How would you use these funds?

Question

So I have been saving, growing out my credit lines, and finding all sources of funding I can from my own personal sources.  Here is the breakdown of the funds my wife has agreed to let me utilize in my REI ventures.

Cash: $8,300

Roth IRA Contributions: $2,600

*Can pull out without penalties

Employer Roth 401k Loan: $6,000

*5% interest rate amortized over 15 years

HELOC: $20,000

*5.75% interest only payments with 15 year amortized after 10 year draw (8 years remaining)

*Currently own primary residence with approximately $60K more in equity from appreciation on top of the HELOC

Personal Line of Credit: $9,000

*7.75% interest rate revolving terms (2% of outstanding balance minimum payment per month)

Total Funds Available: $45,900

Any thoughts on how you'd utilize these funds and deploy them appropriately?  I want to more buy and hold properties in life over time, but am open to suggestions as well as I've been studying up on wholesaling, BRRRR, and other methods.

Bill S. · Answer

@Bryan Wilson so here goes. Set all the borrowing aside and spend the cash on a direct mail campaign. Sounds like you have put the time in to know our market so you would know what is a good deal if you saw it. Read everything you can on using direct mail and then pull the trigger. 6 months at $1k per month spend. You will have a deal if you follow the education you can get here on BP. I know I've done it. I actually have made several deals from mailing of that size.

Too much of your available funds are debt. IMO now is not a good time to max out leverage. Figure out how to raise more cash capital. Get a 2nd job if working the direct mail angle is not for you.

Too much of your available funds are debt. IMO now is not a good time to max out leverage. Figure out how to raise more cash capital. Get a 2nd job if working the direct mail angle is not for you.

Bryan Wilson · Answer

Thanks @Bill S. that was my main focus was whether or not utilizing the debt was the best decision.  I know with some patience I can double up on the cash reserves and even increase my credit lines as well.  I like the direct mail idea.  I've been reading up on successful people's strategies and have been creating my own list even around neighborhoods I'm willing to buy.

I have looked into the 2nd job a few times, but unfortunately have a career that requires a lot of after hours work and in office hour projects.  Also have a newborn so sleep is a premium right now.  I like the ideas though and appreciate it.

Allen Fletcher · Answer

@Bryan Wilson

That is great! You have a firm foundation so here are a few things that I would suggest as far as the funds you mentioned:

1) Avoid touching retirement related accounts. They are technically available for purchase of real estate, but I would exhaust every other means of funding before tapping your building nest egg for a real estate purchase. Taking funds out of retirement accounts is typically a huge loss on future growth.

2) HELOCs and PLCs are usually not acceptable sources of capital for down payments. Different lenders have different rules, but many that I have worked with do not accept funding from another source of debt as a viable source for down payment requirements.

Do you and your wife have your hearts set on living in your current home? One strategy that you could try is to refinance your current residence to a 30 year loan for only what you owe on it and then use a low down payment mortgage (like an FHA loan) to buy another one and move into it. This strategy may work for you because a) the reduction of monthly debt service on your current home may allow you to rent out your current home for a decent cash flow b) the low down-payment requirement (3.5% last I looked) on FHA loans would allow you to tap only the cash you have on hand and purchase a new property.

Pros:

Most efficient use of available liquid capital (from the brief snapshot you have given me)

Equity in current residence could later be tapped to help you remodel and build equity in second purchase

Current residence may cash flow well once rented (not enough data to verify)

Cons:

Require you to move

Have to pay refinance closing costs

There will be time that you are paying both mortgages while you are looking for a suitable renter, but if you plan this for PCS season for the large number of military installations in the area your risk here is greatly reduced.

Please remember to take this with a grain of salt, I do not have all of the details of your situation and you should talk with your spouse and lenders to ensure that this works in your situation before executing this strategy.

I hope all goes well for you,

Allen Fletcher

Bryan Wilson · Answer

Thanks @Allen Fletcher I actually have checked all of these off my list already and have developed a very solid plan so far.  I just haven't executed and with limited capital wanted to understand more about how others would utilize the funds.  You are indeed correct Colorado Springs is a hot market.  I've looked at SF and Multi-Family that are off the market within hours just about every weekend for the past 6 months.  I have a real estate agent willing to work with me and my strategy and have been working with a fix and flip investor who also has buy and holds as well.  I've reached out to many lenders and have found the ones that will work with me in the manner I have chosen.  Have my MLS alerts set up and utilize it to analyze 100s of deals a month to get a feel for how properties are being priced.  I appreciate the reinforcement though.  Never want to stray off the path.

Allen Fletcher · Answer

@Bryan Wilson

In order to answer your question you need to figure out what strategy will work best in your market. Every BP member that reads your post will say, "you should..." which is based on their experience and their market, but they might not be investing in the same market you are. You really need to dig into your market and figure out where the money is. I just purchased a SFR in Peyton and happen to know that the market is hot in the Colorado Springs area and you are going to need to spend a lot of time and effort to find deals quickly. In my searching I saw great properties disappear in less than a day. With that level of competition you really need to know the market well or else you will be chasing smoke.

A couple of steps for you to take:

1) Find a real estate agent that deals with buy and hold investors and take them to lunch. This will allow you to pick there brain and start building a network.

2) Find a local buy and hold investor and do the same with them as mentioned in step 1).

NOTE: I chose buy and hold because that is what you said you wanted to focus on.

3) Talk with as many lenders as you can (small local or regional banks, credit unions, mortgage companies, etc.) and network with them. Figure out what their lending requirements are and the pros and cons of each lender.

4) Get an agent to set up MLS alerts for you. You may not use this to find deals, but you can use it to start building your knowledge of what is out there, what sells, what sits, what areas are popular, etc. This is one of the better ways to get a glimpse of the market and figure out where you should focus to meet your goals.

5) Take notes, document, record, and report everything. I say this because it has multiple benefits for you: a) documenting everything, while time consuming, makes you think over and review findings b) while documenting you can find really good specific questions to ask that will help you better focus your RE efforts c) you will be better armed with information when it comes time to work/negotiate with lenders and your wife in the future.

6) Continue building capital. Always a good thing to do.

These steps are not one and done but a constant process that you will continue until you either die or leave RE forever. You will find as you continue to do these things you will find deals, change your strategy according to the needs of the market, and come to be an expert on the market that works deals as often as they want.

Hope this helps,

Allen Fletcher

How would you use these funds?

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