newbie with a little cash - what to do

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newbie with a little cash - what to do

Jon Lafferty
Investor · Woodstown, NJ · Member since 2014 · 123 posts · 43 votes

So I have a bit of a dilemma without even begining my great REI career. Just a bit about me:

I earn an above avg income

Owe 245k on my personal residence (married 3 kids). No other debt.

My long term REI goals are to build enough passive income through buy and hold rentals to quit the day job. I really want to build a business that my wife and children will have the ability to join me in long term.

the dillema: I have around 40k in cash and am not sure where to begin. I'd like to stay within an hour of my primary residence while staying within the 30-40k cash deal. I am thinking SFR or duplex. Does it make more sense for me to pay cash for a property and pay in full or should I be looking to buy as many properties as I can for the 40k and leverage loans to pay the excess amounts.

example

SFR @ $40k - put 10-15k down and finance the rest through HML or personal loan - cash flow @ 200 / month

multifam @ 120k - put 20-30 down and finance the rest through HML or commercial loans- cash flow @ 100-200 / month

That would be three doors of cash flow and I would be out 40k in my cash. The plan was at this point level out, learn to landlord and a year later do a heloc or refi on these homes to leverage equity into new homes. Wash rinse repeat. Maybe this puts me at 6 rentals in 2 years and a decent cash flow.

Thoughts? Is this a newbie way of thinking this through? Should I wait and save more cash?

Thanks all

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Annette Hibbler
Real Estate Consultant · Brighton, MI · Member since 2013 · 607 posts · 251 votes
12y

Using OPM (other people's money) is always the better way to stretch (or leverage) your investment dollars and quickly grow your portfolio. I prefer to keep the mortgage portion below 50% that way I have the greater ownership but that is my own personal take on it and neither right or wrong.

There's nothing wrong with 25% down and mortgage the rest provided the numbers work to cover fixed expenses & payments and still leave you with at least $200 in cash monthly.

Keep in mind there are many other ways to invest in real-estate that are known as "armchair" investments too. Use a variety of investment methods and in several different market to diversify your portfolio. Staying in your backyard may seem "safe" initially, however, there are many good markets out of state that can prove lucrative. Just keep an open mind.

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  • Shawn McenteerBusiness Member
    Realtor · Boonton Township, NJ · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    @Jon Lafferty I see similarities between you and myself. I live not to far and deals are tough to come across in our area. I have been connecting with various members from BP and I highly recommend you do the same. There are plenty of meet ups going on in the tri state area. Unfortunately I am not comfortable giving advice in the areas in NJ you would be able to purchase for $40k.

    Your plan looks achievable, but it sounds like a lender/mortgage provider would be ale to asses your leveraging strategy better then myself.

    Bets of luck, happy to help if you have any questions.

    973-975-3895
    House Hacking New Jersey563 Reviews
    WebsiteView Page
    0Reply
  • Chris Mills
    Investor · Washington, DC · Member since 2014 · 49 posts · 21 votes
    12y
    Leverage is your friend. One of the best things about our business.
    0Reply
  • Jon Lafferty
    OP
    Investor · Woodstown, NJ · Member since 2014 · 123 posts · 43 votes
    12y

    @Shawn Mcenteer yes I am planning on doing some serious networking in the local and BP community. I really am hoping some of my business experience can be helpful to others as well.

    In sourcing deals I have been following alot of what Lisa Phillips does with WCN and simply scouring the web. I think the key is eventually we have to jump on a property and get some skin in the game.

    @Chris Mills forgive my lack of experience but are you saying it may be better to leverage existing equity in a fully paid property or in your experience is it better than 25% equity on 2 or 3 properties

    0Reply
  • Shawn McenteerBusiness Member
    Realtor · Boonton Township, NJ · Member since 2013 · 2k+ posts · 1k+ votes
    12y

    @Jon Lafferty I agree, knowledge is our greatest asset but completely useless if not put to use. I am listening to Lisa blog now, she does a wonderful job.

    973-975-3895
    House Hacking New Jersey563 Reviews
    WebsiteView Page
    0Reply
  • Rhonda C.
    Homeowner · Issaquah, WA · Member since 2014 · 26 posts · 2 votes
    12y
    Chris Mills what do you mean?
    0Reply
  • Annette Hibbler
    Real Estate Consultant · Brighton, MI · Member since 2013 · 607 posts · 251 votes
    12y

    Using OPM (other people's money) is always the better way to stretch (or leverage) your investment dollars and quickly grow your portfolio. I prefer to keep the mortgage portion below 50% that way I have the greater ownership but that is my own personal take on it and neither right or wrong.

    There's nothing wrong with 25% down and mortgage the rest provided the numbers work to cover fixed expenses & payments and still leave you with at least $200 in cash monthly.

    Keep in mind there are many other ways to invest in real-estate that are known as "armchair" investments too. Use a variety of investment methods and in several different market to diversify your portfolio. Staying in your backyard may seem "safe" initially, however, there are many good markets out of state that can prove lucrative. Just keep an open mind.

    1Reply
  • Abel Vazquez
    Chino, CA · Member since 2013 · 62 posts · 7 votes
    12y

    Hey @Jon Lafferty

    Sounds like the plan you have is pretty solid. I think the Duplex idea might be more profitable idea in the long run in my opinion. The reason I say that is because at two units for the right price you have a larger margin for profit. I guess it all depends also what the demand is for in your area, is there is more demand for SFR's because there is families looking for rentals? or is there more demand for 1/1 & 2/1 units like a duplex can offer? Pretty much whatever gives you a lower vacancy rate and makes your first land lording experience a lot smoother. Hope it helps.

    0Reply
  • Jon Lafferty
    OP
    Investor · Woodstown, NJ · Member since 2014 · 123 posts · 43 votes
    12y

    @Annette Hibbler you got right to the point of my question. I have really had the OPM epiphany lately and realize it may be best for me to use my little chunk of cash to spread myself across the board as much as possible, ie: 1-3 rentals.

    @Abel Vazquez I agree with you that a duplex can offer more cash flow however at my stage in the game as an early investor I like the exit strategy an SFR give's me.

    1Reply
  • Kevin Fletcher
    Denver, CO · Member since 2013 · 185 posts · 160 votes
    12y

    @Jon Lafferty I think the comments here are good. You'l be able to achieve so much more with OPM then you will with your own, and the fact that you have a good job makes it that much easier. I think it would be wise to check the average rental cap rates in your area and the areas around you to see where your best target area/market is. Many people think that you must be able to get 2% of the purchase price per month for the property back to make the deal viable, but its almost impossible in the bigger markets from what I've seen. Good luck hunting

    0Reply
  • Chris Mills
    Investor · Washington, DC · Member since 2014 · 49 posts · 21 votes
    12y

    @Rhonda C. Sorry for my delayed response.

    What I meant is that in real estate you are able to buy $120k worth of property without having to actually spend $120k. You put down your down payment and the bank takes care of the balance. A bank won't give you that deal buying stocks, mutual funds, or most other types of investments. If you indeed have $120k in the bank, instead of buying one property you can buy about 5 at $100k each.

    Example:

    $175k SFH rents for $2000

    I got into it for about $40k, all things considered, and the note is just under $1k, netting about $1k before expenses. If I paid cash for the property I'd make all $2k before expenses. By using leverage, I make a 60% return on my money. Without leverage, I'd make 14% on my money. #nobrainer

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