Tips for Real estate investing debt free?
Real Estate Broker · Louisville, KY · Member since 2014 · 362 posts · 232 votes
Im looking to invest but want to do it all cash out of pocket. Is there anyone here who started working that way with say 15-25k? Sweat equity is no problem for me. Should I be scouting forclosure sales on the courthouse steps? buying micro condos?
@Jay Leisten Remember those questions I listed above? I'm going to fill in the blanks for you based on a typical property:
Typ. Property:
$60,000 ARV (either when you buy or down the road)
$45,000 Cost to buy/rehab/close...also = 75% ARV
$ 9,000 20% of Cost (DP)
$ 500 Cash Flow per month with NO DEBT
9 years How long it takes to get the next $45k to buy next property all cash ($5k/yr)
Here is the list of questions you need to ask, then compare the answer from the 3 options:
Q1 - How much out pocket (cash) am I putting in?
Q2 - How much cash am I getting back...what is my cash flow?
Q3 - How long will it take before I break even, and actually making money...see Q1 & Q2.
Q4 - How long will it take before I have the means (cash) to go onto my next property?
Q5 - What is my Cash on Cash Return?
Q6 - How long could it take to acquire 10 properties?
Q7 - How much money would you end up spending for those 10 properties?
Q8 - How long would it take to break even...as in all the cash you put in, you got back?
Here are your 3 options to buy/rehab:
Option1 - Buy all cash, and carry no debt.
Q1 - $45k
Q2 - $6k/yr
Q3 - 7.5 years (assuming no repairs, not vacancies, no problems)
Q4 - 9 years (assuming $5k/yr)
Q5 - 13%
Q6 - 90 years (9 years per property)
Q7 - $450k ($45k/property...not counting inflation)
Q8 - 75 years (7.5 years per property)
Option 2 - Buy using cash for 20% down payment & financing the rest.
Q1 - $9k
Q2 - $3.75k/yr
Q3 - 2.4 years (assuming no repairs, not vacancies, no problems)
Q4 - 2 years
Q5 - 42%
Q6 - 5 years
Q7 - $90k
Q8 - 22 yrs +/-
Option 3 - Buy all cash, then refinancing to get all your cash back out within 6 months.
Q1 - $45k
Q2 - $48.35k = $45k + $3,35 in CF
Q3 - 3 - 6 months...when you refinance
Q4 - 3 - 6 Months...when you refi
Q5 - 107% (remember, you're getting all your cash back + CF
Q6 - 2.5 - 5 years
Q7 - $0 When you refi that last property, you get your original cash back.
Q8 - Your ahead as soon as you refi.
I agree with J.Scott. There is debt that performs and has debt coverage and cash flow as part its performance. We call that a performing asset! It does require management whether it be you or someone else depends on your time and skill set. But I found in order to grow my portfolio to reach my goals, I had to learn how to use leverage to my advantage. When growing your portfolio faster than one at a time purchasing models, we found debt and equity leverage works to expedite that process too. But it really depends on your goals and vision as to how much you would want to expose yourself but if you work with asset based leaders then its not personal credit but only the asset at risk.
thanks Dave & Mark,
I'm caught up on the podcasts at this point and have read the quick guide, Rich Dad/Poor Dad, and am looking at JScotts book in the next few weeks. Brandons is on the schedule soon as well.
Just to clarify, a large part of my strategy was to make a purchase like this every 6-9 months, so that at 4-5 years Im holding 10-15 properties 100% after repairs/marketing cash flow. At that point I would likely upgrade to higher value property by selling the group off?
Welcome to BP.
You are what I refer to as an "At Risk" future investor. I'll elaborate.
You have a chunk of hard earned money saved up. Congratulations!
You've somehow obtained a copy of the RDPD Quick Study Guide. There is not a single piece of literature produced by RDPD that isn't designed to upsell to something else that you "need" that's essential, and 'only they can provide'.
Their job will be to separate you from your savings.
Careful with your plans Real estate investing is more challenging than most people who do it fess up to, at least the early period when there's so much to learn.
Your best investment will be in your education.. You can't beat becoming a bird dog for someone who has 5-10+ years experience and is an active, in-the-trenches investor. You can buy books and audio material that's relatively affordable.
Few get past a year, even fewer 5 years. Do not despair! Declare yourself an investor and associate your identity with that. It will become part of your DNA.
That's what you cannot get from training, whether RDPD or any others!
As long as you can get your money back quickly, whether refinancing or not, then go ahead and put all of your cash into one or two deals. I have an offer (which the listing agent says should be accepted) on a fixer-upper for $6,000. I may have to put up to another $6,000 into it, but even then, I should be able to get my money back in about two years, whether or not I refinance.
I agree with others. I like Dave Ramsey's way of thinking, but in this case it's wrong. His investing philosophy is flawed as well, but I'll leave that alone. That being said, his book did change my life. The only other book that did that was the intelligent investor by Benjamin Graham. His book is hard to read and comprehend so I don't usually recommend it.
The only debts I carry are mortgages. My main goal is to hit a certain amount of rental income and then snowball the mortgages. Leverage will get me there quicker then all cash purchases in my area and in my particular circumstance.
Since you disagree with Ramsey (rightfully so), avalanche the mortgages, rather than snowballing them, unless you would save more by eliminating the PMI from smaller mortgages..
I bought a rental for 23k cash. I put 5k in it and it is rented for $825.00 per month. I just bought one for 25k cash and is rented for $650.00.(no repairs needed) I say it can be done. Just takes time to find them.
I don't pay PMI
Paying all cash can definitely help u sleep better at night. I own all my properties cash, and do not regret it at all. The last house I bought cost 12.5k and after upgrades including a fence I have approx 19k in it total. It is rented out for 625.00 per mth
O3 - Buy all cash, then refinancing to get all your cash back out within 6 months.
I don't quite understand this option. Are you buying with all cash from a hard money lender? If so, the cost of borrowing may be too high for someone seeking to avoid debt.
@Kendall T. So, you put $19k in it all cash, and you rented it out for $625/month. That means, that assuming you didn't have to pay taxes, insurance, repairs and had no vacancies, you would have made $7500/year.
However, we all know you did have to pay taxes, insurance, etc... So, a better assumption would be that you made at best half of that = $3,750/year...which means, you were behind (as in lost money) until at least 6 years...if all went well.
Now, if that's OK with you, that's OK with me...it's your money. One question though. If you are paying all cash for these properties, how long does it take before you get enough cash put together for the next deal?
O3 - Buy all cash, then refinancing to get all your cash back out within 6 months.
I don't quite understand this option. Are you buying with all cash from a hard money lender? If so, the cost of borrowing may be too high for someone seeking to avoid debt.
I'm buying all cash...in other words, I have the cash to buy the property. In 2-6 months, I refinance, and get all my cash I used to buy the property back...and use it on the next deal.
Then, I keep repeating these steps...
@Joe Villeneuve 19k is more like my total cost, my taxes are around 300 per yr. and no I do not have insurance.
@Joe Villeneuve Alas, that's not an option for me. Thanks for the explanation and for all you give to fellow BPers.
@Kendall T. So, you put $19k in it all cash, and you rented it out for $625/month. That means, that assuming you didn't have to pay taxes, insurance, repairs and had no vacancies, you would have made $7500/year.
However, we all know you did have to pay taxes, insurance, etc... So, a better assumption would be that you made at best half of that = $3,750/year...which means, you were behind (as in lost money) until at least 6 years...if all went well.
Now, if that's OK with you, that's OK with me...it's your money. One question though. If you are paying all cash for these properties, how long does it take before you get enough cash put together for the next deal?
Thats what Im wanting to hear is the compounding purchasing power factor. I make plenty of money to support my family, so I'd be putting 75-100% back into the next purchase, plus another 6-12k out of my pocket. based on these #'s I am buying 1 myself every year, and the 1st house buys 1 for me end of year 2 ( so 3 total owned), the second buys me one in year 3 ( 5 total) year 4 I buy 1, as does house 1, As well as 2 & 3 buy one together ( 8 total) then in year 5 it would essentially double on itself? Thats really simple math I know, but even at 50% vacancy I am likely at 6-7 prperties at year 5, just because I bought 5 out of my own pocket, and the others produced atleast 1.
@Jay Leisten That sounds just like a version of my REcapS System. There are many ways to accomplish what A. Einstein referred to as the greatest invention of the 20th century....compound interest. The part I liked best is the next statement he made.
"Those that understand it, live off of those that don't"
@Joe Villeneuve Truer words may have never been spoken.
Another option for you would be to buy vacant land and sell it owner finance to others with owner financing or straight out. On podcast 39 Seth talks about how to do it.
For me personally I am against debt, but I am not against other people being in debt to me while I am making money off of them owner financing.
There is a guy who is doing it in my area who is wildly successful he owns approx 729 properties all paid for in cash,he has no debt( he acquires them at tax sales and other avenues. He then sells it owner finance with 6% interest and no credit check, he also takes items in trade. His lots vary in price from 7499.00 - about 400,000.00
With being a landlord you hope they pay, when selling owner finance, you hope they don't so you can resell
I know this is an old post but this is my market so I thought I would chime in. I think it's doable but not easy. You'll need a source of income (obviously) while your rehabbing your property. You'll be pulling double duty, working for an income, and working on your property. Location will be key. Someone posted above that most properties in this price range aren't worth having and that is true but I know one area, possibly two, in Louisville where it could work. I'm did my first few deals all-cash. Cheers,
Thanks Brett! I'll be sure to chat with you a bit at the meetup. Curious if we are talking about the same zones? Likely we are. The second income part isnt so tough as I work as an illustrator, so my time is flexible, and residuals from books can help keep me funded, even when I am not working.
Jay,
Great question on debt-free real estate investing. It is unconventional, but if used correctly can give you an advantage other investors will not have. How?
As @Joe Villeneuve has stated a number of times, debt is an efficient use of financing to maximize your cash on cash return. By choosing to not use debt, your choice of using cash should be strategic enough to allow you to achieve returns you could not achieve using debt.
Specifically:
In each of these situations, cash provides either the only way to acquire an attractive asset, or delivers a distinct advantage over financing. For the highest returns, acquire value-add assets that require cash, add the value, and sell to a financed buyer in a short time period. Rinse and repeat.
As a bonus: you will avoid all of the appraisal fees, loan fees, interest, and paperwork as well.
Best,
Yousif
Thats what Im wanting to hear is the compounding purchasing power factor. I make plenty of money to support my family, so I'd be putting 75-100% back into the next purchase, plus another 6-12k out of my pocket. based on these #'s I am buying 1 myself every year, and the 1st house buys 1 for me end of year 2 ( so 3 total owned), the second buys me one in year 3 ( 5 total) year 4 I buy 1, as does house 1, As well as 2 & 3 buy one together ( 8 total) then in year 5 it would essentially double on itself? Thats really simple math I know, but even at 50% vacancy I am likely at 6-7 prperties at year 5, just because I bought 5 out of my own pocket, and the others produced atleast 1.
Hi Jay,
So, it's been a year since this thread was started. Did you end up following through with this plan? An update would be great! Thanks.
Hey Tom,
I decided to get my real estate license and use the income from that side business to fund the project. I haven't made my first purchase yet, as it took 4 months longer than I expected to get the license in place. My wife and I didnt want to take money out of our regular job incomes and this seemed like a good way to learn the industry and get access to listings on MLS. There's definitely less of these properties on the market in my area than there was a year ago, but I am seeing some opportunities.
Thanks for asking!
Jay
Hey Tom,
I decided to get my real estate license and use the income from that side business to fund the project. I haven't made my first purchase yet, as it took 4 months longer than I expected to get the license in place. My wife and I didnt want to take money out of our regular job incomes and this seemed like a good way to learn the industry and get access to listings on MLS. There's definitely less of these properties on the market in my area than there was a year ago, but I am seeing some opportunities.
Thanks for asking!
Jay
Thanks for sharing, Jay!
Thank you all for sharing your views on debt free investing pros and cons.
Thanks Jay for starting this thread and keeping us updated.
I was curious too about investing debt free and I have been listening to Dave Ramsey lately and was wondering if there are investors here who actually practice what he prescribes to?
I know it is not the most popular way and as Robert Kiyosaki proposes leverage with good debt. However, I have also come across the author of Lifeonaire Shaun McCloskey who advocates to debt free investing with joint ventures. Is there anyone here who has explored that avenue?
Thanks,
Pauline Misiak
I just came across this thread today, thought I would add my 2 cents on debt and leverage.
My husband and I are at a cross roads with an older investment property. We have had it for about 10 years and I am kind of over it. It always gets rented, but since it is older, there are always repairs and maintenance issues. Do we sell it outright? Do we fix it? Do we exchange it?
Don't get me wrong, I love Dave Ramsey, but the anti debt thing sometimes drives me crazy. When he tells people that have real estate to "just sell everything" and pay off debt, I wonder if he ever considers capital gains and all the other issues that come along with that?
To make a long story short, we talked to an accountant about the ramifications with selling this investment property and keeping the proceeds vs. reinvesting it into another property (1031 exchange). By selling and keeping the proceeds, we would be hit with a 60k tax bill, yikes! This included all of the rental income recapitulation (another thing a lot of investors don't think about). So what are we going to do? We are in the process of exchanging this property for a new construction townhome that will put us in another 80k of debt.
Of course we could have just fixed it, but guess what? That would have still put us in more debt, probably 30-40k in rehab costs for an older property that would have still needed maintenance.
It's makes me crazy, the whole leverage thing. On one hand taking on debt is scary to me, but on another hand, as an investor, it appears to be one of the only way to really build true long term wealth. Selling and not taking on the debt would have meant a 60k loss for my family, how long before we recapped that loss?
Food for thought...