What would you do with 20K?

15 Replies

I recently refinanced a home that I have been rehabbing for a year. I am currently living in the home rent free due to my roommate who covers almost my entire mortgage payment. Through my refinance I was able to draw out a little over $20,000 and so I am now ready to move on to my next endeavor. I have some student loans from college that could definitely use a $20,000 reduction, however, what I would really like to do is reinvest this money into another property and start my path into investing in real estate full time. 

I would love to start  accumulating some buy and hold properties so that I can begin generating a passive income down the road but I can also see the value in looking for another flip.

So my real question is... What would you do if you were starting out with $20,000?

Any advice is appreciate. Thank you in advance.

@Chris Campbell  

You should always start with a solid, written, specific goal.  What do you want to do by what date?  Once, you have a definite goal...then think about the risk your comfortable with taking.  Making money is one thing.  Keeping it is equally important.  

Continual education is going to be one of the best ways to eliminate risk as you build your portfolio.  Keep in mind that you might refine your risk tolerance over time (as you get older, have kids, etc...).

Ideally, you'd like to find a project where you can know/understand the risks.  Then manage them effectively.

You're making payments on the $20K correct? If so, at what rate and what are your payments, fixed or variable, term, etc.?  

If you invest the $20k, you better be sure you're going to obtain a return that surpasses the rate you're paying on the loan.  You might look for properties locally in which you could put $20k down, however I suspect many lenders will not make you a loan if you're down payment is borrowed funds, so it might be a while for you to locate one that will.

If you can't located something locally where $20k is enough for a down payment, I'd consider something outside your city or even out of state.  On each investment, conduct an in depth analysis to ensure you'll be able to generate a rate of return that's high than your cost of funds.  You can search the site or Google "APOD" to locate a template for analyzing real estate investments.

Most importantly... NEVER give up.

If your student debt is a low interest rate I probably wouldn't pay it off. The first thing that comes to my mind would be if you could buy a little investment rental in a decent area with a good return and good tenants for around 50k. Put 10k down or 20% and save the other 10k for emergencies etc (as there always can be in real estate). If you're handy I would buy somewhere that needs minor cosmetic updating (or worse if you can do the work)  and fix it up to force appreciation. Once your cashflowing and your savings are back up to 20k I would then get another investment property and keep repeating the process. For most banks you have to own one year to cash out refinance for the appraisal value (not what you paid for it). So after some equity is built up with a few places then refinance the properties to buy more with a portfolio loan. 

The key is to buy well and undervalued and cashflowing and  try to avoid places that have serious deferred maintenance issues or bad neighborhoods where high chance of tenant or theft problems as that could take you off course from your goal. I'm not much of a fan of flipping as I feel that's a lot riskier although some people have done well with that. 

Anyway that's my 2 cents :) good luck :) 

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I appreciate the quick feedback @Jon Strishak

The $20K is equity I pulled out as part of my refinance, so while it is liquid cash in my bank account right now I am paying back my refinanced mortgage at 3.85% over 20 yrs. Also, like I mentioned before I have a roommate who is renting from me and covering almost my entire mortgage even after my refinance.

My initial thought was to pay down part of my student loans due to their much higher percentage rate but there is a large part of me that wants to reinvest this money.

I have been reading everything I can get my hands on about Investing in real estate from books to Bigger Pocket blogs and I couldn't agree more that continuing education is key. I plan to be a student of Real Estate Investing for my entire life but while I am young I would like to take some educated and calculated risks. 

I appreciate the feeback @Laura Williams  .

I think your strategy for using $10k for a down payment and keeping $10k for emergencies then building my cash back up and repeating the process sounds like a smart idea. I do happen to be pretty handy so the idea of generating sweat equity even if only a little is always appealing to me. 

Thank you! I really appreciate the advice.

I agree with @Laura Williams ... student loans will usually be a better rate than the loans of any bank. Also, most lenders do not look at student loans as a red flag, as long as you have been making payments on them. She is also correct with keeping a reserve. You never want to be the landlord than can only fix things the first week of the month. Good luck!

@Chris Campbell  

One way to approach this question is to compare the after-tax interest rate on the student loans that you pay to the after-tax return generated by a flip or rental property. I would be willing to assume that the cash-on-cash return generated by the cashflow on a good rental would surpass the rate you pay on your student loan debt. Beyond that, consider that if you DO decide to use the cash to pay off student loans then you will be foregoing the opportunity to invest that cash and be on the road to full-time REI, which is something that you stated that is your ultimate goal in your original post.

In my opinion, simply stay current on those student loans and reinvest, reinvest, reinvest.....

What are your goals? How long have you lived in your house? Can you buy another house?

Since you ask what I would do! I would use the money to buy another personal property slow hold. I would either leave my roommates at my old place and fill my room or I will fill my new house with roommates. Now I just bought a second house as a personal property with 0-5% down depending on how I invest. Hopefully if I did it correctly it is another house that I am not paying for. So now I have two houses that are growing equity with someone else's money.

A huge portion of our investing style has been using personals as they have low interest rates and little down. It has been a great benefit. My website discuss our strategy and investment style.

Elizabeth Colegrove 

My goal is to develop a portfolio of rental properties to produce enough passive income to leave my 9-5 and do REI full time. It is going to take some patience and smart deals but I know that this is the time to start.

I feel like your website article "Building Equity Through Roommates" was written for me. That is exactly what I am doing right now and it has allowed me to live almost rent free for the entirety of my time as a homeowner. 

When you talk about buying another house as a personal property are you buying it as a second home or are you moving into each new residence that you purchase? I definitely don't want to get caught up in any legal discussions by telling the bank I am buying it as my personal residence and then only using it as a rental.

I appreciate your thoughts and advice!

One thing I have done to move up to nicer properties and repeat quicker without a bunch of cash is run my buy and hold rehabs like a flip. 

Buy distressed property with cash or hard money (in my case a family loan for a year), make smart equity boosting repairs. 

6 months later,  refinance and pull out enough equity to pay back myself and the loan 100% or even mor and repeat. 

In your case, you can use 10k as reserve,  10k down, get a lowes credit card, do a quick rehab.

Refinance after 6months, pull more than 20k out and repeat. 

Of course this strategy carries more risk than some of the other suggestions. 

All depends on your goals/timeframe, and ability to earn.  

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@Chris Campbell  

If you have lived in the house for more than one year you can usually buy another house. The key is you have to "live" in the house. So moving is a pay. On the other hand a conventional 5% mortgage is alot cheaper than an investment 20% or when you reach 4+ 25% with my broker in California. My husband has a transient career so personal has been a huge part of our "strategy". The navy's transient career has been a good thing in one way lol. Feel free to pm me if you have specific questions. If you loved the article and would share or like me on Facebook that would be amazing.

I would pay "cash" for a cheaper house in a decent (low income) neighborhood, then refi to get the cash back. The key is to buy at a significant discount. Paying cash should help command a discount. A 20K property financed 100% should still cashflow nicely.

Does this apply to Texas too?

@Jordan Decuir

I see you are located in Texas. Can one get a 20k property with decent cash flow in Harris County in Houston Texas?. I am also starting out and wondering of this scenario can play out in Houston Tx.

Thank you.