Rental Property Investor · Columbus, OH (columbus oh) · Member since 2020 · 65 posts · 71 votes
What do you recommend for short term savings?
I’ve been a bit timid with purchasing my first investment property. Analysis paralysis makes me hesitant at this time with interest rates what they are and anticipating a recession. I don’t want to be too speculative of how the recession will impact the real estate market, but IF there’s more inventory available and IF there are more buying opportunities to find deals (or even time the market for stock investments) I want to be ready.
So how do I prepare my finances?
When saving cash, we hear about inflation and losing value in cash. Part of me wants to turn to my brokerage accounts but that’s essentially a gamble.
How are others preparing their money for potential purchases to come? What finance vehicles or methods are you using?
This is a great question and really depends on your timeline.
If you think you're unsure to the point where you'll sit our for a while you'll probably want to put your money safer, longer-term investments.
If you're thinking about jumping in soon you might want to keep that cash on hand or in assets that can easily be liquidated to be able to make the move when the time comes.
You can consider some higher risk/reward investments based on your comfort but I'd recommend minimizing the percentage of your portfolio you expose to those asset classes.
I would consider using some of your cash/liquid reserves to buy a few rentals now. If your waiting for a housing market crash you may not see one any time soon. We have multiple things in place to help avoid another big crash and over the last 10 years there were "No ARM" loans written to the general public to crash this time! Values may adjust down in certain areas but people are not going to walk away from homes this time around since payments are locked and affordable.
Rates are up a bit but elect to do a buy down or go with a Hybrid ARM 3/1 or a 5/1 it can make sense for an investor, especially if your going to refinance in 6-12 months to pull ut cash anyways.
@Alex Wise, I'm dealing with the same question/issue. I've been saving as much as possible over the past 12 months and putting everything into my brokerage account at Betterment. It was doing great for awhile but we've all seen what the market has done this calendar year...
The other option is to stash it in a savings account and while those rates have climbed (1.9% currently with Cap1), that's a lot less than inflation and a lot less than what the market could potentially return.
I've heard on a BP podcast recently and I think seen it here to keep it in safe accounts like a savings account if your time horizon is less than 24 months out. I'm not sure I agree but it's all a gamble in some respects right?
What is your timeframe for purchasing?
Also, a great nugget I heard on the BP podcast this week (I'm working my way through all 600+ episodes and currently in the mid 200's) regarding analysis: we get hung up on numbers like CoC returns, cap rates, 1% rule etc and look at those as absolutes. However, all markets are totally different and getting big CoC returns in your market might not be possible. Run the numbers on a number properties and establish what average returns are in your hood; then you can use that as a benchmark for your deals and help you with the analysis paralysis.
@Alex Wise personally, I am just going to keep buying real estate while other people sit on the sidelines and make it easier. I honestly don't care if the rates have doubled if the deal pencils out and fits what I am looking for I'll do it.
I appreciate your reply. I know I’m not alone but nice to feel validated. Haha.
Timeframe could be in the next 12 months. I thought about sooner (and maybe so if numbers make sense) but I’m sending more adjustments in the market, at least for Single Family, where it’s not as aggressive as it was 6 months ago.
@Patrick Drury yeah I hear that for other investors encouraging to buy rather than sitting on the sidelines. For me, it’s my first leap into the market and that’s where the natural analysis paralysis comes in.
This is a great question and really depends on your timeline.
If you think you're unsure to the point where you'll sit our for a while you'll probably want to put your money safer, longer-term investments.
If you're thinking about jumping in soon you might want to keep that cash on hand or in assets that can easily be liquidated to be able to make the move when the time comes.
You can consider some higher risk/reward investments based on your comfort but I'd recommend minimizing the percentage of your portfolio you expose to those asset classes.
I’ve been a bit timid with purchasing my first investment property. Analysis paralysis makes me hesitant at this time with interest rates what they are and anticipating a recession. I don’t want to be too speculative of how the recession will impact the real estate market, but IF there’s more inventory available and IF there are more buying opportunities to find deals (or even time the market for stock investments) I want to be ready.
So how do I prepare my finances?
When saving cash, we hear about inflation and losing value in cash. Part of me wants to turn to my brokerage accounts but that’s essentially a gamble.
How are others preparing their money for potential purchases to come? What finance vehicles or methods are you using?
The way I think about it is if I need the cash in the next 3-5 years I'm keeping it in cash, if I want it 5-10 years then I'll put it in something more liquid like stocks. 10+ years is real estate.
Alex, I have run into this question myself as I was saving money for my next rental. On one hand you don't want to lose money in the market if you plan to use it within the next 24 months, but on the other hand hate to see it sitting in your bank account not working for you.
I'm not sure if you have a Financial Advisor, but through the advisor I work with I was able to put some of my savings into a principal protected structured note tied to the performance of the S&P 500. If the S&P went up I could participate in up to a 21% return, but if it went down I was principal protected and would receive all my money back at maturity (13 months). It tied up my cash for 13 months, but that lined up with my time horizon. Basically, if the market went down it would be like my money was just sitting at the bank because it was principal protected, but if the market went up I wouldn't be regretting leaving my money actually in the bank. Seemed like the best of both worlds. Not 100% sure of your situation, but maybe this is something you'd want to look into.
The basics of financial management hasn't changed in many, many decades:
For short-term cash/emergency planning, use something like a CD ladder or money market/savings acct that pays something. This money is to keep you from going into debt should a near-term emergency happen (car engine throws a rod, water heater dies, etc.). CDs do three things: they psychologically present a barrier to 'easy' cash like a savings/checking account to cash out, even if it only takes 10 extra minutes to do; they pay better interest than savings/checking, and they CAN be cashed out within a business day or less if you need them. You might be wise and ladder them over time (buy a 60mo one every year, and build up over time. You can do the same thing with i-bonds from TreasuryDirect if you like to have interest rates that track with inflation. Ideally, you'd build up savings to eventually cover 6 months to a year of your annual budget. All of this is predicated on you spending less than you take home, and you find debt more distasteful than kidney stones. Personal debt=no. Just don't do it, or get rid of it and don't do it again.
Mid-term planning overlaps with CDs/iBonds. This would also include investing in broad low-fee items within an HSA-qualified health account (these also save on premiums as most folks over-buy health insurance out of ignorance of their options and realistic fees. Fear sells insurance. Talk with a fiduciary advisor to see if whole market index or target date funds might fit your investment needs. Presumably you are also using a Roth account. Nice thing about Roths is that you can pull your contributions out after 5 years if you had a different investment opportunity came along -- or you can open a self-directed Roth and use it with an LLC for passive real estate opportunities.
Long-term opportunities such as 401k-type investments that a W2 job may offer a match -- again, with low-fee broad spectrum investments. You can open a solo401k (and use it for real estate down the road), too.
So note the multi-use options with a few of these thoughts. Yes, you should be on the lookout for deals that seem to fit your math for investing in real estate. Nothing stopping you from developing the skills and understanding for paper savings, habit-forming behavior to position you for a deal in the near or far future -- all of this would be good life skills to learn and practice while you are under your analysis paralysis. Personally, I think you should be doing all of the above AND look for either property or an opportunity to partner with someone else so some current assets could be used for a 'deal'. Set a starting number, write up a business plan, join a local REIA, and figure it out. You are risk-adverse. So do you want to start with $5k or $10k to loan out as private money? Do you want to just shadow some active investor/developer to learn what they do (help them with spreadsheets, or pricing materials/labor, or maybe befriend a real estate agent to help them as a volunteer. Just go do something -- it'll cascade into something more or you'll learn real estate isn't for you. All good.
I appreciate you taking the time to reply! Helpful!
Alex,
Have you looked into out of state markets like Tennessee or Alabama? You can pick up a SFR on 1-2 acres 3bd 1bth from $175K- $200K, with property taxes around $550.00 a year!
@Conner Olsen so maybe balance it more. Realistically thinking what cash I’ll need on a potential deal and the rest I can move to something else perhaps. You’re right, it doesn’t have to be all or nothing and just holding all the cash I can.
@Desmond Fielding Desmond I haven’t heard of this structure before! It sounds like you’ve navigated it so I might have to explore this a bit. Could be what I’m after,
@Rick Albert I have thought about that more lately. Didn’t seem like the maker allows houses to sit long enough but now I’ve seen a couple price reductions on a few homes. So you’re right, maybe just write it up and see how it plays out.
@Rick Albert I have thought about that more lately. Didn’t seem like the maker allows houses to sit long enough but now I’ve seen a couple price reductions on a few homes. So you’re right, maybe just write it up and see how it plays out.
That's what I'm going to start doing this weekend. Many are pricing it as if they are getting market rents. I'm thinking write two offers, one realistic, and one where the Seller raises the rents prior to the close of escrow.
I’ve been a bit timid with purchasing my first investment property. Analysis paralysis makes me hesitant at this time with interest rates what they are and anticipating a recession. I don’t want to be too speculative of how the recession will impact the real estate market, but IF there’s more inventory available and IF there are more buying opportunities to find deals (or even time the market for stock investments) I want to be ready.
So how do I prepare my finances?
When saving cash, we hear about inflation and losing value in cash. Part of me wants to turn to my brokerage accounts but that’s essentially a gamble.
How are others preparing their money for potential purchases to come? What finance vehicles or methods are you using?
I'm always timing my action, that's the way I can buy at the bottom and avoid a crisis.
I always look at Chase-Shiller index, mortgage/refinance index, Zillow home index,etc.
If the realtor or 90% Biggerpocket folks say otherwise I don't care.
Dollar cost averaging. Same thing I do with index funds. I bought, am buying and will continue to buy regardless of market conditions.
Real Estate is the same. You have some greedy sellers right now though, so don't fall for that trap. You're here to start with a base hit, understand what you're doing, then make only great deals.
If it's not a great deal, then I'm out. I'm not one to buy a market prices then turn it into a rental with mediocre returns.
@Carlos Ptriawan yeah I feel like I don’t want to relay on a recommendation that I’m not convinced about. Cuz at the end of the day, it’s my money/investments and myself I’m accountable to.
