Real Estate Investing Advice - Wholesale OR Buy & Hold?

Question

I need a little advice as I prepare to take the plunge into Real Estate Investing in 2017.

A little of my background I am 33 years old. I have been working in the mortgage industry for close to 8 years for one of the nations largest lenders. Father of three kids. Currently, I have become jaded with corporate America and want to step out and become my own boss. Have time to enjoy breakfast with my kids and family. Be there to pick them up from school and do homework. You know the little things in life.

I have a couple questions that have come up as I have been researching this endeavor.

1. Is it a prerequisite that I own my own primary residence before considering investing in other property?

2. In Colorado, currently is it better to wholesale(flip) property or buy & hold?

3. Would you agree it would be a good idea to pull from my 401(k) for my first deal?

Bill S. · Answer

I don't really have anything to add on points 1 & 2 to what @Dan Mackin said.

Point 3) Not a good idea and here is why. a) How do you get access to the funds? Two ways. The first is a loan and the second is an early withdrawal. Both have significant downside. The loan comes due if you have a change of employment status. If you are fired or downsized or move to a better job the funds are due at that time. At least that's how mine worked. If you can't pay it back it becomes an early withdrawal with associated 10% penalty on top of being taxed at your standard income rate. It can also push you into a higher tax bracket as well. This site mentions this downside.

The second option, paying the penalty, makes it extremely hard to recover the costs, especially in a very challenging market like we have here.

The reality is if you are truly "investing" then you have money. If you don't have money, then you are looking for a second job in real estate. That job can be flipping or wholesaling. Buy and hold is investing unless you are self managing. Self managing is really just a second job in RE that supplements your investing by allowing you to have better returns (in theory).

Christopher Lawhead · Answer

Hey Jonathan,

Here's my two cents, for what it's worth.

First, ditch the cooperate lender and join the broker world.  You'll be much happier, set you own hours, make more money if you hustle, and will always win on rate and cost for your clients.  Compare the numbers of banks and direct lenders vs wholesale brokers, you'll be amazed.

To answer your questions;

1.  No, but why don't you own your own house?  It's the cheapest money you can get and doesn't require 20% down.

2.  I'm a buy and hold guy, but the cash on cash deals for buy and hold are tougher to find since everyone is moving here.  Flips and wholesale deals are more risky, but there's always opportunity.  It's simply tougher to find deals than it was a decade ago, or even a few years ago.

3.  I'm not a big fan of 401(k), but I've been self employed most of my life, so what do I know.  I've never had one.  BUT, I'd bet on Real Estate before betting on any 401(k).  Do the math.  Let the number be your guide.

Good luck!

Chris

Bill S. · Answer

There is really no easy way if you don't have money. Look at your situation, your skill set and figure out what your "superpower" is. After that you have to find a way to leverage your super power and create some income with it. The best thing is always the thing that fits with you and what you bring to the table. Right now, what's best in the Denver market was to have invested 10 years ago. It's far better to do what fits you and your skill set rather than trying to find the sweet spot in the market. It's all hard and you have to bring your A game no mater what you do. It's best to be playing the game you like and fits with you than trying something else that may look easier on paper but is not a good fit.

I would say if you don't have major savings aside from your 401K then start saving as a first step. Take your next bonus or raise and start banking it. No mater what you do in real estate it takes some money to get the ball rolling. Get some money management education and live below your means.

Dan Mackin · Answer

1. No it is not a prerequisite, but it does help at least in terms of knowing what to expect. Plenty of people do this without owning a primary first.

2. Depends on what your goals are. Do you want to get out of corporate fast, or just start supplementing that income slowly so you can transition out? Colorado is hard right now no matter which route you take.

3. I would not agree. This again is specific to the person and the situation. Pulling from retirement accounts can open a can of worms. You can do it, but it must be executed correctly.

Justin Windham · Answer

This is true if you have self-employment activity, but no full time W2 employees, yes.

Michael Rodriguez · Answer

I pulled from my 401k for my first rental before the appreciation went made here in Colorado and made out big, just REFI'd and got my 401k money back including the penalty! BUT that was because the market was on my side.

Now I wouldn't do it here in Colorado.  Maybe somewhere else like the mid-west but you've got to be ready to be in it before you do that.

IF you bounce from your job I believe you can move your 401k $$ into a self directed solo 401k and then buy passive real estate (no involvement) without penalty.

Good luck,

Mike

Christopher Lawhead · Answer

No, I don't buy notes.  I buy and hold rental properties which has worked out.  I've done a little "house hacking" which has also been great.  I know guys that buy notes and have done very well, but I can't offer any advice on that.

Todd Douglas · Answer

@Christopher Lawhead I see that you are a buy and hold notes. Does that work out for you?

Jonathan White · Answer

@Bill S.  Aside from my 401(k) it's the only major savings I have at this point. I had the idea of borrowing versus an early withdrawal. My job seems to be stable for the time being. Nonetheless, a gamble either way it goes.

Should I try and find a mentor over trying to tackle flipping or wholesaling?

Which is better in the current Denver market?

Is there any way I can leverage my position inside the bank to find deals?

Real Estate Investing Advice - Wholesale OR Buy & Hold?

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