How to spend $80,000

Question

Hello BPers!

My husband and I will have $80,000 to spend on rental investments next year.  We will invest in a buy and hold, in the Memphis area.  I am curious how you would invest $80,000...

1. Purchase a home with cash, bringing profit each month of a much larger sum.

2. Use $20,000 to $40,000 for downpayment and repairs, and mortgage the rest.  Obviously, this means more of the rental income would go to pay the mortgage.

3. Something I haven't thought of yet.

M husband works full time in the military and we are NOT wanting to purchase a large quantity of properties at this time.  We already own two rental homes.

Thanks!  Anna

Dustin Heiner · Answer

Hi @Anna Smith!

It sounds like you are in a terrific position to build up your rental business. Good for you!

You have a lot of options on how to invest with this money that you have. What I recommend, as well as currently do for my rental business is, buy your next property for cash, and then do a delayed financing on the property once you have a lease.

Delayed financing is basically just like getting conventional financing before you buy the house but is done after you already purchase the house for cash. With delayed financing, you can pull out 75% of the homes appraised value up to 100% of your purchase price including all closing costs.

Hopefully, if you buy right, you will have equity built up in the property already, and you will be able to pull out 100% of your purchase price for the property and have zero dollars in the deal. Also, the rents will cover the financing and put money in your pocket every month.

This is much better than doing conventional financing before you purchase the house because you do not have to put down 20% for the down payment and be out that money. With pulling out 100% of the purchase price, you can now use that money to purchase another property and do delayed financing all over again.

I have done this strategy many times and it is fantastic! I love buying a home, getting it rented, pulling ALL my money back out, and still own the property while it brings in cash flow every month and do it all again with another property.

If you have any questions about this process, send me a PM and I'll share more about it with you.

Hope it goes well!
Dustin

Jerry Padilla · Answer

@Lance Austin

That is why so many investors start out with residential property and conventional loans. The lowest interest rates with fixed 30 year loans. Every 5 years with commercial or blanket mortgages, there is a need to refinance or sell.

Jerry Padilla · Answer

@Anna Smith

@Douglas Skipworth

@Lance Austin

What is the interest rate for the line of credit? Is it variable? If your long term plan is to buy and hold, there are many things to take into consideration.......

•  A variable rate is most likely going to increase, in the long term, How much? Who knows ten years down the road. 
• A fixed interest rate locks you in to that interest rate for thirty years. There is no risk of your interest rate increasing. Rates are still very low these days on residential property. 
• A business line of credit interest rate is going to be much higher than a cash out refinance or HELOC. 
• What are the closing costs going to be twice? It fluctuates depending on your state and county. Some of the closing costs are property insurance and taxes, which you are you paying out anyways. Ok, so it costs you a couple of thousand dollars........ But, for example you just bought a SFR house for $100k with a value of $150k that the seller wants all cash offers. You can cash out with an LTV of 75% based on appraised value, up to a maximum of purchase price plus closing costs prior to 6 months. So you can pull out the $150k -( 25% equity ) $37.5k = $112.5k allowing you to pull out your initial investment in the property, and in a couple month period, essentially you got into a house with no money down. And can now use that money to keep purchasing more property. Or even if you put $10k into it, it is still less money into the property than if you initially used financing.

Jerry Padilla · Answer

@Douglas Skipworth Thank You for the mention!

@Anna Smith Douglas has some good suggestions! If you can pay cash to get a house with equity, it is a great way to then, turn around and immediately cash out finance the property with delayed financing. Below is some more facts on delayed financing. You can immediately pull out your initial purchase if the LTV is there. If you keep doing this and pay little out of pocket, your $80k could go a long way.

Delayed Financing Exception

A cash-out refinance within six (6) months of a purchase transaction when no financing was obtained for the purchase transaction are allowed under the following parameters:

• The new loan amount is not more than the actual documented amount of the borrower’s initial investment in purchasing the property, plus the financing of closing costs, prepaid fees, and points (subject to the maximum LTV).

• 1. SFR mortgage #1-6 - 75% LTV
• 2. 2-4 unit MFR mortgage #1-6 70% LTV
• 1. SFR mortgage #7-10 -70% LTV
• 2. 2-4 unit MFR mortgage #7-10 - 65% LTV

Jerry Padilla · Answer

@Matthew Edwards

For delayed financing, prior to 6 months from closing you can borrow the initial purchase price  plus closing costs. Unfortunately, you can't borrow the funds for rehab. After 6 months you can cash out on the appraised value. If you have liens against the property for that rehab along with the purchase than you can rate and term refinance that loan without any seasoning.

Matthew Edwards · Answer

@Jerry Padilla: I've read a couple of posts today where you provided the above comments and they were very helpful. Just so I am clear, you can borrow up to the amount of money you put into the property, meaning the appraisal in that situation would be for more? Example you buy a house for $90k and then refinance with an appraisal of $120k and pull the $90k back out.

Second question, does it matter if the "initial investment" was at purchase or rehab costs? If I buy something for $45k and put $45k into it and it appraises for $120k again, am I still able to pull out the $90k?

Thank you!

Lance Austin · Answer

Thanks. I hope to get hard numbers tomorrow on what a LOC would be for the 4 unit complex. I'm just not familiar with LOC financing options related to commercially zoned units.  The cc on my HELOC was $200. The cc on the conventional loan were quoted as $6500, $2000 of which are prepaids.

Asking price for the unit is $139,900 (currently working to find comparable values so not sure how much equity would be available at this price yet).  This is where I lose my way and why I'm trying to reduce expenses related to cc. It's zoned commercial and 5 yr balloons on 20yr term make me nervous and takes a lot of the cash out of the flow.

4 unit, all units rented at $500, $2000 gross

section 8 eligible,

T&I $1800 annually

Remodeled 2 years ago

Roof 1 year old, vinyl siding needs replacing

This would be my first deal. I'm trying to ask all the right questions and I feel like I'm missing a few things. It seems to cash flow well on a 30 year term. If commercially zone units don't qualify for conventional loans, the bank financing allows for a higher LTV (75% vs 85%) 20 term and of course the rate jumps a .25 (5.0% vs 5.25%) for the 5 yr balloon - PITI $923 balloon payment. I don't need the cash flow. I realize it may not the big win regarding instant inequity.   Would you move on it or pass it over?

Current renters pay on time and are low maintenance.

Lance Austin · Answer

I love this idea of delayed financing.  Simply wanting to confirm when implementing this process, we will incur the expenses related to cost of closing 2 times ( once for the cash purchase and a second time for the cash out refinance) correct?

I've been trying to think of another way to avoid doubling my closing costs and this is what I have been pondering. It seems too easy so I expect some to shine a light on  why this is a bad idea.

Here's my scenario. I'm looking at a four unit apartment that is zoned commercial. Commercial loans obviously do not cash flow as well as conventional loans seeing that this would be a 20 year term with a five-year balloon as opposed to a 30 year term with a lower interest rate. My idea was to pay cash for the property using the equity out of my  primary residence and then come back and open a line of credit ( much lower closing cost if any) against the four unit apartment after closing and meeting the seasoning requirements. This would essentially pay off my HELOC loan entirely and  allow me to avoid the second set of closing costs ($4k) related to cash out refinancing the property. Realizing the inherent risk of a HELOC and the adjustable rate, it allows me to get into the property and cash flow it more aggressively for the first year or two before I eventually  refinance it on a fixed term.   Assuming that I can execute the options above, Why should I not do this?

My long-term goals are to buy and hold creating passive income. I'd love to do the BRRRR technique but I'm not sure I have the time to build a portfolio that way, At this point.

Douglas Skipworth · Answer

Hi, @Anna Smith.

It's definitely "safer" to pay all cash for a property.

However, the income returns on rental houses are usually pretty slim if you pay all cash (and there's no appreciation and eventual sale).

A little leverage could get you more houses and a larger nest egg (either cash flow or paid off houses) in the future.

Here's the good news.  If you buy a house for cash, you can always go back at a later date and borrow some money against it.  That can be a lot better option than borrowing Day 1 and being locked into a situation that you might not want to be in on Day 2 (remember, the borrower is always servant to the lender).

You are definitely wise to consult with the BP community on opportunities like this.  The real estate experts on this site have seen and done it all!

Anna Smith · Answer

Thanks Douglas, I suppose, I don't have an exact objective for that money.  We don't need it to live on.  If we didn't invest it in real estate, we would have it in mutual funds.

I guess I am thinking long term.  Is it better to purchase 1 house in cash and bring in the rent every month.  Or mortgage a home and bring in the smaller amount of monthly profit.

Over the long term, is one strategy better than the other?  I do like Dustin's method mentioned above!  Anna

How to spend $80,000

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