What would you do with $60K?

[Adrien S.]

I'm in a unique position as far as REI: lots of head knowledge from reading and some real experience with 1 SFR. My long term goals are to grow a business with enough passive income to live on comfortably. Currently, I don't have enough extra cash to do anything else. My SFR is at 90% LTV and is still recovering from the crash. My short term goal is to accumulate cash as quickly as possible.

My parents sold some family property and are ok letting the money sit in the bank at 0.1% interest. I asked to "borrow" $60K because I know I can get them more and help myself at the same time.  We've discussed 6% interest only loan. 

I've thought up 4 options and I'll list them from less risk to most risk (and/or experience) 

1) Invest money in an REI company. They give 12% paid monthly. My 6% is $3600.

2) Purchase a condo. I can find 2/1 condos or town homes for $60K that need minimal work. I can get $1200/m or more (my condo is a 2/1.75 and 1250 sq ft and I get $1300/m now). Estimated NOI is $3000 using the 50% rule. This is consevative since expenses are limited to inside the unit. A NOI of $4500 is more realistic. This area rents quickly; in the past 48 months at my other condo, I've had 3 tenants and haven't missed a month. This is the low end side of an A area.

3) Purchase a MFH. In this price range, I'm looking at C areas (one with promise as 2 large 500 employee companies are relocating there in the next 3 yrs.). Again using the 50% rule, I'm looking at NOI between $7000-15,000. Factors include if I use a property manager and 4 or 5 unit buildings.

4) I have an acquaintance who just shared with me his current investment strategy. He buys $10,000 bank owned houses (mostly in Gary) and does minimal work if any. He turns around and sells them with owner financing ($5K down and 10% over 10yrs). Assuming they pay over the 10yrs, his profit per house is $40K. He only does 3 per year per Frank-Dodd. 

Thoughts on those 4 options and/or other options I'm missing.  I'm thought of flipping (I'm good at it and enjoy it but I make too much at my career to take the time off to do it) 

Thanks 

[Brian Gibbons]

At the paper in Indiana Indianapolis paper

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I am looking for rehab projects to fund

must be in first position if the numbers make sense 

Personal credit is not a problem 

money in the deal is not a problem

My phone number

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[Ryan Mullin]

@Adrien S.

Personally I think option 4 is just to risky.  I would throw that one out all together. I have tried a million variations of that type of deal and I couldn't ever get it to work...  I know lots of people have, but that is just me.  

Option 3 is a good option but I would want more than 60k to work with for anything over a couple of units.  And I would really be sure about the the C area becoming a B area / attracting those companies, etc. 

Option 2 sounds great. 

Is there a way to combine option 1 and 2 with out getting to complicated?

Could you get something for around 50k all in and use the remaining 10k to invest in (option 1) REI company? possibly a crowd funding type of situation...

[Adrien S.]

Agree on assessment of #4. Not sure how he's getting $5K cash down payments on houses in Gary. It's appealing to the owner because he sells them at 75-80% of ARV but they get them As-Is. Plus he'll have to deal with foreclosing as well on some.

The company in #1 is essentially a giant wholeselling company. They buy houses in 3 states, mark up a bit, and resell quickly. At times, they'll flip and sell as turn key or as lease option. They are looking for outside capital. I've seen several of their houses and the numbers work well for a flipper- a quick $15-25K profit in most houses and occasionally a beauty of a flip. 

[Mike D'Arrigo]

I agree with @Ryan Mullin that #4 is very risky. Gary is an economically depressed market. What happens when you have to take that property that you did "minimal work" on back when the buyer defaults on the note you're carrying? What's your exit strategy then? I don't think #2 is a good strategy either. In my opinion, condo's don't make good investments and 2 bedrooms have limited marketability.

[Adrien S.]

Originally posted by @Mike D'Arrigo:

I agree with @Ryan Mullin that #4 is very risky. Gary is an economically depressed market. What happens when you have to take that property that you did "minimal work" on back when the buyer defaults on the note you're carrying? What's your exit strategy then? I don't think #2 is a good strategy either. In my opinion, condo's don't make good investments and 2 bedrooms have limited marketability.

Thanks Mike- in my market (specifically 1 town) condos are not a bad market. They are 1/3-1/2 the cost of a SFH but can fetch rents in the $1000-1500 range. We get a huge influx of IL folks crossing the border because of the school system and cost of living. The HOAs do eat into the NOI but I look at that as a CapEx expense since it takes care of the big maintenance issues (roofs, H2O, etc). One should look at these as cash flowing properties ($250-400/door monthly) and not appreciation properties; although my condo has jumped 30% in last 3yrs and are back to 2006 values.

[Vincent Crane]

First of all, 6% is too high of an interest rate. The economy is completely flat right now and even 4% interest is fair. The highest return on your money would be from househacking so instead of spending $10,000 a year on rent, it's going toward your mortgage and you gain appreciation and your roommates start building your wealth for you. But $60k is still a lot of money so there's more, buy a small multi, triplex or quad that cashflows $800 a month or so. Condo's have HOA fees and they don't hold their value as much when the economy crashes because the previous phase to the crash is.. hypersupply, which is usually in the form of large MFH like condos.

In short, house hack, buy multi's, give them 4-5% interest, 6 is too high. Stocks aren't even returning a positive return this year..

[Adrien S.]

Thanks Vincent- I'm a tightass and did most of my initial numbers using 4%. I figured I'd be a little more generous and up it a little for them. 

House hacking is not an option. I have a primary residence (which isn't the big issue), a wife, and 3 kids (the bigger issue). If I was single or married without kids, I'd do it in a heartbeat. If I could find a large enough duplex- I'd consider it now. 

[Scott W.]

Originally posted by @Vincent Crane:

First of all, 6% is too high of an interest rate. The economy is completely flat right now and even 4% interest is fair. The highest return on your money would be from househacking so instead of spending $10,000 a year on rent, it's going toward your mortgage and you gain appreciation and your roommates start building your wealth for you. But $60k is still a lot of money so there's more, buy a small multi, triplex or quad that cashflows $800 a month or so. Condo's have HOA fees and they don't hold their value as much when the economy crashes because the previous phase to the crash is.. hypersupply, which is usually in the form of large MFH like condos.

In short, house hack, buy multi's, give them 4-5% interest, 6 is too high. Stocks aren't even returning a positive return this year..

this is wrong on so many levels. no one is going to give you this cheap of $ with the risk involved. 6% interest only with no points is a great deal. ignore what he said.

[Vincent Crane]

Mortgage interest rates are 4%... Okay if househacking isn't an option, multi's are the best way to go. If you buy 2 multi's with the money, you can trade them up for a small apartment complex after 3 years by reinvesting the cashflow, appreciation and equity paydown. Or, you could use the BRRR strategy to get infinite returns. Honestly that's what I would do. You can buy a house for $80k, put $20k into it, rent it out for $1,500 a month, $400 a month cashflow, do a cash-out refi, and then repeat and use that same money over and over. I know several people who've done this and make $5k-$7k per month in passive cashflow after all expenses and all they had to do was save up the initial $40k-$50k to start the BRRR and it just snowballs after 3-4 years.

[Justin Long]

Originally posted by @Vincent Crane:

Mortgage interest rates are 4%... Okay if househacking isn't an option, multi's are the best way to go. If you buy 2 multi's with the money, you can trade them up for a small apartment complex after 3 years by reinvesting the cashflow, appreciation and equity paydown. Or, you could use the BRRR strategy to get infinite returns. Honestly that's what I would do. You can buy a house for $80k, put $20k into it, rent it out for $1,500 a month, $400 a month cashflow, do a cash-out refi, and then repeat and use that same money over and over. I know several people who've done this and make $5k-$7k per month in passive cashflow after all expenses and all they had to do was save up the initial $40k-$50k to start the BRRR and it just snowballs after 3-4 years.

 This is my current business goal and start paying them off after I get to my 10 limit, then rinse and repeat. 

[Wesley C.]

No one has said this, but borrowing from family can be a very bad idea.  Notice I said can.  If everything goes as planned, it works for everybody.  If everything doesn't go as planned (rarely does) there is a lot of potential for fallout.  If I were to borrow from family, I'd budget very conservatively.  You are an adult and don't need a lecture, but I've seen this go wrong for so many people.  Proceed with caution.

[Adrien S.]

Originally posted by @Wesley C.:

No one has said this, but borrowing from family can be a very bad idea.  Notice I said can.  If everything goes as planned, it works for everybody.  If everything doesn't go as planned (rarely does) there is a lot of potential for fallout.  If I were to borrow from family, I'd budget very conservatively.  You are an adult and don't need a lecture, but I've seen this go wrong for so many people.  Proceed with caution.

 Fully agree- when they say skin in the game, I can say I have double. I'd be more concerned about losing their money vs mine. I'm leaning towards the first 2 options as they are in my comfort zone. Less returns but less risk. A couple of quick flips could change the situation quickly. 

[Mike J.]

@Vincent Crane Out of curiosity, in what market are your colleagues using BRRR?

@Adrien S. Not trying to hijack your thread. Just wondering what market Vincent is referring to. Being in Southern California, the numbers that he mentioned are certainly more attractive than what we can get out here :)

[Vincent Crane]

Yeah it's going to be hard to do that in or around LA. I know people that have done it in several midwestern states, Illinois, Indiana, Tennessee, but then a couple people in Atlanta when the market was lower here, it's already gotten back to pre-recession prices here unfortunately. 

[Shawn Holsapple]

@Adrien S. - Welcome to BP!

All good points above.

As mentioned - I would stay clear of Gary and any C class multi families.

For the past few years, I've been using family and friends funds [yes, we are all still speaking] to buy simple SFH. I then do a light rehab [with their funds as well] then go to my local credit union and refi. This gets all of my principle plus some profit for my lender back. Most of the time I walk away with the property fully funded by the bank or maybe I have to put a few bucks into myself. Sometimes I walk away with an equity check [which is tax free BTW].

So, pay your parents that massive 6% APR and start buying homes. Rinse and repeat.

Your parents make $3600 per year and you get 7-10 houses per year all netting $200 plus for FREE!

Just a thought...

[Mike J.]

@Vincent Crane Thanks for the heads up!

[David Nolan]

@Adrien S. I am not sure your experience to date is sufficient for anyone to invest $60,000.00 with you. Would you lend someone of your experience $60,000.00? I know I certainly wouldn't. You clearly have a desire to create some money, although you are not yet able to prove you can. 

I would suggest that given your family's desire to help you, which is great, that perhaps you find a JV deal with an experienced operator and provide advice or assistance to your parents to enter into a JV and perhaps share the profits with them. This way you can get some real life experience by working with an experienced investor who knows what they are doing and can possibly teach you. You also reduce the risk of losing your parent's money and both you and your parents will have a better chance of making some cash.

Alternatively, you could find a deal and ask your parents to consult with an experienced financial adviser if they should invest their $60,000.00 with you in that deal. If they say OK then you are good to go, if they say no then they will no doubt point out all the risks that you may not see.

I am not trying to put down your efforts just to share with you, from many years of experience, that investing other people's money is fraught with danger. Either you will not value it as much as your own and therefore take greater risk, or you value it so much that it will cause you great distress if you should lose it. Either way I don't see how you can win.

Another alternative is to run your proposed deal past a hard money lender and hear what they say. They charge more for a reason.

Ideas on paper are great, reality can be something else altogether.

Good luck with your project.

Happy investing!

[Adrien S.]

Crazy what one can learn in 5 months. I never took a loan from my parents. In late September, I went all out on marketing and D4$$ to find properties. I spoke with dozens of investors and read hundreds of forums on BP to figure out what really is a good deal. In 4 months, I've closed 8 wholesale deals and helped sell 2 for other wholesalers. Looking back at those 4 options, they are horrible options now. I know half a dozen other ways to use that same money on better deals. I'm still not going to use there money- it's almost a pride thing to build my business without any outside financing help from friends/family.