I have 100K - New to investing. What should I do?
San Jose, CA · Member since 2012 · 14 posts · 0 votes
Hello,
I am brand new to investing. My husband and I bought our first house when we were 22; using my parents as co-signers.
Now, we are 25 and we have rented our 4 bedroom house and moved back with his parents to save some $$ in order to buy a condo in cash (the 4 bedroom house was too big for us; and far away from work). The tenants paid a full year of rent upfront.
Properties in the Bay Area are selling fast to all cash investors.
As of now, we have been able to save 100K but need it grow in order to buy our condo for cash.
What do you recomend? We do not have any investments as of right now.
First, don't post on public forums like this that you have money available. That's just asking for trouble.
Second, be sure that property you've rented actually cash flows. Not much in the bay area actually does. So, that may be actually hurting you. Unfortunately, buying then selling three years later is almost certainaly going to cost you a ton of cash with the closing costs. So a small loss on the rental may be better than a big cash hit to sell.
A years rent up front makes me nervous. Have you been there and had a look?
A residence you live in isn't really an investment. It might seem that way if you compare the value now to the price paid 30 years ago. But factor in interest, insurance, taxes, maintenance and 30 years worth of upgrades, and you're probably spent more than you could net from a sale. There are certainly exceptions, but they're exceptions and not the rule.
That said, you have to live somewhere and living with parents probably isn't a long term solution. Buy what you can afford that meets your needs.
DO NOT invest that money in anything riskier than bank CDs. You say you want it in less than a year. You can't afford to take any risk. Nothing is going to significantly grow that money in one year without a LOT of risk. And that means your money may shrink just as well as grow. You can't afford the risk.
If you want to pay cash, you're just going to have to wait. But interest rates are incredibly low right now. Locking in long term, fixed rate financing may be your best option if you want to buy sooner rather than later.
Very cool at 25. It is nice to see a younger person make a sacrifice like that and save money.
There are options but growth relies on risk either to a small degree or larger degree depending on the need for yield.
Have a hunch you'll do well. Others on here will most likely be making suggestions. Be careful.
Thanks Jeff! I guess I would want to start with a small risk - small return. What about transactional lending?
Thanks Sean. I am willing to put on sweat equity. In fact, we totally gutted our home and re-did it the way we wanted it to be. I learned how to tile, lay hardwood floors, paint... and we even built an outdoor fireplace =). I would love to buy a small condo in San Jose by February 2013.
First, don't post on public forums like this that you have money available. That's just asking for trouble.
Second, be sure that property you've rented actually cash flows. Not much in the bay area actually does. So, that may be actually hurting you. Unfortunately, buying then selling three years later is almost certainaly going to cost you a ton of cash with the closing costs. So a small loss on the rental may be better than a big cash hit to sell.
A years rent up front makes me nervous. Have you been there and had a look?
A residence you live in isn't really an investment. It might seem that way if you compare the value now to the price paid 30 years ago. But factor in interest, insurance, taxes, maintenance and 30 years worth of upgrades, and you're probably spent more than you could net from a sale. There are certainly exceptions, but they're exceptions and not the rule.
That said, you have to live somewhere and living with parents probably isn't a long term solution. Buy what you can afford that meets your needs.
DO NOT invest that money in anything riskier than bank CDs. You say you want it in less than a year. You can't afford to take any risk. Nothing is going to significantly grow that money in one year without a LOT of risk. And that means your money may shrink just as well as grow. You can't afford the risk.
If you want to pay cash, you're just going to have to wait. But interest rates are incredibly low right now. Locking in long term, fixed rate financing may be your best option if you want to buy sooner rather than later.
The problem with investing in this market, especially short term (8 months) is the relative illiquidity of it... even if you find and buy a house well under FMV, and then get some appreciation on top of that, you still need to be able to sell it to pull that cash back out. There's also the very large transaction cost on top of it.
I just think you'll have trouble seeing a number larger than $100k in your bank account in February. You could easily show it on a balance sheet as part of your net worth, but sitting in cash?
Your best bet would be to find a Hard Money Broker that will lend out your money for you for a small fee. That will keep your money fairly liquid and give you some return. You might be able to squeeze $10 or 15k out of your hundred grand by February using that sort of approach timing it well.
Hi Jon,
Thanks for your reply.
The rental market in the Bay Area is extremly competitive because a lot of people are lossing their homes. A way that people are becoming more attractive is paying a year up front to seperate from the rest. I have been inside and they are taking better care of the house than I was. The family is extremly clean.
Living with the parents is short term solution. I was thinking that if I buy the condo in cash, I can always to a cash out refinance and lock a good rate. The proble with financing now, is that everything is selling in the Bay Area to people that have the cash.
I think I will put it on a CD.
Thanks!
With that wad of cash, you should be in a strong position. Not as strong as all cash, but you should be able to buy something. What you may have a tough time buying is a fixer or a bank owned property. Sellers are nervous that your lender or appraiser will have a problem with the property. So, they're willing to take an all cash offer with no financing contingencies even at a slightly lower price.
You can compete with those offers by also leaving out any financing contingency and by providing a nice earnest money check. You want to be confident in both your ability to get financing and the value of the property, though. This can be risky if you end up having trouble getting financing or the value isn't there. If the appraisal comes in low, you may be able to make up the value with your own cash. But if you just can't get financed, you'll lose your EM.
Do you or your parents know someone who could do a private loan? Its still a loan, but you have less hassles with appraisals and the lender backing out at the last minute. Then you could do the refi later and pay them off. This will be an easier refi, too, because you're paying off an existing lender rather than getting cash.
Nathan Emmert, I think Hard Money Lending is a great idea. I am going to reasearch Capitalbenifit.com.
Jon Holdman - No, we do not know anybody that can do a private loan. I totally agree with getting a loan with no contigencies... But, the first house was 400K; therefore, I do not qualify for much more. The rental income does not help because the house does not have 30% equity.
Marimar: Taking it slow would probably be the best approach right now. Read, learn, network, and figure out what is best for you and your husband given your resources, time, and strengths.
Remember, NO deal is better than a BAD deal...
Once you've had the rental for a while, a lender will consider the rental income. They compute that in two ways. If its not on any tax returns, they take 75% of the rent and subtract the PITI payment. Whatever is left is the "net rental income". If its is on tax returns, they take the actuals from your tax returns. Most will add depreciation back in. If the net rental income is positive, it adds to your income, which helps your DTI. If its negative, it adds to your debt payments, which hurts your DTI. In either case, you ignore the loan on the rental for computing.
It can be tough to find a lender who will consider the rental income without it being on two tax returns, though. They're wise to the "jump and dump" strategy. That's where you buy a new cheaper residence claiming the old one is a rental. Then you let the old one fall into foreclosure. Not saying you're doing that, but lenders have been burned many times by that, so they want to be sure you can fully qualify for both loans without the rental income. Once the rent appears on two tax returns it will be easier to use to help you qualify.
A years rent up front, though, can hurt. All the income is in one year while none is in another. If you don't get the second year paid in full, it will look like income fell in the second year. Glad to hear the house is OK. I'd be concerned with someone turning it into a grow house with a year's rent up front.
If that banker's estimate (75% of rent less PITI) is negative, you are in a losing position on the rental. It may do OK while its filled and there are no repairs. But you will eventually have vacancy and repairs that will come into play.
Also, be sure to change your insurance policy from a homeowners policy to a landlord policy. Homeowners may refuse to pay a claim if they find out its rented.
Here are a couple of preliminary thoughts.
I have always urged investors to stay away from condos and especially expensive ones like you would find in California.
Transactional funding – I would stay as far away from this as you possibly can! There are many risks and laws that can put you upside down in a hurry. This would certainly not fall into the conservative part of the equation in my mind and I have done transactional funding.
I agree 100% with what LOC said. Some of the best deals I've ever had our deals that I did not invest in!
Jon H warned you about being careful advertising the amount of money that you have available. There are many people out there in the world that would love to separate you from it and unfortunately there may be some here on BP.
Study, research, network, investigate, be cautious, and then you might be in a position where your $100,000 is less at risk in my opinion.
Rich
I agree with Loc in that you should educate yourself first and foremost! Take it slow and learn whichever investment strategy you think you would be good at and that would deliver nice returns with your ability to mitigate risk.
Being the bank is a great means to create returns, but you must be educated enough to know how to play that game. Transactional funding is tricky and can be dangerous as Rich pointed out, there are so many crooks out there. Hard money lending is a great way, but you must be licensed in CA to do so unless you keep your rate at 10% or below which is the CA usury maximum. Therefore, you need to bring in a broker to make the loans for you so that you can in deed make more than 10%. Doing these loans with low LTV's (Loan to Values) and with the borrower having enough skin in the game (their own cash), you can mitiagte risk.
Another option is notes/paper. Loc is a great person to talk to about that as is Marc Faulkner. You can buy notes or create notes and get some great returns, the always important factor is the LTV. If your LTV is always well below the risk/cost of foreclosing and getting the property back, then you have mitigated risk.
One other quick note, if your idea of paying cash is only because you believe that is the only way to get a deal in your area, you may want to get some professional help in your area, I can't imagine that is true. While cash does improve your position, CA holds many opportunities for financed buyers as well.
Thanks Everyone!
I am so glad I found this website. I am very thankful for everyones responses and insight.
I will definetly take a couple months to study, do a lot of research, and of course, network!
Look at the timeline. Marimar Hernandez says "I would love to buy a small condo in San Jose by February 2013." With a time horizon of only eight months there's no guarantee she can be in and out of any other investment in time. She also says she's new to investing. I'm all for notes and loans, and have a significant amount of money tied up in that type of investment. But you can only get out when the borrower pays you off. And, no matter what you do, there is risk. That $100K could easily end up being $80K or $90K a year from now.
Because she has a specific, short-term plan for the cash, I think any sort of risky investment - stocks, bonds, real estate, loans- are inappropriate. If she said this was a long term investment and only a portion of her savings, then those investments become more appropriate. Even so, some learning and study is in order.
I do agree with you Will Barnard that over the long term, inflation may eat away at your capital when invested in CDs (or any sort of fixed return investment, even a real estate loan.) But over eight months? If something happens that the value of those dollars falls by a significant amount with respect to US assets over the next eight months we're all in deep doo-doo.
Point well taken Jon, that makes much more sense, I mean cents. :)
I missed that timeline portion, glad you cleared it up.
Will Barnard, you also need to define risk.
I think risk refers to the uncertainty of outcomes, rather than the overall performance.
By that definition, burning dollar bills is low-risk - and getting a free coin flip for $100 is high-risk. (I know that one sounds strange, but just imagine that they give you $50 and then ask you to flip a coin to win or lose another $50).
Putting money in a CD for a little while is very low-risk inasmuch as the uncertainty of outcomes is very low - even though you might lose a little value to inflation along the way.
I agree Michael, risk has to do some with uncertainty of outcomes but even that can be mitigated. Again, I missed Marimar's timeline and after Jon pointed that out, his response made more sense regarding the CD.
Be that as it may, my definition of mitigating risk is the investor's ability to cover any and all downsides in such a way that the downside could actually turn into an upside.
For instance, if I loaned $50k each on two different properties, each worth $125,000, I would have an LTV of 40% and if the borrower did not pay me back, the process and cost of foreclosure would be far less than the equity left in the security. That is covering your downside and mitigating risk so that if the uncertainty does occur, it is not the worst thing in the world, perhaps the best thing. So uncertainty does not always equate to risk in my book, except under the extreme example of a coin flip you pointed out.
Hi! I am back!! Thank you so much for all of your help! We ended up buying a condo in San Jose in January 2013!!!! 1 month before of our goal! And perfect timing too! We welcomed a baby boy in February 2013.
Our house was refinanced as an investment property in July 2012 at 3.75% 30 year fixed; the tenants are incredible and are taking great care of the house.
We were able to save for a nice down payment on the condo. Financed the rest at 3.5% 30 year fixed.
New question: We got the condo at a incredible price through a short-sale, they are now selling for 205,000 more. It is tempting to sale, but since we have not been there for 2 years, the taxes would be painful. I am now thinking that the best way to continue investing is to rent it out and by another primary residence.
The condo would give us a profit of a little bit over 1K per month (since mortgage is low because of big down payment). We have been pre-approved for another primary residence but is this the best move?
My ultimate goal would be to continue to buy and rent homes to retire early and be a stay home mom.
To all of you who have chimed in. Great advice for the young couple Rich, Jon, and Will and the rest. Now I heard that many are loosing their homes in the Bay area. I don't know the laws in CA, but what about taking over one of the properties SUBJECT TO: You have the CASH to make up the payments to the bank and then you can choose a home that fits you. I would not do a condo. To many people are CARELESS and if they burn their property down, yours goes with it. Also, even if it is 8 months Jon I would not put my money in the CROOKS hands. I consider banks CROOKS. I feel better sleeping on my under my mattress. Hell the worse I can do with it is PISS on it like the CROOKS. Take your time and realize knowledge is POWER. Just because you have the CASH if you DON'T know how to make it work for you, you are just like the POWERLESS and CASHLESS.