Class C: Personal loan for 200k, should I use it for multiple down payments, or...?

Hong Kong · Member since 2024 · 161 posts · 57 votes

First of all, feel free to make any and all comments you wish; there's no need to sugarcoat anything. I appreciate almost any feedback where the poster makes a sincere attempt to share their opinion, regardless of what it might be. Thanks.

I really like the idea of using OPM to invest. Here is my current situation - I can probably secure a personal loan for about 200k at around a 3-4% interest rate with a 5-year tenor. Repaying this shouldn't be a problem assuming I don't suddenly lose my job.

I am thinking about starting off in some class C neighborhoods and will be handling everything remotely. Perhaps I'll try to acquire around 3 properties in cash deals that need fixing up, rent them out, and then hold onto them... forever? Based on my previous investing history (completely unrelated to real estate), I would describe myself as a buy-and-hold kind of guy. Hopefully, things will go relatively smoothly with the rehab, vetting tenants, and so on. If the rent stabilizes, I can then consider refinancing these properties using DSCR or other valid options (please educate me, and let me know what other options you think are valid). What are your thoughts on this plan?

Alternatively, do you think it might be better to use the 200k to make down payments on higher-quality homes, i.e., ones that are almost rent-ready, and finance the remainder of those purchases with DSCR, etc.?

I'm entirely new to real estate investing, but I have a high risk appetite because I have seen other people achieve amazing things that many say cannot be done. I often look at them and think if they can do it, probably I can have some level of success too.

Other key info I may have left out above:
1) I am not in the US, and have no plans to visit or move there
2) I am not a US citizen, but possibly have a credit history there (maybe none) since I attended university there many many years ago
3) I am completely new to real estate - I've been reading crazily and consuming lots of content. Next step will be to start analyzing deals for practice and asking others for feedback on my analysis. Once I've done that multiple times and I'm getting positive feedback on my numbers it will be time to begin the real journey.

Thoughts please. Thanks again.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

Quote from @Nicholas L.:

@Zach Howard

when you say a 'personal loan' at that interest rate - that must be a friends and family thing, right? no one is commercially loaning at that interest rate right now. and even for friends and family, that's more of a favor than a loan...

you asked not to sugarcoat, so here goes. what you're proposing, while possible, is incredibly difficult and highly risky, and i don't know how you would do it completely remotely with no plans to visit or set up a team.

i think i've said this in other posts, but there is tremendous demand for inventory right now among both retail buyers and investors. to BRRRR something, you need a goldilocks property - something distressed enough that it can be bought substantially below market, but not so distressed that it can't be repaired. everyone wants those deals, and so you're competing remotely / from your computer against experienced investors in person in any market you'd pick. on the chance that something comes to you somehow - you'd have to snap it up / put it under contract immediately, and again, that's very difficult to do remotely. as an example, you'd have to do something different than this:

https://www.biggerpockets.com/forums/963/topics/1195280-expe...

https://www.biggerpockets.com/forums/48/topics/1137397-balti...

i am trying to do the same thing locally, in person, and it's difficult. everything on and off market gets multiple offers almost immediately. and if it's sitting, and you see it, it means everyone else passed on it. what does that tell you?

on your second question - you're proposing 100% financing. you'll be cash flow negative / losing money, potentially for years and years. it's your money, so if you find something in a market you believe in and want to try to hold it very long term, OK - but again, it will be many years before you recoup all the interest you'd be paying. i don't think that makes any sense - there are investments that make money - but YMMV.

hope this helps

Your talking financial suicide.. Class C from half way around the world fully levered.. U will go broke that I can basically assure you or at least 90% chance this will not work and you will lose money.

U would be better off making loans with that 3% 4% money at 10 to 12% and make the interest rate delta pick very good borrowers and let them take the risk on the assets.. Thats what i would do.. BE the BANK..

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Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
1y
@Zach Howard
let me know if i am missing something, but if the 200K loan is fully amortized over 5 years, then you'll have very large payments each month, and the property's income won't support it. i think that is part of what we're all struggling with. if you pick a specific property and run the numbers maybe it will help. (or, again, maybe we're missing something - let us know.)
take this thread as an example.
https://www.biggerpockets.com/forums/927/topics/1224249-my-e...
that poster shelled out probably 80-85K in cash to be.... negative each month on what seems like a pretty solid property. if he holds it for... several decades, or longer, he might come out on top. but in the short term it's actually going to consume his capital. and that was his cash. what you're proposing is, again, borrowing 100%.
1 Reply
Zach Howard
OP
Hong Kong · Member since 2024 · 161 posts · 57 votes
1y
Quote from @Jay Hinrichs:

Quote from @Zach Howard:

Quote from @Henry Clark:

OP the good thing about BP is lots of opinions and experience. You get to pick what you want. We don’t know all of your info. Nor may appreciate your risk tolerance level.

1. Financial terms. Your personal loan has a 5 year balloon period. Assume you will be making payments in it. Not 100%. Your house loans will be long term say 25 years. Never invest in Longterm assets with short term debt. Even if it is just the downpayment. This is a lesson many investors and pro investors fail over and over again.

2. Real estate investing can be a combination of cash flow or appreciation. If you’re talking C properties probably cash flow. Making this up but you will probably need to own 100 of these to match the stories you’re referring to. I would both buy a property to get your feet wet and at the same time make a plan to scale. Personally I would stay away from this. Lot easier ways to grow wealth.

3. It is always better to invest locally. Looks like you’re in Hong Kong based on your tag line. We already invest in Belize. Thinking about Italy or Sicily. Did Xmas in Malta. Lived it but they drive in the opposite side of the road. The following is the thought process on a house we looked at in Italy over Xmas. Our interest in Italy Sicily is both our brother and son are based over there.

Deal analysis in Italy.
1. 2,000 sq meters. Two story. 3bd, 2bath
2. 12 acres in the valley between two hills. Most villages are on top of the hills. So property is private. But is in a rise of land so it has a broad view down the valley. My brother lives above.
3. 2007 house just updated by owner.
4. Asking $495k euro. 3% interest fixed, 10% down. 25 year term. Probably get down to $430k.
5. Location. 25 minutes to beach, 40 minutes to Florence, 15 minutes to Pisa, 60 miles to snow skiing. 10 minutes to Home Depot style store, etc. Desirable location both locally and regionally.
6. Revenue stream. Own living quarters. Weekly Airbnb. Military or civil service housing using their Base Housing Allowance.
Now what does the above have to do with you and HongKong.
7. Revenue stream. Airbnb. Shared living quarter rental, Military or Civil service rental. US military or civil service or other government renters are low risk, high collectibility, steady flow.
8. Hong Kong both chance for cashflow and appreciation. At 3% interest you’re bearing both inflation and appreciation from the cost side.

9. Our deal was a new build. Thus easy to manage and low Capex expenditures.
10. It would be local for you. And your team would be local.

11. Just like there is only so much beach frontage. There is only so much Hong Kong. Guaranteed value appreciation or maintenance.
Although you said you don’t mind high risk. Your true return has to be risk adjusted. Example. I would take a 10% return in my home town A/B versus a 15% return in a C market OSS. The 15% return is in paper and not sustainable.

"Never invest in Longterm assets with short term debt."
What makes you state this? Curious to hear the rationale behind this mindset or... mantra.

"Your personal loan has a 5 year balloon period."
If I understand what you're saying correctly, no, it doesn't have any balloon payments. After the loan is drawndown I need to immediately start making monthly payments for the next 60 months. Each payment is exactly the same amount. Early repayment will mean a 2% fee being assessed.

Yes, I'm based in Hong Kong, but have no intentions of investing in property here. I have no idea how anyone makes money investing in real estate in the Hong Kong market - other than developers, that is. Just a case in point, the tiny apartment I live in (800 square feet) the mortgage payment is about 4000 per month, and the typical rent for such a place would probably be somewhere between 1500 to 2000 per month. So the in terms of getting something that cash flows locally... the numbers never pencil as far as I see. Of course, there is always the possibility I could be wrong, just as I could be wrong about maybe jumping into some class C properties. However, before doing anything I take my time to gather information, think outside the box, connect with people who have done the very thing that other people say is impossible, stay patient, see whether there are any unique solutions I can bring, and only then decide what to do.

Thanks a lot for your feedback, and I'm looking forward to learning more, especially on the thesis of not using short-term debt for a long-term investment.

look at Rural Japan its closer and much better tenants you can buy homes there for 40 to 60k that rent for 500 to 700. never a worry about tenant issues like your going to experience with C class US tenants. 800 sq ft is a very large home in Hong Kong if your not living with family and your maid in the same apartment

What a coincidence! I literally started my real estate idea by considering buying property in Japan, but eventually decided that the US made more sense. My wife actually is somewhat open to the idea of investing in Japan though. Maybe I'll need to give it some more consideration, haha, especially because we could probably actually go see some properties in person that way and she speaks passable Japanese. My main concern with the Japanese market is that I really know nothing, and I find it a bit hard to find information about it, but I guess I also know "nothing" about property markets anywhere other than maybe Hong Kong.

800 square feet is not tiny by Hong Kong standards, you are absolutely correct, but just as you mentioned we have a live-in helper and are hoping to start having kids about 1.5 years later. Regardless, the point about apartments in HK was that I don't know how investors make money here. The rents pretty much never seem to cover the mortgage costs, even with low interest rates. I guess an appreciation play would be the only thing that makes sense over here. I won't buy into anything that I don't think will cash flow though - that's beyond my risk appetite.

Hmm, thanks again, I'll recheck some Japanese properties and see whether something there looks like it might work out ok.
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Zach Howard
OP
Hong Kong · Member since 2024 · 161 posts · 57 votes
1y
Quote from @Nicholas L.:

@Zach Howard
let me know if i am missing something, but if the 200K loan is fully amortized over 5 years, then you'll have very large payments each month, and the property's income won't support it. i think that is part of what we're all struggling with. if you pick a specific property and run the numbers maybe it will help. (or, again, maybe we're missing something - let us know.)
take this thread as an example.
https://www.biggerpockets.com/forums/927/topics/1224249-my-e...
that poster shelled out probably 80-85K in cash to be.... negative each month on what seems like a pretty solid property. if he holds it for... several decades, or longer, he might come out on top. but in the short term it's actually going to consume his capital. and that was his cash. what you're proposing is, again, borrowing 100%.

Ok, I'll read through that thread, and possibly comment later.

For now - yes the payments are going to be very large each month for the next 5 years. That's totally fine.. I think? I know the property's income won't 100% cover the loan repayments, but my salary will.

Just for an extreme scenario if the property/properties bring in 0 rent, but have no other expenses ( know this is impossible considering taxes etc, but it's just a hypothetical thought experiment of sorts) that's fine as my salary will cover the initial 200k loan repayments. What I am more concerned about is in terms of real estate what would be the best way to utilize the 200k - I want to put that money to work.

Without running any specific numbers yet, and ignoring my 200k loan repayments for now, if I my rent income minus property taxes, insurance etc and everything else related to the expenses of the property (again, ignore the 200k loan repayments) comes out to anything beyond 12000 annually in the first year I'll probably be relatively satisfied with that outcome.

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Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
1y
Per your reply to @N. Your short term loan your paying in full with your payroll and not amortizing for say 25 years. The confusion is most people are talking about a 5 year ballon on a 25 year amort period. Almost all deals won’t cashflow using that approach. You want to leverage.
1 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
1y
When I’m talking short term financing is bad. Is using variable rates say 1 to 3 year periods on a 25 year asset. People have failed twice now with the housing bubble and the recent meteoric increase in rates because they were gambling with the rates to save a percentage point.
1 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
1y
When you say a mortgage of $4,000 per month on an 800 sqft apartment. Is the market value around $500,000?
1 Reply
Zach Howard
OP
Hong Kong · Member since 2024 · 161 posts · 57 votes
1y
Quote from @Henry Clark:

When you say a mortgage of $4,000 per month on an 800 sqft apartment. Is the market value around $500,000?

Market value is at least $835,000
1 Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votes
1y
Quote from @Zach Howard:

Quote from @Henry Clark:

When you say a mortgage of $4,000 per month on an 800 sqft apartment. Is the market value around $500,000?

Market value is at least $835,000
As you mentioned no way to make the cashflow numbers to work. Would have to be appreciation which would not be a good approach starting at that level.

I would look at markets where you can do overseas military or state department renters. This takes care of collections and filters tenants to a large degree. Their boss or officer becomes your rent collector if needed.

Plus as I mentioned the low interest rate is available in other countries.

Jay mentioned Japan. You might look at South Korea also.
1 Reply
Corey ConklinPro Member
Investor · Member since 2021 · 129 posts · 209 votes
1y
Quote from @Zach Howard:

Quote from @Corey Conklin:

@Zach Howard Using OPM isn't a bad strategy when it comes to real estate. The problem is thinking when you are starting out that you should use 100% OPM.

Don't use this money for down payments, and don't use it to be 100% leveraged. As others have said you WILL fail. There are other ways to use OPM and not be as risky about it.

What you should do is leverage this money at 80% LTV and put 20% of your own money into the deals. That gives you a great advantage to the lending investors are getting here in the states with the much lower interest rates.

As others suggested you could also lend this money out for 10-12% and make your money that way and not put yourself on risk on the asset. The problem there is you only have 200k and there are a lot of local lenders that offer similar same terms, so why would anyone chose someone outside of the states? If you go this route you better find a way to set yourself apart. That means you'll probably have to take on riskier borrowers or agree to riskier terms.

My advice - If you don't have boots on the ground here in the states (that you can rely on), or someone you know you can trust to borrow this money then I wouldn't risk it. Make those connections first.

I know you want to take advantage of a great opportunity in your lending terms but that's only a piece of the pie when it comes to success in real estate.

I'm curious as to why you suggest putting down 20% of my own money. Somehow I think it's better to hold onto my own money and keep that dry powder on the sidelines waiting to get into the game if there are some emergency expenditures (haha, very likely with the kinds of deals I'm thinking about in class C neighborhoods). I can't wrap my head around your ideas, but I would really love for you to educate me on your thought process. And why 20-80, is that some magical ratio, or perhaps it's backed up by some sort of statistical analysis?

I'm still really not sure what to do, so thank you very much for your contribution to this thread, I hope you'll say more. I'm still in reconnaissance mode... so need to collect as much information and knowledge as possible before deciding what to do.

20-80 is more of a rule of thumb and not a "magical" ratio. If you have a good understanding of your market, asset class, risk profile, etc. this ratio can change accordingly. One thing I can assure you, there isn't an asset class in the world that would have me comfortable at 100% leverage.
Your money on the sidelines is great in principal but in reality it will be put to work covering the net loss on the properties you buy as you will be overleveraged and won't be able to cover your operating expenses with the rent. So really to have a higher chance at success you should have both money to put in the deal to lower your leverage AND money on the sideline to cover those potential cap ex projects.
As you seem to be aware, class C is risky. Having no experience is risky. Not being in the country you want to invest is risky. 100% leverage is risky.
Lowering your leverage point is one of the easier ways to decrease your risk and therefore increase your odds at success. If you had 20 years of experience, great connections in the US, and knew your market in and out then I would say you could probably leverage at a higher rate and could probably manage that risk because you have substantially decreased all of the other risks.
You should really study what happened in the US during the 80's when overleverage on real estate put a lot of people in a bad spot. This is what got Dave Ramsey in trouble years ago and that's why he preaches financial advice the way he does.
3 Reply
Zach Howard
OP
Hong Kong · Member since 2024 · 161 posts · 57 votes
1y
Quote from @Corey Conklin:

Quote from @Zach Howard:

Quote from @Corey Conklin:

@Zach Howard Using OPM isn't a bad strategy when it comes to real estate. The problem is thinking when you are starting out that you should use 100% OPM.

Don't use this money for down payments, and don't use it to be 100% leveraged. As others have said you WILL fail. There are other ways to use OPM and not be as risky about it.

What you should do is leverage this money at 80% LTV and put 20% of your own money into the deals. That gives you a great advantage to the lending investors are getting here in the states with the much lower interest rates.

As others suggested you could also lend this money out for 10-12% and make your money that way and not put yourself on risk on the asset. The problem there is you only have 200k and there are a lot of local lenders that offer similar same terms, so why would anyone chose someone outside of the states? If you go this route you better find a way to set yourself apart. That means you'll probably have to take on riskier borrowers or agree to riskier terms.

My advice - If you don't have boots on the ground here in the states (that you can rely on), or someone you know you can trust to borrow this money then I wouldn't risk it. Make those connections first.

I know you want to take advantage of a great opportunity in your lending terms but that's only a piece of the pie when it comes to success in real estate.

I'm curious as to why you suggest putting down 20% of my own money. Somehow I think it's better to hold onto my own money and keep that dry powder on the sidelines waiting to get into the game if there are some emergency expenditures (haha, very likely with the kinds of deals I'm thinking about in class C neighborhoods). I can't wrap my head around your ideas, but I would really love for you to educate me on your thought process. And why 20-80, is that some magical ratio, or perhaps it's backed up by some sort of statistical analysis?

I'm still really not sure what to do, so thank you very much for your contribution to this thread, I hope you'll say more. I'm still in reconnaissance mode... so need to collect as much information and knowledge as possible before deciding what to do.

20-80 is more of a rule of thumb and not a "magical" ratio. If you have a good understanding of your market, asset class, risk profile, etc. this ratio can change accordingly. One thing I can assure you, there isn't an asset class in the world that would have me comfortable at 100% leverage.
Your money on the sidelines is great in principal but in reality it will be put to work covering the net loss on the properties you buy as you will be overleveraged and won't be able to cover your operating expenses with the rent. So really to have a higher chance at success you should have both money to put in the deal to lower your leverage AND money on the sideline to cover those potential cap ex projects.
As you seem to be aware, class C is risky. Having no experience is risky. Not being in the country you want to invest is risky. 100% leverage is risky.
Lowering your leverage point is one of the easier ways to decrease your risk and therefore increase your odds at success. If you had 20 years of experience, great connections in the US, and knew your market in and out then I would say you could probably leverage at a higher rate and could probably manage that risk because you have substantially decreased all of the other risks.
You should really study what happened in the US during the 80's when overleverage on real estate put a lot of people in a bad spot. This is what got Dave Ramsey in trouble years ago and that's why he preaches financial advice the way he does.

Back to the original topic. I'm thinking about getting a 200k personal loan - I'll use my salary to repay equal monthly payments for the next 5 years. As long as I don't lose my job and don't have any major financial surprises, repaying this loan is not a problem. Another way to think of this is that the repayment of this loan has nothing to do with what I use the 200k for. Having said that, I'd like to put the 200k to work, otherwise what is the point of borrowing the money in the first place?

I think then that if you were me you would use the 200k to purchase something outright in cash, and not use the 200k for down payments on 1 or multiple properties - fair?
0 Reply
Ify (Bobby) Anizoba
Specialist · Atlanta Metro Area, GA · Member since 2020 · 38 posts · 23 votes
1y
@James Hamling This is the realest thing I’ve read in a while. Broke it down and made it simple
0 Reply
Corey ConklinPro Member
Investor · Member since 2021 · 129 posts · 209 votes
1y
Quote from @Zach Howard:

Quote from @Corey Conklin:

Quote from @Zach Howard:

Quote from @Corey Conklin:

@Zach Howard Using OPM isn't a bad strategy when it comes to real estate. The problem is thinking when you are starting out that you should use 100% OPM.

Don't use this money for down payments, and don't use it to be 100% leveraged. As others have said you WILL fail. There are other ways to use OPM and not be as risky about it.

What you should do is leverage this money at 80% LTV and put 20% of your own money into the deals. That gives you a great advantage to the lending investors are getting here in the states with the much lower interest rates.

As others suggested you could also lend this money out for 10-12% and make your money that way and not put yourself on risk on the asset. The problem there is you only have 200k and there are a lot of local lenders that offer similar same terms, so why would anyone chose someone outside of the states? If you go this route you better find a way to set yourself apart. That means you'll probably have to take on riskier borrowers or agree to riskier terms.

My advice - If you don't have boots on the ground here in the states (that you can rely on), or someone you know you can trust to borrow this money then I wouldn't risk it. Make those connections first.

I know you want to take advantage of a great opportunity in your lending terms but that's only a piece of the pie when it comes to success in real estate.

I'm curious as to why you suggest putting down 20% of my own money. Somehow I think it's better to hold onto my own money and keep that dry powder on the sidelines waiting to get into the game if there are some emergency expenditures (haha, very likely with the kinds of deals I'm thinking about in class C neighborhoods). I can't wrap my head around your ideas, but I would really love for you to educate me on your thought process. And why 20-80, is that some magical ratio, or perhaps it's backed up by some sort of statistical analysis?

I'm still really not sure what to do, so thank you very much for your contribution to this thread, I hope you'll say more. I'm still in reconnaissance mode... so need to collect as much information and knowledge as possible before deciding what to do.

20-80 is more of a rule of thumb and not a "magical" ratio. If you have a good understanding of your market, asset class, risk profile, etc. this ratio can change accordingly. One thing I can assure you, there isn't an asset class in the world that would have me comfortable at 100% leverage.
Your money on the sidelines is great in principal but in reality it will be put to work covering the net loss on the properties you buy as you will be overleveraged and won't be able to cover your operating expenses with the rent. So really to have a higher chance at success you should have both money to put in the deal to lower your leverage AND money on the sideline to cover those potential cap ex projects.
As you seem to be aware, class C is risky. Having no experience is risky. Not being in the country you want to invest is risky. 100% leverage is risky.
Lowering your leverage point is one of the easier ways to decrease your risk and therefore increase your odds at success. If you had 20 years of experience, great connections in the US, and knew your market in and out then I would say you could probably leverage at a higher rate and could probably manage that risk because you have substantially decreased all of the other risks.
You should really study what happened in the US during the 80's when overleverage on real estate put a lot of people in a bad spot. This is what got Dave Ramsey in trouble years ago and that's why he preaches financial advice the way he does.

Back to the original topic. I'm thinking about getting a 200k personal loan - I'll use my salary to repay equal monthly payments for the next 5 years. As long as I don't lose my job and don't have any major financial surprises, repaying this loan is not a problem. Another way to think of this is that the repayment of this loan has nothing to do with what I use the 200k for. Having said that, I'd like to put the 200k to work, otherwise what is the point of borrowing the money in the first place?

I think then that if you were me you would use the 200k to purchase something outright in cash, and not use the 200k for down payments on 1 or multiple properties - fair?
If I were you I wouldn't invest in real estate at all.

You seem to be getting caught up in putting money to work. In order for money to go to work it needs to be invested properly. If you do that wrong you might as well throw it out of an airplane. Investing in real estate can be lucrative but it's not as easy as real estate "gurus" on podcasts say.

You have every odd stacked against you when it comes to investing in real estate at the moment (multiple people have provided multiple reasons). If you want to flip those odds it's going to take a lot more than throwing 200k into some of your own real estate deals. You will need to find partners, you will need to travel to where you wish to invest, you will need to understand the ins and outs of the business by being actively involved and treating it like a business and not some super passive investment.

If you don't want to do that work I suggest you just put that 200k into some sort of diversified mutual fund that can make you 10+% on your money without any of the work of real estate.

At the end of the day this is just my advice and I'm only a stranger on the internet. For all I know you could be one of the first people to invest out of country, with no experience, in class c assets, at 100% leverage and be highly successful.

Do what you think is right for you and put up the fight to make it work out if you have to.

Good luck and I hope it all works out for you!

1 Reply
Travis TimmonsPro Member
Rental Property Investor · Ellsworth, ME · Member since 2021 · 1k+ posts · 2k+ votes
1y
If real estate traded on a screen, this may be a good strategy. The reality of owning property is just different. I used broker physical fuels...bad or new traders would treat rail cars or vessels of diesel like trading contracts/paper. It's not the same - you have to deal with transportation, storage, through put cost, counterparty risk, the need to find an end buyer in the right location with the demand at the right time, collections and billing on giant sums of money, etc.
This is kind of the same. Real estate is an investment but cannot be bought, sold, and managed like other investments.
2 Reply
Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
1y
@Travis Timmons
yep. something that seems to surprise new investors is that transacting real estate is expensive.
in Pittsburgh transfer taxes are 5%, usually split between buyer and seller. but if you buy something off market you'll typically pay the entire amount. on a $200K property that's $10K. so closing costs by themselves could easily be $12-15K. how long to recoup that if you are "cash flowing" $100 a month? =)
2 Reply
Zach Howard
OP
Hong Kong · Member since 2024 · 161 posts · 57 votes
1y
Quote from @Corey Conklin:

Quote from @Zach Howard:

Quote from @Corey Conklin:

Quote from @Zach Howard:

Quote from @Corey Conklin:

@Zach Howard Using OPM isn't a bad strategy when it comes to real estate. The problem is thinking when you are starting out that you should use 100% OPM.

Don't use this money for down payments, and don't use it to be 100% leveraged. As others have said you WILL fail. There are other ways to use OPM and not be as risky about it.

What you should do is leverage this money at 80% LTV and put 20% of your own money into the deals. That gives you a great advantage to the lending investors are getting here in the states with the much lower interest rates.

As others suggested you could also lend this money out for 10-12% and make your money that way and not put yourself on risk on the asset. The problem there is you only have 200k and there are a lot of local lenders that offer similar same terms, so why would anyone chose someone outside of the states? If you go this route you better find a way to set yourself apart. That means you'll probably have to take on riskier borrowers or agree to riskier terms.

My advice - If you don't have boots on the ground here in the states (that you can rely on), or someone you know you can trust to borrow this money then I wouldn't risk it. Make those connections first.

I know you want to take advantage of a great opportunity in your lending terms but that's only a piece of the pie when it comes to success in real estate.

I'm curious as to why you suggest putting down 20% of my own money. Somehow I think it's better to hold onto my own money and keep that dry powder on the sidelines waiting to get into the game if there are some emergency expenditures (haha, very likely with the kinds of deals I'm thinking about in class C neighborhoods). I can't wrap my head around your ideas, but I would really love for you to educate me on your thought process. And why 20-80, is that some magical ratio, or perhaps it's backed up by some sort of statistical analysis?

I'm still really not sure what to do, so thank you very much for your contribution to this thread, I hope you'll say more. I'm still in reconnaissance mode... so need to collect as much information and knowledge as possible before deciding what to do.

20-80 is more of a rule of thumb and not a "magical" ratio. If you have a good understanding of your market, asset class, risk profile, etc. this ratio can change accordingly. One thing I can assure you, there isn't an asset class in the world that would have me comfortable at 100% leverage.
Your money on the sidelines is great in principal but in reality it will be put to work covering the net loss on the properties you buy as you will be overleveraged and won't be able to cover your operating expenses with the rent. So really to have a higher chance at success you should have both money to put in the deal to lower your leverage AND money on the sideline to cover those potential cap ex projects.
As you seem to be aware, class C is risky. Having no experience is risky. Not being in the country you want to invest is risky. 100% leverage is risky.
Lowering your leverage point is one of the easier ways to decrease your risk and therefore increase your odds at success. If you had 20 years of experience, great connections in the US, and knew your market in and out then I would say you could probably leverage at a higher rate and could probably manage that risk because you have substantially decreased all of the other risks.
You should really study what happened in the US during the 80's when overleverage on real estate put a lot of people in a bad spot. This is what got Dave Ramsey in trouble years ago and that's why he preaches financial advice the way he does.

Back to the original topic. I'm thinking about getting a 200k personal loan - I'll use my salary to repay equal monthly payments for the next 5 years. As long as I don't lose my job and don't have any major financial surprises, repaying this loan is not a problem. Another way to think of this is that the repayment of this loan has nothing to do with what I use the 200k for. Having said that, I'd like to put the 200k to work, otherwise what is the point of borrowing the money in the first place?

I think then that if you were me you would use the 200k to purchase something outright in cash, and not use the 200k for down payments on 1 or multiple properties - fair?
If I were you I wouldn't invest in real estate at all.

You seem to be getting caught up in putting money to work. In order for money to go to work it needs to be invested properly. If you do that wrong you might as well throw it out of an airplane. Investing in real estate can be lucrative but it's not as easy as real estate "gurus" on podcasts say.

You have every odd stacked against you when it comes to investing in real estate at the moment (multiple people have provided multiple reasons). If you want to flip those odds it's going to take a lot more than throwing 200k into some of your own real estate deals. You will need to find partners, you will need to travel to where you wish to invest, you will need to understand the ins and outs of the business by being actively involved and treating it like a business and not some super passive investment.

If you don't want to do that work I suggest you just put that 200k into some sort of diversified mutual fund that can make you 10+% on your money without any of the work of real estate.

At the end of the day this is just my advice and I'm only a stranger on the internet. For all I know you could be one of the first people to invest out of country, with no experience, in class c assets, at 100% leverage and be highly successful.

Do what you think is right for you and put up the fight to make it work out if you have to.

Good luck and I hope it all works out for you!

For sure you are correct about me being obsessed with the idea of putting money to work. I believe it's the most likely path to proper wealth. Anyway, thanks again for your thoughtful reply. I'm still not sure what to do.

Another reason I'm somewhat stuck on the idea of real estate investing as an out-of-country investor is because I plan/hope to document the entire process and post some content on youtube etc. I'm guessing that if I manage to be successful (haha, and there are lots of ways to define success) then I can branch out into other things such as teaching others who are in a similar position how to get started in something where the odds are stacked heavily against them. So my thinking is that even if I only manage to break even one year in etc., there's almost definitely significant value in some sort of proof of concept. This getting way ahead of myself and into the realm of daydreaming, but it is something that's on my mind.

I'm still trying to find what strategies might work for me.
0 Reply
James Hamling
Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
1y
Quote from @Zach Howard:

Quote from @Jay Hinrichs:

Quote from @Zach Howard:

Quote from @Henry Clark:

OP the good thing about BP is lots of opinions and experience. You get to pick what you want. We don’t know all of your info. Nor may appreciate your risk tolerance level.

1. Financial terms. Your personal loan has a 5 year balloon period. Assume you will be making payments in it. Not 100%. Your house loans will be long term say 25 years. Never invest in Longterm assets with short term debt. Even if it is just the downpayment. This is a lesson many investors and pro investors fail over and over again.

2. Real estate investing can be a combination of cash flow or appreciation. If you’re talking C properties probably cash flow. Making this up but you will probably need to own 100 of these to match the stories you’re referring to. I would both buy a property to get your feet wet and at the same time make a plan to scale. Personally I would stay away from this. Lot easier ways to grow wealth.

3. It is always better to invest locally. Looks like you’re in Hong Kong based on your tag line. We already invest in Belize. Thinking about Italy or Sicily. Did Xmas in Malta. Lived it but they drive in the opposite side of the road. The following is the thought process on a house we looked at in Italy over Xmas. Our interest in Italy Sicily is both our brother and son are based over there.

Deal analysis in Italy.
1. 2,000 sq meters. Two story. 3bd, 2bath
2. 12 acres in the valley between two hills. Most villages are on top of the hills. So property is private. But is in a rise of land so it has a broad view down the valley. My brother lives above.
3. 2007 house just updated by owner.
4. Asking $495k euro. 3% interest fixed, 10% down. 25 year term. Probably get down to $430k.
5. Location. 25 minutes to beach, 40 minutes to Florence, 15 minutes to Pisa, 60 miles to snow skiing. 10 minutes to Home Depot style store, etc. Desirable location both locally and regionally.
6. Revenue stream. Own living quarters. Weekly Airbnb. Military or civil service housing using their Base Housing Allowance.
Now what does the above have to do with you and HongKong.
7. Revenue stream. Airbnb. Shared living quarter rental, Military or Civil service rental. US military or civil service or other government renters are low risk, high collectibility, steady flow.
8. Hong Kong both chance for cashflow and appreciation. At 3% interest you’re bearing both inflation and appreciation from the cost side.

9. Our deal was a new build. Thus easy to manage and low Capex expenditures.
10. It would be local for you. And your team would be local.

11. Just like there is only so much beach frontage. There is only so much Hong Kong. Guaranteed value appreciation or maintenance.
Although you said you don’t mind high risk. Your true return has to be risk adjusted. Example. I would take a 10% return in my home town A/B versus a 15% return in a C market OSS. The 15% return is in paper and not sustainable.

"Never invest in Longterm assets with short term debt."
What makes you state this? Curious to hear the rationale behind this mindset or... mantra.

"Your personal loan has a 5 year balloon period."
If I understand what you're saying correctly, no, it doesn't have any balloon payments. After the loan is drawndown I need to immediately start making monthly payments for the next 60 months. Each payment is exactly the same amount. Early repayment will mean a 2% fee being assessed.

Yes, I'm based in Hong Kong, but have no intentions of investing in property here. I have no idea how anyone makes money investing in real estate in the Hong Kong market - other than developers, that is. Just a case in point, the tiny apartment I live in (800 square feet) the mortgage payment is about 4000 per month, and the typical rent for such a place would probably be somewhere between 1500 to 2000 per month. So the in terms of getting something that cash flows locally... the numbers never pencil as far as I see. Of course, there is always the possibility I could be wrong, just as I could be wrong about maybe jumping into some class C properties. However, before doing anything I take my time to gather information, think outside the box, connect with people who have done the very thing that other people say is impossible, stay patient, see whether there are any unique solutions I can bring, and only then decide what to do.

Thanks a lot for your feedback, and I'm looking forward to learning more, especially on the thesis of not using short-term debt for a long-term investment.

look at Rural Japan its closer and much better tenants you can buy homes there for 40 to 60k that rent for 500 to 700. never a worry about tenant issues like your going to experience with C class US tenants. 800 sq ft is a very large home in Hong Kong if your not living with family and your maid in the same apartment

What a coincidence! I literally started my real estate idea by considering buying property in Japan, but eventually decided that the US made more sense. My wife actually is somewhat open to the idea of investing in Japan though. Maybe I'll need to give it some more consideration, haha, especially because we could probably actually go see some properties in person that way and she speaks passable Japanese. My main concern with the Japanese market is that I really know nothing, and I find it a bit hard to find information about it, but I guess I also know "nothing" about property markets anywhere other than maybe Hong Kong.

800 square feet is not tiny by Hong Kong standards, you are absolutely correct, but just as you mentioned we have a live-in helper and are hoping to start having kids about 1.5 years later. Regardless, the point about apartments in HK was that I don't know how investors make money here. The rents pretty much never seem to cover the mortgage costs, even with low interest rates. I guess an appreciation play would be the only thing that makes sense over here. I won't buy into anything that I don't think will cash flow though - that's beyond my risk appetite.

Hmm, thanks again, I'll recheck some Japanese properties and see whether something there looks like it might work out ok.

Our parent company (GA Technologies) is the #1 investment real estate service provider in Japan. If looking into that market, I'd suggest starting there. As it's designed specifically for out of country investors (Shenjumiaosuan / RENOSY).
Like anything, there is pro's and con's to that market.
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Corey ConklinPro Member
Investor · Member since 2021 · 129 posts · 209 votes
1y
Quote from @Zach Howard:

Quote from @Corey Conklin:

Quote from @Zach Howard:

Quote from @Corey Conklin:

Quote from @Zach Howard:

Quote from @Corey Conklin:

@Zach Howard Using OPM isn't a bad strategy when it comes to real estate. The problem is thinking when you are starting out that you should use 100% OPM.

Don't use this money for down payments, and don't use it to be 100% leveraged. As others have said you WILL fail. There are other ways to use OPM and not be as risky about it.

What you should do is leverage this money at 80% LTV and put 20% of your own money into the deals. That gives you a great advantage to the lending investors are getting here in the states with the much lower interest rates.

As others suggested you could also lend this money out for 10-12% and make your money that way and not put yourself on risk on the asset. The problem there is you only have 200k and there are a lot of local lenders that offer similar same terms, so why would anyone chose someone outside of the states? If you go this route you better find a way to set yourself apart. That means you'll probably have to take on riskier borrowers or agree to riskier terms.

My advice - If you don't have boots on the ground here in the states (that you can rely on), or someone you know you can trust to borrow this money then I wouldn't risk it. Make those connections first.

I know you want to take advantage of a great opportunity in your lending terms but that's only a piece of the pie when it comes to success in real estate.

I'm curious as to why you suggest putting down 20% of my own money. Somehow I think it's better to hold onto my own money and keep that dry powder on the sidelines waiting to get into the game if there are some emergency expenditures (haha, very likely with the kinds of deals I'm thinking about in class C neighborhoods). I can't wrap my head around your ideas, but I would really love for you to educate me on your thought process. And why 20-80, is that some magical ratio, or perhaps it's backed up by some sort of statistical analysis?

I'm still really not sure what to do, so thank you very much for your contribution to this thread, I hope you'll say more. I'm still in reconnaissance mode... so need to collect as much information and knowledge as possible before deciding what to do.

20-80 is more of a rule of thumb and not a "magical" ratio. If you have a good understanding of your market, asset class, risk profile, etc. this ratio can change accordingly. One thing I can assure you, there isn't an asset class in the world that would have me comfortable at 100% leverage.
Your money on the sidelines is great in principal but in reality it will be put to work covering the net loss on the properties you buy as you will be overleveraged and won't be able to cover your operating expenses with the rent. So really to have a higher chance at success you should have both money to put in the deal to lower your leverage AND money on the sideline to cover those potential cap ex projects.
As you seem to be aware, class C is risky. Having no experience is risky. Not being in the country you want to invest is risky. 100% leverage is risky.
Lowering your leverage point is one of the easier ways to decrease your risk and therefore increase your odds at success. If you had 20 years of experience, great connections in the US, and knew your market in and out then I would say you could probably leverage at a higher rate and could probably manage that risk because you have substantially decreased all of the other risks.
You should really study what happened in the US during the 80's when overleverage on real estate put a lot of people in a bad spot. This is what got Dave Ramsey in trouble years ago and that's why he preaches financial advice the way he does.

Back to the original topic. I'm thinking about getting a 200k personal loan - I'll use my salary to repay equal monthly payments for the next 5 years. As long as I don't lose my job and don't have any major financial surprises, repaying this loan is not a problem. Another way to think of this is that the repayment of this loan has nothing to do with what I use the 200k for. Having said that, I'd like to put the 200k to work, otherwise what is the point of borrowing the money in the first place?

I think then that if you were me you would use the 200k to purchase something outright in cash, and not use the 200k for down payments on 1 or multiple properties - fair?
If I were you I wouldn't invest in real estate at all.

You seem to be getting caught up in putting money to work. In order for money to go to work it needs to be invested properly. If you do that wrong you might as well throw it out of an airplane. Investing in real estate can be lucrative but it's not as easy as real estate "gurus" on podcasts say.

You have every odd stacked against you when it comes to investing in real estate at the moment (multiple people have provided multiple reasons). If you want to flip those odds it's going to take a lot more than throwing 200k into some of your own real estate deals. You will need to find partners, you will need to travel to where you wish to invest, you will need to understand the ins and outs of the business by being actively involved and treating it like a business and not some super passive investment.

If you don't want to do that work I suggest you just put that 200k into some sort of diversified mutual fund that can make you 10+% on your money without any of the work of real estate.

At the end of the day this is just my advice and I'm only a stranger on the internet. For all I know you could be one of the first people to invest out of country, with no experience, in class c assets, at 100% leverage and be highly successful.

Do what you think is right for you and put up the fight to make it work out if you have to.

Good luck and I hope it all works out for you!

For sure you are correct about me being obsessed with the idea of putting money to work. I believe it's the most likely path to proper wealth. Anyway, thanks again for your thoughtful reply. I'm still not sure what to do.

Another reason I'm somewhat stuck on the idea of real estate investing as an out-of-country investor is because I plan/hope to document the entire process and post some content on youtube etc. I'm guessing that if I manage to be successful (haha, and there are lots of ways to define success) then I can branch out into other things such as teaching others who are in a similar position how to get started in something where the odds are stacked heavily against them. So my thinking is that even if I only manage to break even one year in etc., there's almost definitely significant value in some sort of proof of concept. This getting way ahead of myself and into the realm of daydreaming, but it is something that's on my mind.

I'm still trying to find what strategies might work for me.

Obsession isn't a bad thing in this case as long as you don't make poor decisions just to "get in the game"
It sounds like your motive to get in real estate is a good one if you are looking to help other people. Feel free to reach out if you need anything while you are getting your foot in the door with real estate. I may not be the most polished investor but I'm also not going to try and sell you on anything either haha.
0 Reply
Ian IppolitoBusiness Member
Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
1y
Quote from @Zach Howard:

First of all, feel free to make any and all comments you wish; there's no need to sugarcoat anything. I appreciate almost any feedback where the poster makes a sincere attempt to share their opinion, regardless of what it might be. Thanks.

I really like the idea of using OPM to invest. Here is my current situation - I can probably secure a personal loan for about 200k at around a 3-4% interest rate with a 5-year tenor. Repaying this shouldn't be a problem assuming I don't suddenly lose my job.

I am thinking about starting off in some class C neighborhoods and will be handling everything remotely. Perhaps I'll try to acquire around 3 properties in cash deals that need fixing up, rent them out, and then hold onto them... forever? Based on my previous investing history (completely unrelated to real estate), I would describe myself as a buy-and-hold kind of guy. Hopefully, things will go relatively smoothly with the rehab, vetting tenants, and so on. If the rent stabilizes, I can then consider refinancing these properties using DSCR or other valid options (please educate me, and let me know what other options you think are valid). What are your thoughts on this plan?

Alternatively, do you think it might be better to use the 200k to make down payments on higher-quality homes, i.e., ones that are almost rent-ready, and finance the remainder of those purchases with DSCR, etc.?

I'm entirely new to real estate investing, but I have a high risk appetite because I have seen other people achieve amazing things that many say cannot be done. I often look at them and think if they can do it, probably I can have some level of success too.

Other key info I may have left out above:
1) I am not in the US, and have no plans to visit or move there
2) I am not a US citizen, but possibly have a credit history there (maybe none) since I attended university there many many years ago
3) I am completely new to real estate - I've been reading crazily and consuming lots of content. Next step will be to start analyzing deals for practice and asking others for feedback on my analysis. Once I've done that multiple times and I'm getting positive feedback on my numbers it will be time to begin the real journey.

Thoughts please. Thanks again.

Every investor has a different financial situation, set of financial goals and risk tolerance. So something that looks great to one will look terrible to another and vice versa.

As a conservative investor, I personally would never touch class C. I have seen far too many times where these do not hit pro forma due to unexpected problems like theft, crime, etc.

And, on top of that you are not even going to be in the US and have no ability to supervise and make sure that the people that you hired (who are not aligned with you) are looking out for your best interests. In that situation, I personally would not be investing in direct real estate at all.

If I wanted exposure to a foreign real estate market, I would invest passively and hire a manager that has years more experience than I could ever hope to gain, and whose job is to supervise and watch everything and make sure that it goes well.

Just my $0.02.

And whatever you decide to do: good luck.
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