Newbie - How should I save to fund my first investment?

[Sunshine Chow]

Hi everyone! I'm an investor newbie and would love to start my real estate investing journey with flipping houses. I currently work a 9-5 job M-F and my husband and I own our home. I was wondering how much we need to save up to dive into our flip? I read about a bunch of creative financing ideas including taking out a HELOC, private loans, or hard money loans, but it sounds pretty risky to completely leverage my first deal. Especially since property in the OC/LA area is so expensive. How did you fund your first few projects?

[Michael Kelly]

I'm new to real estate too, but not to investing and personal finance.

Velocity of growing a property portfolio will depend on "core" financing strategy, including equity management, mortgage products and financing resources, but a wholistic approach beyond standard banking will:

- speed things up
- open new options
- mitigate risk

To obtain money for real estate, you can:

1. Borrow
2. Save
3. Earn

I recommend using a combination of all three methods. In addition to [growing portfolio faster], using 'save' and 'earn' methods alongside 'borrowing' will [keep your pipeline full] down the road, give you [buffer to prevent setbacks] and [durability to last through any downturns]. It will make lenders want to give you loans and alleviate temptation to take on excessive loans too fast. Below are some ideas.

1. Borrow

Refinance:
you may be able to pull out max of 90% equity from a local bank. Build relationships through networking and ask a good mortgage broker. This strategy introduces some risk because you may be less durable in the event of a recession. Carefully review loan rate terms and calculate "worst case" numbers should treasury interest rates rapidly increase and home value drop 20-50%. Could you still afford payments and avoid selling low? Even with surprise vacancy? Is interest rate capped? Adjustable? Length of term? Balloon risk? All need consideration.

1031 exchange:
you can sell your current place and move proceeds to escrow for 1031 exchange to buy a different property of equal or greater value. Officially, you need to make next purchase within 45 days. Advantage is proceeds from house sale are "tax deferred" so you can indefinitely delay paying capital gains tax on appreciation you gained in the old house. This means you get to reinvest that money and get appreciation and CashFlow on those dollars. Consult a qualified pro for help.

Seller finance:
work out a deal directly with the seller of a future property. This can let you buy a new place in a situation when bank might not lend it to you.

Private investors:
practice running numbers on cash flowing deals. Network to find established real estate investor and ask them to review your deal to critic. Once refined, ask that person or another if they'd like to front money for large percent of gains. Bigger pockets community can recommend fair terms. For profit share on top of principal, I like 35% me, 65% for investor. Always take good care of your investors. They make the deal possible and have most skin in deal. In this case, I've heard people putting loan in their name when investor puts way more cash. Transfers risk off investor and puts on borrower.

Build credit:
Strategically build credit to get future loans

2. Save

Analyze current expenses:
- create spreadsheet of ALL expenditures over last three months
- find and reduce or eliminate any expenses you don't need or love
- target 15% monthly reduction. For 3k monthly budget, that's $450/month or $5,400/yr.
- areas include eating out, entertainment subscriptions, convenient purchases, expensive dates or drinks, consumer goods, fancy brand items, rent or mortgage at or over 30% pay, etc.
- don't give up everything you enjoy, just be aware that small choices add up. Avoid unnecessary ones.
- send extra money to separate savings or investing account on same day each month

Invest in other asset classes:
- you might seek a talented mentor in stock investing and ask for help building a portfolio targeting 15% annual returns. There's risk, but it's definitely possible, even these days. Review capital gains taxes before.
- get a compounding interest calculator. I use "compound me" app for IPhone. $450/month for 3 years at 15% average annual compounded appreciation should yield $20k+ after taxes. That's a 20% down payment on a 100K property, a new roof for an existing rental property, or 12 months cash reserves at 1500+/month. Certain loans may require 6 month's cash reserves, so that may cover two loans, qualifying you for money you couldn't otherwise borrow for new CashFlow. Pretty awesome, and this new strategy can cook on the back burner so it's ready when you need it. 3 yrs is doable!

3. Earn

New income:
- add new sources of part time income to accelerate savings and get funds sooner.
- goal to earn extra $500/month
- combined with $450/month savings = $5700 after 6months, or 3.5% down on a 165k property residential property with an FHA loan. I think you can get 4 of those type loans before entering higher lending requirements?
-After 2 years it's nearly 25k.
- After 3 years invested for 20%annual compounded interest - nearly 50k! That's close to a turnkey single family in some regions. Certainly would buy another flip or pay for good reno projects on two properties to force appreciation on each. Worth looking in to.

Ideas include:
- drive uber
- Tutor school kids
- babysit
- cut grass
- handwrite invitations
- sharpen cutlery
- make YouTube channel for product reviews
- write a book
- teach guitar lessons
- run a summer camp
- sell things on eBay
- organize parties for people
- part time customer service emails for company
- write resumes for employees
- property manage
- start Etsy store
- air BnB a room in your house
- buy clothes in thrift store and sell online
- host BBQ dinner and sell tickets for food and beer

Get a raise:
- you can also ask boss for a 5% raise. If you and husband do so successfully, that's 10% more right there, or another 10k/yr pretax for 100k income household. Added that to $5700 gained from six months of saving + extra earning and you've achieved over 20k new money by this time next year.

Good luck, and I hope this helps spark ideas!

Anyone have comments on this?

Best,
Michael