Unusual Situation -- advice would be most appreciated

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Unusual Situation -- advice would be most appreciated

N.A N.A
Real Estate Investor · FL · Member since 2008 · 6 posts · 0 votes

hi,

I'm hoping someone here can provide some insights...I'm reluctant to divulge this information to just any "advisor" whom I don't know well (for reasons which will become readily apparent), so I thought posting it anonymously on the internet might be a good way to start.

I'm 40 years old, no debt or dependents, I have good credit, a temp job that pays $18/hour, and I inherited a little over $500,000 two years ago. The money is "parked" in CDs, etc. right now. I would like to get into real estate investing. I have no experience (other than selling my father's house) in real estate--I've been renting apts all my adult life. I've read "Real Estate Investing for Dummies" and "Mortgages 101", but those books seem to be geared more toward people who are struggling to make a downpayment, etc. -- they don't cover my situation. I was planning on buying a house or condo for myself first (price range 150K - 180K, approximately), and then buy one more condo or house to rent out as an investment, see how things go, and then possibly buy more. My problem is that I don't know how to come up with a "mortgage strategy", as it were. Obviously I can make a huge downpayment for both of the houses, or even just pay all cash for one of them, or I could try to borrow the maximum I can.

I don't know how to make a decision on this--I understand the different types of mortgages from the books and that I should make a downpayment of at least 20% to avoid PMI, but other than that, I'm lost.

One other thing I was wondering about--is there a school of thought in real estate investing on how much one should pay for one's own place of residence?

Thanks!

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  • N.A N.A
    OP
    Real Estate Investor · FL · Member since 2008 · 6 posts · 0 votes
    18y

    Thanks for your input. Believe it or not, it is not that easy when you have very limited financial acumen and suddenly come into this kind of windfall. One wrong move could blow everything your deceased parents worked for. The options are so varied and dizzying that one sits paralyzed and procrastinates, while the money accrues 3% interest in some bank.

    What I need to be able to do is buy the first two properties while leaving my options open (financially) to buy more in the future. That is as clear as the picture gets at this stage.

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  • Account Closed
    Real Estate Investor · Chicago, IL · Member since 2008 · 1k+ posts · 218 votes
    18y

    I think prior to putting down a large chunk of cash, you would need to figure out the calculation of CASH ON CASH return. Sometimes this is abbreviated as CoCR.

    Basically if you put in 10k and you get out 10k, that is break even. If you put in 10k and get out 20k, you have 100% CoCR.

    Now, if you are wanting to rent, you might be putting in say 70K down and get 200.00 per month, or 2400/year. So 2400.00 return on 70,000.00. I believe that comes to like 3.5% (not using calculator here so don't hold me to that). I am not sure the return the CDs are getting, but before I moved that money around. I would be careful to clearly calculate your return on that investment.

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  • N.A N.A
    OP
    Real Estate Investor · FL · Member since 2008 · 6 posts · 0 votes
    18y

    thanks for the information

    [snip]Now, if you are wanting to rent, you might be putting in say 70K down and get 200.00 per month, or 2400/year. So 2400.00 return on 70,000.00. I believe that comes to like 3.5% (not using calculator here so don't hold me to that). I am not sure the return the CDs are getting, but before I moved that money around. I would be careful to clearly calculate your return on that investment.[/snip]

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  • N.A N.A
    OP
    Real Estate Investor · FL · Member since 2008 · 6 posts · 0 votes
    18y

    One more daft question, if you can stand it....

    Would it be better to just get a mortgage (without a prepayment penalty) on the primary residence, and then just pay the whole thing off in the next year or two if I change my mind about real estate investing? Because I assume it's going to be more difficult to get a good mortgage rate for the investment property than for my own residence and I should save the cash for the investment property. Thanks!

    Originally posted by "danoconnor":
    Anon,

    Interesting post. Obviously, opinions will differ greatly on the subject of paying cash vs various financing strategies.

    My suggestion...figure out exactly what you want to achieve and then deciding on a plan of action will be much easier. Right now, the matter is wide open for anyone to voice their opinion based on what they'd likely do if in a similar situation...good or bad.

    One side of the spectrum...as you've mentioned, put a huge down payment or pay cash for a place or two (not hard to do with $.5M in Fl at the moment).

    The other side is to not even touch your reserve and get started creatively, honing your skills first while the stakes are lower.

    Oh, about your question regarding how much to pay for one's personal residence...I suggest spending much less than you can afford. :lol:

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    18y

    I would say the CD's are an excellent location for you money at the moment. I totally believe you when you say its not easy in this situation. Is even worse than for most people because you're going to have hucksters out the wazoo after that money.

    Ryan talks about cash on cash return. I'm guessing that's new information to you, or maybe you read over it in those two books. You need to learn about just handling money before you even try to invest in real estate. That's what we talk about a lot here, but I for one have a lot more money invested in other vehicles than real estate. You need some basic financial understanding first. So the CD's are a good, safe location for your money.

    Take a year to learn about real estate before you plunk down anything. If you want to buy something, that's fine. I wouldn't buy much in FL right now because I think prices have a ways to go down there. But if you can find a decent single family for under $100K, it would be something to consider. On the other hand, if you can rent something for $700 or so a month, I think I would just do that. You have a wealth of options open to you. Buying real estate ties you down. You may find the option you choose involves moving. A property you live in is not an investment. Its a liability just like a car. You have to pump money into it to support it. Transaction costs are very high. Of the three residences I've owned and sold, NONE of them made one dime in nominal returns, let alone the inflation loss. Two were break even and one was a loser. Renting is not such a bad thing.

    I'd seriously consider investing in some education. You say you're 40 years old and making $18 an hour. Without some sort of credentials, or real experience, that wage is going to be eaten up by inflation, and you'll be making the equivalent of $12/hour 20 years from now. $500K is not enough to live on. The rule of thumb for retirement (which is what you would be doing if you decided to live off the $500K) is to take out 4% the first year, and then adjust for inflation. That translates into $20K or just over the equivalent of $10/hour. If you take some of that money and invest in a degree ($50K at a state school, including room and board) or a technical certificate (some are only a few thousand and take less than a year), you're earning potential will be significantly enhanced. A few bad investments can easily half that windfall. Ask anyone who bought condos right where you are or dot com stocks in 1999. A diligent investment in yourself will give you the ability to recover from mistakes.

    If you are serious about getting into real estate, take enough time to really learn the business. Reading here is useful, but it sort of assumes a certain level of knowledge. Spend some time reading 10 books on various aspects of the business. Ryan is absolutely right about cash-on-cash returns if you're plunking down hard cash for properties. If you buy crummy rentals, and its very difficult to buy anything else, you'll end up with less of a return than the CD's, more risk, and WAY more hassle.

    0Reply
  • N.A N.A
    OP
    Real Estate Investor · FL · Member since 2008 · 6 posts · 0 votes
    18y

    thanks for the post Wheatie. I'm in no rush, as you say, since prices are still in the doghouse here in Florida, but I don't want to be caught off guard when the market finally hits bottom. That's why I'm trying to learn now. I was hoping that if I bought my own home when the market hits rock bottom here it would be almost guaranteed to appreciate well over time--I don't know whether that's really the case or not, though.

    Are there many people who rent the house they live in and own rental properties?

    Originally posted by "Wheatie":
    I would say the CD's are an excellent location for you money at the moment. I totally believe you when you say its not easy in this situation. Is even worse than for most people because you're going to have hucksters out the wazoo after that money.

    Ryan talks about cash on cash return. I'm guessing that's new information to you, or maybe you read over it in those two books. You need to learn about just handling money before you even try to invest in real estate. That's what we talk about a lot here, but I for one have a lot more money invested in other vehicles than real estate. You need some basic financial understanding first. So the CD's are a good, safe location for your money.

    Take a year to learn about real estate before you plunk down anything. If you want to buy something, that's fine. I wouldn't buy much in FL right now because I think prices have a ways to go down there. But if you can find a decent single family for under $100K, it would be something to consider. On the other hand, if you can rent something for $700 or so a month, I think I would just do that. You have a wealth of options open to you. Buying real estate ties you down. You may find the option you choose involves moving. A property you live in is not an investment. Its a liability just like a car. You have to pump money into it to support it. Transaction costs are very high. Of the three residences I've owned and sold, NONE of them made one dime in nominal returns, let alone the inflation loss. Two were break even and one was a loser. Renting is not such a bad thing.

    I'd seriously consider investing in some education. You say you're 40 years old and making $18 an hour. Without some sort of credentials, or real experience, that wage is going to be eaten up by inflation, and you'll be making the equivalent of $12/hour 20 years from now. $500K is not enough to live on. The rule of thumb for retirement (which is what you would be doing if you decided to live off the $500K) is to take out 4% the first year, and then adjust for inflation. That translates into $20K or just over the equivalent of $10/hour. If you take some of that money and invest in a degree ($50K at a state school, including room and board) or a technical certificate (some are only a few thousand and take less than a year), you're earning potential will be significantly enhanced. A few bad investments can easily half that windfall. Ask anyone who bought condos right where you are or dot com stocks in 1999. A diligent investment in yourself will give you the ability to recover from mistakes.

    If you are serious about getting into real estate, take enough time to really learn the business. Reading here is useful, but it sort of assumes a certain level of knowledge. Spend some time reading 10 books on various aspects of the business. Ryan is absolutely right about cash-on-cash returns if you're plunking down hard cash for properties. If you buy crummy rentals, and its very difficult to buy anything else, you'll end up with less of a return than the CD's, more risk, and WAY more hassle.

    0Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    18y

    Its impossible to buy at rock bottom except by pure luck. I have a lot more luck buying at the top and selling at the bottom than vice versa. You can't tell the bottom has happened until some time later. Then its too late.

    If you read some of the discussion here about rental property expenses, and apply those formulas to rents and prices where you live, you may discover there's no way landlords can be making money. If that's the case, renting is allowing your landlord to subsidize your housing. When prices are appreciating, the owner will make it up when they sell. But when prices are falling, the owner is losing money each month and holding a depreciating asset. Being a renter is being on the better side of that deal.

    0Reply
  • N.A N.A
    OP
    Real Estate Investor · FL · Member since 2008 · 6 posts · 0 votes
    18y

    Thanks again--I'm glad I came to this site first before jumping into anything.

    Originally posted by "Wheatie":
    Its impossible to buy at rock bottom except by pure luck. I have a lot more luck buying at the top and selling at the bottom than vice versa. You can't tell the bottom has happened until some time later. Then its too late.

    If you read some of the discussion here about rental property expenses, and apply those formulas to rents and prices where you live, you may discover there's no way landlords can be making money. If that's the case, renting is allowing your landlord to subsidize your housing. When prices are appreciating, the owner will make it up when they sell. But when prices are falling, the owner is losing money each month and holding a depreciating asset. Being a renter is being on the better side of that deal.

    0Reply
  • Jason Hanson
    Real Estate Coach · Oakton, VA · Member since 2008 · 695 posts · 43 votes
    18y

    Here is what I would do:

    1. First, don't tell anyone (and I mean anyone) that you have the $500,000.
    2. Invest in your education (go to the library and check out numerous books on real estate investing, go to your local REIA meetings and network)
    3. Since you are in a great position I would keep your money in a safe place for now, until you have a good understanding of this business.
    4. I would not put down much money at all on properties and I would learn wholesaling, lease options and subject-to techniques starting today.

    0Reply
  • Mark N.A
    Real Estate Investor · North Carolina · Member since 2008 · 1k+ posts · 483 votes
    18y

    Your education is one thing no one can ever take from you. I second all those who suggest that you invest in that area first.

    But here's one conservative approach:

    First off, remember that you must not keep more than $100,000 with any one financial institution, as that is all the FDIC guarantees. Next, to capture the best 'average' interest rate, ladder your CDs. Simply put, that means to buy CDs of varying maturities. Research the definition. Remember, no one will ever care for your money better than you.

    Next, only put the interest you earn at risk. In other words, if your CDs earn you $20,000 the first year, use that for the down payment . If you need more, wait another year.

    Lastly, while CDs have their place in an overall investment strategy, they should not encompass your entire investment universe. At your age you will definitely want to grow your fortune. How you do that is up to you.

    I could go on but hey, thousands of books have been written on all aspects of investing, and they even award college degrees in the field!

    Your new fortune is a boon and a blessing, but will also require that you master some crucial new skill sets.

    Good luck to you, and let us know how things turn out.

    0Reply
  • Account Closed
    Tucson, AZ · Member since 2008 · 945 posts · 45 votes
    18y

    I am, as strongly as possible, urging you to NOT buy a condo anyplace in Florida, or into any home owners association or property owners association of any kind.
    The state of the economy there is terrible, condo associations can and do both often do not have high initial assessments, to sucker people in, then a year or two later, the dues are raised by large amounts, do not keep and constantly contribute to a reserve fund, so when repairs are needed, the money is not available, and if emergency, assessments have to be raised again, the boards are not regulated, there are control freaks on the board (and off) and the ccrs aare often enforced to various degerees-not fairly and evenly, and the management companies are unregulated.
    HOAs and POAs are similar, but since houses are houses and not apartments, there are major differences.

    Do be careful.

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  • Account Closed
    Minneapolis, MN · Member since 2008 · 691 posts · 12 votes
    18y

    You could look for screaming low deals that only cash buyers could get, and maybe use $100K only for buying those deals. Leasrn your market inside and out. Offer 40% of market price, and sell at 70%.

    0Reply
  • Trisha Hogan
    Real Estate Investor · Malibu, CA · Member since 2008 · 9 posts · 0 votes
    18y

    BLUE CAT,

    VERY INTERESTING!!

    I'M GOING TO JUST THROW OUT SOME COMMENTS, AS THEY HIT ME (THOUGH THEY MAY SEEM UNRELATED).

    FIRST OFF, I AM A 53 Y/O PROFESSIONAL FEMALE, WHO IS SINGLE, AND ALSO WITHOUT DEPENDENTS OR EVER HAVING OWNED A HOME.

    I AM A REGISTERED NURSE WITH MY B.S.N. AND 5 1/2 YEARS OF COLLEGE. I CAN GET WORK AT THE DROP OF A DIME. DO I WANT TO IN NURSING - NO! NO OFFENSE TO THE PROFESSION OR NEED, BUT IT IS MEDICAL SLAVE LABOR IN MANY REGARDS.

    PUNCHING A CLOCK FOR ANYONE WILL NOT LEND TO FINANCIAL INDEPENDENCE!

    DO I ENDORSE EDUCATION - YES. IS IT THE GOLDEN TICKET - NO!

    LIFE CAN COME AT YOU FAST: MEDICAL EXPENSES, UNEXPECTED, POINT IS:
    THAT MONEY CAN GO FAST! I SUGGEST FOREMOST - THAT FIRST... YOU DEVISE A FINANCIAL PLAN - BEFORE ANY REAL ESTATE PLAN. THAT YOU SET A GOOD PORTION OF IT ASIDE JUST TO EARN INTEREST, AND SET ANOTHER PORTION ASIDE STRICTLY AS A SIX MONTH EMERGENCY FUND - BOTH BEFORE YOU DO ANYTHING WITH THE MONEY!

    YOU ARE IN AN ENVIABLE POSITION THAT MANY PEOPLE WOULD DIE FOR - NAMELY, TIME OPPORTUNITY.
    THE TIME TO TRANSFORM THEIR LIVES FOREVER!

    I MYSELF HAVE BEEN RESEARCHING REAL ESTATE INVESTING ONLINE FOR A YEAR NOW AS TIME PERMITS.
    DO YOUR RESEARCH. YOU HAVE TIME TO STUDY, AND MONEY TO INVEST IN MENTORSHIP & TRAINING (CHOOSE WISELY).

    I HEAR THAT TAX LIEN CERTIFICATES CAN/MAY LEND UPWARDS OF UP TO 24% EVEN 50% (?) INTEREST! YOU HAVE THE TIME & OPPORTUNITY TO STUDY AND LEARN ABOUT THEM!

    IMAGINE, IF THERE IS ANY TRUE MERIT TO SUCH FIGURES - WHAT YOU COULD POTENTIALLY EARN WITH $50 - $100K OF MONIES INVESTED AT THOSE RATES!

    SINCERELY,

    TLH

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  • Lynn Payne
    Real Estate Investor · Provo, UT · Member since 2008 · 57 posts · 0 votes
    18y
    Originally posted by Blue Cat:
    hi,

    One other thing I was wondering about--is there a school of thought in real estate investing on how much one should pay for one's own place of residence?

    Thanks!


    I try to buy at 70-80 cents on the dollar and finance 80% to pull my cash out. Keep some reserves for fixes and vacancies. But you can buy a lot of properties if you use the same money over and over again. As for your house, when you find one you love, live in it for 2 years and hopefully capture your equity tax free.
    0Reply
  • Michael Sokolski
    Homeowner · Stony Brook, NY · Member since 2008 · 69 posts · 5 votes
    18y

    Did you consider buying a 2 family - living in one while renting the other?

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