Have $40,000. Where would you put it for the best return??
Investor · Santa Cruz, CA · Member since 2017 · 61 posts · 50 votes
So, my wife and I have been have been saving for a while, which isn't really easy. (Two kids, tuition, CA prices..) But we do live a pretty thrifty lifestyle. 2001 ford truck for me and 2010 Pilot for the Mrs. All paid off and very little CC debt. Mortgage on our PR is $1500/mo.
That said, where would you park your $40k? Strongly feeling this bubble is near the popping point, and don't want to make the same mistake I've seen so many make. I'm really getting interested in MF syndication.
I'm not you so I'm answering this from my perspective. I had around $60,000 to invest.
I bought 3 cheap/low income houses paying cash. I'm bringing in $1,650/month and own the properties free and clear. Used that money and just put a 4th one under contract that will close those week which will bring my monthly income to $2,350/month. Once again I own everything free and clear. Already have my 5th one lined up as well. Just going to wait another month to save up another $2,000 that I can use towards repairs on the 5th house.
I believe if you are green and just learning the RE business, you should start locally. Learn the business then expand. I think expanding is great, but take baby steps initially.
Derek E. where are you buying properties?
Charleston, WV
Huntington, WV
Ashland, KY
All of these locations are within 2 hours of Columbus, Cincinnati, and Lexington.
They are low income houses but for the area it is not the worst areas by any means.
I just happened to be local to the area and didn't have a ton of money to spend. I just bought a house for $7,000 and it needs less than $2,000 in repairs to get it to market rent. Market rent is $772/month. I always go a little cheaper than rentometer so I can get more applicants and choose the better applicant. I will probably rent it for $725 range.
It's the type of place where you need to know the area. One street could be nice and then next street over is a war zone.
I just spend most of my time throwing out lowball offers and see who wants to sell. My personal rule is it needs to be $15,000 or less and hasn't to rent for a minimum of $600/month.
two words...lottery tickets....youre welcome
You can buy all in investment rental properties in the Midwest for 40K all day long in C class areas. I bought a 2 bedroom 1 bath home with a detached two car garage for 18k. I spent 14k to rehab it and it is rented for $675 a month. People will sell virtually turnkey in the Midwest for 40k. It's a great place to park your money.
Absolutely. The first house I bought was a 1,500 square foot house with fenced in yard on corner lot. Directly across the street from a day care center.
I paid $30,000 for the house. I spent $400 having some new rails installed and $125 to service the HVAC, that's it.
I now have it rented for $800/month. I originally listed it for $900/month, and had multiple showings and 3 ppl who wanted it. After further research on the applicants I decided to lower the price and see what happened. People were beating down my door for this house. Had multiple applicants and was able to choose the best one.
In reference to the CHEAP properties that are throwing off HUGE cash flow. .. that's all well and good on paper. I have seen time and again, at least here in Kansas City, that the out of state investor bought the cheap property with high rents. Went great for a while.
However, the tenant stopped paying, was evicted, moved out in the middle of the night . . . something.
Then the huge cash flow stopped. During the move out the tenant left the house a mess so a make ready needed to be done, sometimes a pretty hefty repair job. And somewhere along the line, while waiting for the make ready or the new tenant, vandals rip and strip the vacant property and now, the $1500 make ready is a $3,000 to $10,000 renovation . . .
So on your cheap properties with high revenues - PLEASE PLEASE PLEASE bank that rental income because maybe not next week or next month, but sometime in the next year or two, you may have to replace the copper plumbing, copper wiring, AC Condenser unit - anything that had copper in it and also need to replaced and everything damaged in the process needs to be fixed.
When the above poster claims he is "parking his money" he doesn't know it, but he means permanently. I don't care what those Midwest houses appraise for. Just cuz some guy with a clipboard and fancy paperwork tells you the house is worth $65K doesn't mean you'll find a buyer ready, willing and able to pull the trigger on that deal and when the dust settles, that sales price is likely to be much lower than fancy clipboard guy claims it should be. That house will be on the market, vacant, along with lots of other on the market, vacant, houses all looking for the same low income, subprime buyer who is most likely more happy being a renter. I've got two of those awesome deals left in my holdings. Awesome deals I did when I didn't know what I was doing. Now they are anchors producing crappy returns and I almost can't give them away. As they say; when you lie down with dogs, you get up with fleas.
If I only had $40K to work with, I'd find a proven flipper in a market very close to me and I'd lend him/her the money secured by real estate, using escrow and getting a lender's title policy. I've done lots of these exact small loans when I was starting out and they were the only early on deals that paid off very well again and again.
This part is true. If you are buying with the hopes of selling in a few years then I would be very careful about investing in the Midwest.
I'm not planning to sell for at least another 25 years. I'm young and I'm buying for cash flow, and I'm buying so cheap it doesn't matter as my investments pay for themselves in two years max.
In reference to the CHEAP properties that are throwing off HUGE cash flow. .. that's all well and good on paper. I have seen time and again, at least here in Kansas City, that the out of state investor bought the cheap property with high rents. Went great for a while.
However, the tenant stopped paying, was evicted, moved out in the middle of the night . . . something.
Then the huge cash flow stopped. During the move out the tenant left the house a mess so a make ready needed to be done, sometimes a pretty hefty repair job. And somewhere along the line, while waiting for the make ready or the new tenant, vandals rip and strip the vacant property and now, the $1500 make ready is a $3,000 to $10,000 renovation . . .
So on your cheap properties with high revenues - PLEASE PLEASE PLEASE bank that rental income because maybe not next week or next month, but sometime in the next year or two, you may have to replace the copper plumbing, copper wiring, AC Condenser unit - anything that had copper in it and also need to replaced and everything damaged in the process needs to be fixed.
You are absolutely correct and it's why it's risky for an OOS investor. My guess is that someone sold them a house in a bad section of town.
I don't buy houses on those streets. There are some houses that you literally couldn't give me because of the street it's on, but a few streets over there might be a house that sold for $50,000 just five years ago and i can now buy it for $15,000.
I also do most of my repairs myself and live within an hour of each property so I can keep an eye on it myself, meet the prospective tenants myself etc.
As much as I would love to start locally, it sure is tough when my local market sells a 400 square foot, 90 yr old shack on a postage stamp of land for $6000k.. My measly 40k won't even cover the permits and soils reports on a new construction project here. LOL!
I own 3 properties here and am well aware of the costs locally. That's why I need to find a place out of state.
While I'm sure there are some opportunities to make a few dollars in interest, I'm really shooting to purchase. Unfortunately with the market so high right now, I may need to hold till things stabilize. If someone has a nugget they're willing share.
There is so much information and options that it's hard to focus on one path. Multi-family, single family, loan the money, syndication.. Honestly, I'm feeling a bit overwhelmed. A good mentor with solid experience would be welcomed.
You said you're interested in multi-family syndications. $40K is just about the right amount to get into a deal. Most of the ones I see set a minimum of 50K, but the smaller ones are 30 or 40. It's a good way to learn without doing any work. Another poster said that you're giving up control, and that's true. But you're giving it up to someone who already knows what they are doing, instead of you making your own mistakes.
Now, let me clarify my statement about "not doing any work." You need to make sure you understand multi-family properties and how they differ from single-family, so that you can evaluate a potential investment. Then you have to build a relationship with a sponsor, so that you can trust him/her with your money. Both of those things take time and effort. But after you do that, the investment is passive. It's not for everyone, but I like the ability to ride someone else's coattails so that I can focus on my day job and earn more money to invest.
@Paul B., What kind of annual ROI is usually typical in a syndication deal? Are you able to pull your money out or is it basically tied up? Are you usually invested in long term buy and hold syndications are are there some where properties are bought to redevelop or value add an existing property and then flip?
Do most syndications require one to be an accredited investor or has this changed with the newer SEC rules /JOBS ACT.
I'm not you so I'm answering this from my perspective. I had around $60,000 to invest.
I bought 3 cheap/low income houses paying cash. I'm bringing in $1,650/month and own the properties free and clear. Used that money and just put a 4th one under contract that will close those week which will bring my monthly income to $2,350/month. Once again I own everything free and clear. Already have my 5th one lined up as well. Just going to wait another month to save up another $2,000 that I can use towards repairs on the 5th house.
Hi Derek,
New to investing here and wanted to get some of your thought processing behind your deals. If looking for buy and hold properties and long-term cash flow, why not leverage some bank financing given that rates are so low right now? Use the cash for down payments on a greater number of properties and increase cash flow and build equity through tenants paying down loans over time?
Again, not questioning your decision, just asking for informational/educational purposes. Thanks in advance!
What about AHP - American Homeowner Preservation. They are currently not taking new investors in, but they have a 12% Pref and will be accepting new investors soon. They buy up mortgages in bulk, try to work with the homeowner to keep them in their home and if they can't, sell the property. I believe they will be accepting new investors in about a month.
Is $40k like a large part of your world? Already cashed out Roth contributions, borrowed from the 401k, searched couches?
Or is it truly 'available'? Over and above a rainy day fund?
What do you want to do? What is your tax position? I wouldn't touch lending or flipping because I don't like paying high tax rates. Do you have room with your current income to receive interest?
Personally I am paying down high hassle and higher interest RE debt because opportunities are less available in my area.
With so little info, we're all barking at the wind. GIGO. Explain a little more about what this $40k represents, where you're at and where you want to go @Robert DeForge. I will say this though - if $40k was a big deal to me, I wouldn't put it in some syndication where I had no say.
I always say first pay down CC, student loans and/or car loans. Next, make sure you have 6 months emergency fund. Finally, anything left over (where we are in our finances), we put 50% into index funds (e.g. SP500, Emerging Markets, and Total American Market) and the other 50% goes into a real estate fund. We are trying to break into small apartment buildings (5 to 20 units). But if it were my first deal, I'd go 4 units or less to let the REI bug bite :)
Is $40k like a large part of your world? Already cashed out Roth contributions, borrowed from the 401k, searched couches?
Or is it truly 'available'? Over and above a rainy day fund?
What do you want to do? What is your tax position? I wouldn't touch lending or flipping because I don't like paying high tax rates. Do you have room with your current income to receive interest?
Personally I am paying down high hassle and higher interest RE debt because opportunities are less available in my area.
With so little info, we're all barking at the wind. GIGO. Explain a little more about what this $40k represents, where you're at and where you want to go @Robert DeForge. I will say this though - if $40k was a big deal to me, I wouldn't put it in some syndication where I had no say.
Thanks for the reply Steve.
The $40,000 is not my life savings, it's just liquid cash that I've sitting in the bank drawing a measly -0.001% interest. A total waste in my opinion. It's just some cash that I have set aside that I would like to get into another property and start getting some monthly cash flow and slowly expand my holdings. It's not enough to throw at any of my current mortgages to where it would make any real difference.
I agree that investing in flips or lending probably isn't the best choice right now with that small amount of money because I need the write-offs from Real Estate and not just the income from interest.
But as I said above, the $40-50k that I can pull together right now won't even buy a beat down mobile home in my area. That's why I'm looking for a better return out of state even if I have to hold it 10 years or more.
I know the deals are out there in the Midwest, I just don't have the ability to fly around state-to-state looking for them. That's why I jumped onto BP hoping that someone had some leads in an area where I can develop a team and start my 00S adventure.
I'm 46 and have nine years until I "retire" from my full time gig. I'm trying to Buy and Hold right now to get some capital going. Once I have that my strategy may change to other creative deals. But for now just looking to start my empire and I'm really thankful for all the great ideas and advice I'm getting here on BP. It all adds to my arsenal of weapons (knowledge) to meet the goals for my family. :)
I always say first pay down CC, student loans and/or car loans. Next, make sure you have 6 months emergency fund. Finally, anything left over (where we are in our finances), we put 50% into index funds (e.g. SP500, Emerging Markets, and Total American Market) and the other 50% goes into a real estate fund. We are trying to break into small apartment buildings (5 to 20 units). But if it were my first deal, I'd go 4 units or less to let the REI bug bite :)
Hey Erwin
I'm pretty fortunate that I don't have any real credit card debt, car loans, student loans or anything outstanding other than my mortgages. Again the reason I don't like to have cash just sitting in the bank doing nothing.
Aaron Mazzrillo what kind of returns would an investor expect lending to a local proven flipper ? These would be considered private money loans right ?
The returns won't be what these OOS guys are claiming. Maybe 2 points on the funding and 10-12% interest for a few months. However, instead of getting a lesson in financial distress, partnering up with the right investor will get you a hands on lesson in the rehabbing business. I used to borrow money from people just like this and I gave them full access to my rehab projects. They could walk the jobs, ask questions and got to see the project through from start to finish AND got paid for the loan.
Great post Robert. I too have $40K put aside and am ready to start investing in real estate. I'd entertain partnering with someone if it was the right deal. Seems like there are a lot of newbies (like myself) and this may not be a bad way to get started and grow together...
I'm just going to leave one final post on this as my strategy is under attack @Aaron Mazzrillo. Granted Aaron is a pro, I've listened to his podcast even before he chimed in here and I give respect where respect is due, the guy deserves respect. I think he has an amazing strategy. Robert asked what I would do with 40k. I think a buy and hold strategy with his all cash investment is an excellent way to invest his 40k. Personally, I think he should park his money there-permanently. Let's just do some fun math. On my deal I get $675 a month in rent. If I never raise the rent $675 X 50 years is $405,000- minus expenses. Let's say I picked a real loser and only rented it six months a year, that is $202,500. Personally, I don't see the point in selling it, I'll have my investment back in a handful of years and a free and clear property to will to my kids. If you create a nice product, it will rent. Tons of people rent apartments, go find one to upgrade. I wouldn't recommend buying a property surrounded by vacant houses, I didn't do that. There are lots of great real estate strategies, this one is mine. If you can find a deal in your area, that is of course the best thing.
It isn't under attack. I'm merely pointing out that if you have a small amount of money to invest, the best strategy to grow that money is to get maximum velocity on it. Parking it in the Midwest is like putting it into a retirement home. Just starting out investors cannot afford to put their working capital in a retirement home and collect pension wages on it. You might get wealthy, but we call that the crawl slow to wealth program. I'd prefer to run to wealth... Or take a bullet train. I'd put it into something that turns over several times a year and has upside. When I really started to get into real estate full time, I partnered with another guy and we targeted foreclosures with good equity spreads. One of our early deals was a house we paid $20K cash for subject to the $700K loan. We had to make a few payments and spent $5,000 fixing the place up, but it sold for $1.2M.
I also did the good old Lonnie Deals - buying and flipping mobile homes in family parks. I would double my money on 2-3 deals. They were all small deals, but I could turn $15K into $30-40K by the end of 1 year.
I see no upside in owning a stick built house with a retail value of less than $100K. In this day and age I wouldn't ever consider putting my money into an asset of such impoverished value. If I do a rehab loan to a fix & flip investor and it goes south, the upside is I get to foreclose and now I own a house with a loan in place and a 30%+ equity spread. A deal like that can be converted into cash quite quickly.
Hey Todd
Thanks for the reply.
I feel I can find $40k properties too, just not in a condition to move people in. The ones I'm seeing in that range will certainly need some work, and I'm not in a position to run a job in Missouri from CA.
If you know where I can get my hands on $40k rentable Duplexes, let me know! :)
I wouldn't buy a $40k house or duplex - it likely will be in a war zone. You can buy a $200k+ SF or duplex and use $40k as the down payment. You should be able to find some markets that you can get into B class areas for $200k and have cash flow.
@Paul B., What kind of annual ROI is usually typical in a syndication deal? Are you able to pull your money out or is it basically tied up? Are you usually invested in long term buy and hold syndications are are there some where properties are bought to redevelop or value add an existing property and then flip?
Do most syndications require one to be an accredited investor or has this changed with the newer SEC rules /JOBS ACT.
The deals I consider offer at least 10% cash-on-cash annually (most of which is tax-deferred due to depreciation), as well as some capital gain upon a sale. The goal is to double the initial investment in 5-6 years, which is about a 17-20% annualized return. The money is tied up. It has to be money that you don't need for 5-7 years. In the last few years, the market has been hot, so there have been sales or refinances for a return of capital after only 18 months to three years, but past results don't guarantee future performance. Having said that, the goal is to sell within 3-8 years. It doesn't make sense to be tied to a syndicator for decades, so those who want to hold forever would not like this strategy. One of my deals is a value-add - it hasn't paid me a dime yet after 13 months, but it is already worth much more than what we paid for it. We don't really use the term "flip," because you would want to hold at least a year for tax purposes. I would say we buy poorly performing properties, but not non-performing properties. Another one is a yield - I immediately began receiving quarterly checks, starting three months after closing, but there isn't a huge upside since the place was in good shape already.
I have seen some sponsors only offer their deals to accredited investors. The folks I work with operate under the SEC exemption (I think Reg D 506b but I don't have it front of me) that allows up to 35 non-accredited investors, as long as they are sophisticated and have a pre-existing relationship with the sponsor. I have recently heard of cases where multi-family deal sponsors are using crowdfunding thanks to the JOBS act, but I haven't invested with any of them. In my opinion, a good operator should have a strong pool of investors already and wouldn't need to use a crowdfunding site.
I'm not you so I'm answering this from my perspective. I had around $60,000 to invest.
I bought 3 cheap/low income houses paying cash. I'm bringing in $1,650/month and own the properties free and clear. Used that money and just put a 4th one under contract that will close those week which will bring my monthly income to $2,350/month. Once again I own everything free and clear. Already have my 5th one lined up as well. Just going to wait another month to save up another $2,000 that I can use towards repairs on the 5th house.
Hi Derek,
New to investing here and wanted to get some of your thought processing behind your deals. If looking for buy and hold properties and long-term cash flow, why not leverage some bank financing given that rates are so low right now? Use the cash for down payments on a greater number of properties and increase cash flow and build equity through tenants paying down loans over time?
Again, not questioning your decision, just asking for informational/educational purposes. Thanks in advance!
Hey Ben,
Unfortunately, most banks won't lend on purchases under $35k, a lot won't do a mortgage under $50k.
This is both good and bad I suppose. Because of this, sellers in my price range are limited to cash only buyers which truly limits the competition. This allows you to negotiate well below the asking price (which is already cheap.)
There are creative ways to get financing and I am going to look into some of those ways now that I own 4 homes free and clear.
I like the freedom and peace of mind knowing I don't have a loan payment I need to make.
I'm getting homes so cheap I'm most likely just going to get a $10,15,000 personal loan and use the combine rent to pay it off much quicker. I'm not sure if i will do it or not. Right now I can save rent money up for 3-6 months and pay cash for another one.