home and a retirement account. You could start off by figuring how much of your home equity you are willing to risk and form a plan from there. Find a way to protect some home equity. Retirement accts are already protected.

Chris Martin · Answer

Regarding "As a newbie I have more questions than answers and any answers I get seem to generate more questions." This is a necessary part of the process of moving from consciously incompetent to consciously competent. This is a good thing. Since you have a BA in business administration, I know you have the discipline and drive to get whatever goal you set you mind on done. Licensing is not a prerequisite for success in REI. People who are licensed achieve the license through some testing or other vetting process. I would recommend learning and understanding the education part of the licensing first. For instance... in my case, NC RE license requirements include a course, and that course uses a textbook. In CO you can get the textbook, learn the material (via self education or via a class) and then decide if you want a RE broker's license. In my case, I took the class to learn the material and opted out of licensure. I followed the attorney guidance of the company I worked for. Even as my role changed, the attorney made the right call 7 years ago. Licensure wasn't the right path for me or the company. I am unlicensed by design, but am consciously competent in brokerage per my education... and certainly my experience. Ditto with appraisals and home inspections. For appraisals, your education will most likely need two books, Basic Appraisal Principles and Basic Appraisal Procedures. Now for the ultimate extreme couponing sales pitch. Act now and I'll send you a Basic Appraisal Procedures book from Hondros Learning for 50% off. My price for this book is $4,000... so only $2,000 for you! Don't forget to use your BP double discount. PM me and I'll send it to you (obviously for free... no strings attached. Can't beat that... and yes I happen to have an extra Basic Appraisal Procedures book I'm not using;).)

Darrel K. · Answer

It seems to me that $400K is a lot to have tied up in a house that isn't making you any money. What about selling the house and buying a good sized MFH complex? Live in one of the units for the time being. Or buy SFH's including one to live in, fix up, and flip. It would be a big downgrade in lifestyle, but still a hell of a lot better than a'stan. By the way I'm military also (newly retired).