What Would You Do? 20 Year Old In Need of Some Advice

Question

Hello, my name is Richard. I'm 20 years old and am in need of some advice.

I have graduated from college this year and have been studying real estate investing for a while now and feel like I should jump into it. I am blessed to have 40k dollars in my savings and my dad is going to pass down one of his real estate properties to me. His property is a multifamily worth around 600k (completely paid off), consists of 4 houses, and is being rented out for 1,000 dollars each. I am currently looking into the Phoenix area and want to invest in some more multifamily properties.

As of right now, I have three ideas on what I could do:

Idea #1- Refinance my dad's property and buy an apartment complex altogether. Saving my 40k dollars in my savings.

Idea #2- Buy a multifamily property using the BRRRR strategy. Spend most of my savings as a down payment. Not refinancing my dad's property and collecting the 4k cashflow per month (covering any expenses and repairs for the BRRRR).

or

Idea #3- Use the 40k from savings as a down payment. Do the BRRRR strategy on a multifamily. Refinance my dad's property at a minimum (enough to cover expenses and repairs). (Or vice versa. use my savings to cover repairs while I use the refi for the down payment).

Please let me know what you think. I am open to any thoughts and ideas. God bless!

Rodney Robinson · Answer

@Richard Hayes also keep in mind the dangers of having money and little investment experience. When you have money, you are more likely to make a mediocre or unprincipled investment. Continue to practice the discipline by analyzing deals for the best opportunity for you, even as the money calls you to be put to use.

Ellis San Jose · Answer

The last thing I would advise you to do is to buy something (especially a multi fam)  and pay retail price. Manage the 4 unit property yourself fora year  & learn some acquisition skills in your area to wholesale to other investors while you learn.

Jacob Dawson · Answer

I think refinancing your dad's property is a 100% must do. Interest rates are at historical lows. Now is the time to refinance if you were ever going to. I have seen people get as low as 2.9% interest on a 30 year fixed! Talk with a company like rate.com; they get paid by the bank to find you the best and cheapest refi rate or loan rate in the USA.

Lets first talk about that 40k. Assuming you can qualify for a loan, I would strongly recommend you buy a 2 unit - 4 unit building and self manage it to learn how multifamily works. You learn best when you are thrown into the middle of it. There are 100's of videos and threads about the subject of 2-4 unit investing. I am only recommending a strategy to use for your big picture plan. Additionally, you could qualify for a 3.5% down payment on a four-plex if you live in one unit for your first year of ownership.

Okay, let's talk about that refinanced money from your dad's building. First of all, you will only get 75-80% of the equity back (the bank needs the equity to be 20-25%). You will get roughly $450,000 from your dad's building. You could buy a retail NNN asset. Let me explain a NNN or STNL (single tenant triple net) building is a Starbucks or a wendy's or a chick fil a or even a whole food. The benefit of buying an asset like this is the money is 100% passive for the next 15-20 years. (lease terms are 15-20 years). https://www.crexi.com/properties/201293/kentucky-corporate-arbys I found this deal as an example. Putting down $475,000 would be 25% down. After factoring a mortgage at 3.5% and a 25 year amortization, you will cashflow ~62,000 a year for the next 15 years passively.

The benefit of going passive with the REFI money is you can teach yourself how to manage and operate multifamily deals gaining great experience along the way. With the added benefit of getting ~$62,000 a year passively to reinvest in multi-family

There was a lot to go over. Good luck

Jesse Hinaman · Answer

@Richard Hayes few things you need to keep in mind for the lender. If buying a 2nd multi family property, you’ll have to show a certain amount of reserves to the lender, in addition to downpayment funds. Proceeds from cash-out refi can 100% be used toward down payment on new purchase, but cash-out proceeds cannot be used to meet reserve requirement. With that in mind, it is very beneficial that you already have a $40k reserve set aside.

After the property is transferred into your name, you’ll need to wait 6 months before you can complete cash-out refi. A work around to avoid seasoning requirement is to have your dad record Lien against the property, then you can refinance without waiting. Lender will pay off your old loan (your dad), and your dad can transfer the funds back to you after closing. This is also considered rate/term refi which gets you better interest rate than cash-out refi. However, This strategy won’t work if trying to do simultaneous refi and purchase (you’ll need the funds transferred from your dad to sit in your bank account for 60 days, since gift funds can not be used for investment purchase).

@Jacob Dawson I would highly advise against your internet rate trolling recommendation, unless you want to get spammed by hundreds of call-center LOs. Always work with local mortgage broker that has access to the 100s of banks (like rate.com) who also doesn’t charge you to search and find the best value lender for your scenario. You get same rate, expert advice and service, and someone who’s advice you can rely on as you continue to expand your portfolio and need advanced mortgage planning strategy.

Unless you like being bombarded  by numerous unwanted solicitations, having your credit pulled 3,4,5+ times (Mortgage broker pulls it once and shops for you), and working with a call-center internet service rep who just got their license a few months prior and has 0 time to coach/guide you.

Jonathan R McLaughlin · Answer

@Richard Hayes please check with a good accountant on this...you don’t want to trigger a big tax event through the building “transfer”

Dallon Schultz · Answer

@Richard Hayes looks like you've received plenty of excellent advice and have already thought through multiple scenarios. You're making the right move by posting that question. It's not always easy as you make yourself more vulnerable to other people's opinions but fortunately most people within the real estate investment world want all to succeed and try to help in anyway they can.

If there was one piece of advice I could add into the mix is to make sure you have your projected renovation costs budget up front and have that cash in hand.

Our first purchases were 2 fourplexes and we made the mistake thinking the cash flow would renovate the units. Had we budgeted that money up front we would have increased the cashflow and value much sooner thus increasing our overall return. If possible try to save your $40k for a rainy day to protect you and your assets.

Rodney Robinson · Answer

@Richard Hayes great plan and good luck in achieving your real estate goals

Richard Hayes · Answer

@Rodney Robinson i completely agree with you. Just because I have the money doesn’t mean that I should invest in anything right away. I will do my due diligence on finding a good deal and analyze every property I come across.

Richard Hayes · Answer

Thank you for the feedback Dallon! I will take your advice on having a projected renovation costs budget. Thank you for sharing your experience with me and for giving me some pointers! I will send you a request to connect so that we can keep chatting.

Richard Hayes · Answer

@Ellis San Jose got it, I heard that the best deals made are actually off market.

What Would You Do? 20 Year Old In Need of Some Advice

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