I am 25 years old and, thanks to excelling at my commission-based job since graduating 3 years ago, I've been able to save at a pretty solid rate. I own and am house-hacking my primary residence in Chicago, and am pre-approved on another $100k investment property with 25% down at 4.75% with a minimum loan amount of $50k.
To get down to numbers, I have $30k in savings, $20k in personal stocks I've been toying with since 2016, a few grand in crypto for the heck of it, an IRA, and 401k that I put 10% of every paycheck into that I would never withdraw from (company contributes 1.5% on top of that).
I'm heading to Indiana this weekend to look at some $20-30k SFRs that need around $10k of TLC, and also some duplexes in the $60-100k range. I love the idea of owning something outright off the bat, but it would essentially deplete my current liquid cash savings--has anyone gone through something like this before? If I go the financing route, my initial investment (25% down) would be less skin the game, which feels more comforting, but I would also lose cash flow to the lender. I'm pretty stuck on which is the better move for my first jump in the water.
Thanks for reading,
Most problems in RE can be solved with money. Absolutely, do not go swimming naked in a lake with piranha.
Find a partner to share the risk and have reserves.
Thank you for the good laugh! Great line.
Also sage advice.
@Jeff Greenberg I appreciate the insight. I can definitely see how wiping my liquid cash could come back and bite me. I am definitely leaning towards the financing option with a smaller down payment.
In terms of partners, my friends seem to be too busy buying engagement rings or renting swanky downtown lofts right now, and it's proven difficult to find someone willing or able to start this with me. Most think I'm pretty nuts, unfortunately.
Join us in Oakland next month and maybe meet a partner.
No matter what you still need something left in the bank for emergencies. Use leverage and do it slowly, you'll be fine.
Do some in depth study into the value of cash when investing.
Bottom line is that leverage increases cash flow, cash/equity reduces cash flow. You must understand a income property has two distinctly different income generating streams. One being the property the other your equity in the property. Equity will kill all potential cash flow from the property and turn it from a asset to a liability. Terrible idea.
Cash buyers are the most conservative form of investor and as such earn the lowest rate of return on their investments. Placing their cash in a REIT would generate a greater return on cash and would avoid carrying the liability associated with owning brick and mortar.
@Derek Luttrell Congrats on a great start!
ANY property can cash flow if you throw enough money at it. To me, that's not a good investment strategy.
As an investor, you want to take advantage of the current market and opportunities, such as low interest rates, maybe a fixer to build sweat equity, other people's money (including bank's), etc.
Owning something outright is great but with that strategy, it will take forever to grow your portfolio. Throw all you money into the property, then how long will it take to save for the next downpay? Having no mortgage is something I've heard from more seasoned investors who have multiple properties and is looking for large passive income as oppose to acquisition and aggressive growth.
@Jonathan Klemm @Thomas S. @Paul Choi this is all reassuring, thank you. Especially on my first deal, putting 25% down and keeping ample reserves left in the bank sounds like the right play. I should limit my search to properties between $50-100k in order to minimize my skin in the game, and to meet the loan requirement.
Using leverage you can increase your ROI exponentially.
Also, consider quality of tenants a $30k rental would draw as opposed to a $100k rental.
I went all in. I got into real estate borrowing $20k from my 401k in 2014. I used the money as down payments on a duplex and triplex. I fired my employer July 11 of this year! Best of luck to you!
@Douglas Orr that's a good point about the tenants. Gutsy move drawing out from your 401k--I'm glad that paid off!
I'm with @Jeff Greenberg . Be careful about spending all your cash on a property. Now, with that said, I did just that in 2008 and it worked great. The key was, among other things, the fact that the property cash flowed $450/month (yes with all expenses, mortgage, reserves, etc). If you go all in, then be sure that the deal is really good and that you can maintain your commission income.
Finding partners will help you out along the way. You'd be surprised at who you know that has just a little money and is also interested in real estate.
@Todd Dexheimer how much was your all-in gamble in 2008, if you don't mind my asking? Sometimes I look at the $50k I have in cash/stocks and think how "comforting" it is to have, but I know if I want it to truly work for me, I need to set it free.
It's purely a mental thing for me. A constant battle against myself. But it's great to hear from other people who have done it.
@Derek Luttrell my all in was just over $20,000. We had about $5k left in savings after that
I'm a great believer in going all over in, as long as you don't put it all in the same basket. Two different things
Don't go all-in, make sure you have adequate reserves in place to handle problems.....and there will be problems.
As for the leverage part, you're young and looking to grow your portfolio so you really should use leverage to your advantage. However, you don't have to leverage yourself to a point that you're uncomfortable with the risk. No one can tell you what that number is but you'll figure it out for yourself as you do more deals. If you're making offers and hopefully buying properties with some built-in equity up front, putting 10-25% down should be make you feel pretty good at the end of the day that you're not getting in over your head.
@Todd Dexheimer @Russ Smith my conundrum is this--whether I buy something that needs work for $20k or put $25k down on a $100k property....I'm spending about the same amount. In the Indiana town I'm looking in, that $25k property once touched up can rent for $700/month, while that $100k property would need to rent for at least $1000/month to make sense; a price point relatively difficult to reach in this blue collar town.
I realize I could sell off my $20k stock portfolio I've built up in the past year, but I'd like to hold onto that in hopes of the 8.4% growth I've seen in my fist 12 months holds up. I've gotten the vibe that many people on here aren't fans of the stock market, but that's just another long term I'm play I'm trying to diversity with.
Go all in. It is the only way I know how to do things.
Buying with all cash will get you the best deals. You can make lower offers with cash. You can close fast.
Once you have the deed in your hand you can get a mortgage or home equity loan and use the cash to buy another great deal.
Buying a property with cash saves you time and fees.
I have partners. They have no legal say in how I operate. They are valued advisors, but I have the only vote.
Originally posted by @Derek Luttrell :
401k that I put 10% of every paycheck into that I would never withdraw from (company contributes 1.5% on top of that).
I would only put in what your employer will match. You can do better with your money then someone else will.
You will probably pay more in taxes when you withdraw the money then you are saving now.
Thanks for reading,
This was a fantastically helpful thread. Thank you @Derek Luttrell for posing the questions, and thanks for all of the responses!