What are your suggestions for getting started with $150k?

Question

Hey,

I'm looking for your suggestions on the best ways to utilize $150k that I'm using from my equity.

Some extra details.

I'm a contractor/realtor. I live near Toronto, Ontario (Canada). I have a friend willing to also invest around $250k with me. I'm considering purchasing a student rental in cash because I won't qualify for another mortgage ontop of my own. Also, I won't be affected by the interest rates right now. I'm looking to buy the property for roughly $400k and create 6 bedrooms each earning $650/mth.

Is there a better use for this money? Also, what is the best strategy to use my equity? Heloc or another method?

Thanks

Drew Sygit · Answer

@Eric Shin DSR = Debt Service Ratio. Basically a commerical loan offered for SFR properties, where the approval is based upon property cashflow, not the owner.

They have exploded in popularity in the USA the last 5 years.

Paul Sverdlin · Answer

Hi Eric, buying all-cash restricts your flexibility and size of the deal that you can participate in. It is safer, and for a starter it could be a good step to take. However you might want to look at financing alternatives just to be aware of how much you can borrow and at what rates. As an example, if you limit yourself to $400k whereas a great property comes along with $600k price tag, you may miss it entirely since you won't be even looking at $600k properties.

It is important to know your exit strategy and time horizon too. If you buy and renovate that student rental, what will you be doing with it? Student rentals require more hands-on management. Do you want to keep all your cash tied up in it, plus manage it yourself? Perhaps you want to refinance, take equity out and buy another student rental, in which case you'd you 2 properties to manage with students. Is that scalable, can you dedicate the time to this strategy? I am not implying its not a sound approach, just pointing out that its important to know where are you heading and what you need to build out in terms of systems to get to the end point.

To answer your question directly: I'd likely go with a duplex conversion in Barrie or Ottawa. It adds value to the property, it is easier to manage than a student rental, and it should still break-even at 80% financed if you buy it cheap enough & rates go lower in a year or so. After that just pull the equity and buy another one.

Best of luck!

Paul

Mason Hickman · Answer

@Eric Shin

Utilize your skills as a contractor and get something that needs repairs. Flips or BRRRs would be where I would focus my attention with your skill set and decent starting cash.

Ruchit Patel · Answer

A lot can be done with that big sum of money.

Yes, student rental is a good idea. However, if I were you, I would fund the construction in a great area, and try to generate 6 figures in profit in 18 months.

That's what I did last year.

Eliott Elias · Answer

You have the money now you need the deal. What are you doing to find it?

Matthew Irish-Jones · Answer

I suggest you invest in your contracting business.  I love RE investing as an investing strategy for diversifying and building long term wealth.  My contracting business of 20+ people produces WAY more cash than my RE investing.  Its nice to have a bunch of units to keep my guys busy, but it is now my contracting business producing cash for my investing.

Build out your systems, hire a project manager, foreman, buy tools, market, get a shop, etc... You already know contracting and have a business, that's awesome.  Owning a  successful business's is a faster way to wealth building than RE investing if you know what you are doing and you can go from sole proprietor to mid size business.

Eric S. · Answer

@Mason Hickman thank you. Will I be able to know before purchasing if I'm able to refi after reno and renting?

Eric S. · Answer

@Paul Sverdlin thanks for the good info. Yes, the baby is definitely adding to the motivation. I'm most likely going the JV route. I'll look into Matt Piche!

Paul Sverdlin · Answer

Congratulations! Excited for you! A growing family is one of the greatest motivators for an investor.

To your point about refi: welcome to the real world where podcast hosts don't seem to always live in. If you've reached a limit on financing, that's an issue that may not be easily overcome, although there are certainly some options available:

1. Use JV partner. I went this route. Find someone who'd be willing to take out the mortgage and contribute part of the downpayment. You do all the work, they bring financing, and at the end you split profits 50-50 (or whichever way seems fair). Matt Piche aka Fruitful investor has a whole youtube channel on how this is done.

2. Bring in more expensive lenders. If the deal is good then someone will lend you money for it at a higher interest rate. Private money is always available... just costs a lot more. Perhaps carry a higher rate until you stabilize your cashflow and refinance at cheaper rates later? Sometimes lenders will settle on interest-only loan, which will be costly but easier to manage from a cashflow perspective.

3. Adjust your strategy to flips from brrr. Why stay stuck with 1-2 properties that you can finance if you could make good profits flipping houses (that's a big if and there are lots of transaction costs and tax considerations here).

4. Vendor financing. Sometimes seller will lend you money if you buy the property at the price that they wanted to get. There are courses online on how to do this. A rare find in my experience, but they do exist.

Hope this helps and I am sure there are a dozen other ways to handle financing restrictions that other members of this forum can share with you.

Best of luck and congrats again on the baby!

What are your suggestions for getting started with $150k?

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