Balance between Debt and Cash for being Poised to invest

8 Replies

Hello BP Nation.

I would like some opinions from the experienced investors on the forum.

I have just sold my primary residence and we are in good shape now for our upcoming relocation to the Atlanta area. I also recently sold a rental property that was not performing like I wanted. We did well on both sales. So I am now looking at being free of all property holdings. From these two sales we now have about $200K cash to work with.

We will buy in Atlanta, as we just hate not having our own place to control as we see fit, and we don't intend to move anytime soon either. However, we are considering a modest place that fits our needs, but not excessively so. I have a well paying day job and no debt now that we are free of all our property. I don't have any real assets other than some retirement accounts and the cash.

My investment goals/plans is to flip a few houses per year to help build up cash to then invest into SFR, MFR, and MHP's. I want to collect "doors" and build my semi passive income steam up. A nice B&H income stream is the ultimate goal here, and long term increase wealth with the B&H assets I plan to buy.

My question to the BP Nation is:

Which is more important when seeking external funding to fund flips and buy and hold. Larger amounts of cash on hand, or very low debt levels?

My gut tells me "CASH IS KING", so it would be better to buy a modest home with as little down as needed. I can then keep the cash on hand to help fuel the flips that will help generate more cash short term. I feel I need the cash so I can have skin in the game. My income to debt ratio should still look good as I have a modest home but showing good W2 income. I will have skin to put in to get the first few flips funded and then after a few flips I should have a enough working capital to fund my own flips and then look toward loans, again with minimal down payments to fund buy and hold properties. Of course I can also fix the B&H's and refi to pull as much cash as possible back out to help keep powering the expansion phase. I have experience flipping in a house hacking type of way, having bought homes that needed some updates, living in it, and then selling it for more later. I have done this three time now and gathered a lot of experience along the way. I imagine we might do that again with the new purchase in Atlanta if the wife is not too tired of living in a work zone for a little while :-). We have the professional photos from both recent sales so we have experience in that aspect, and a photo portfolio started as well.

I have been so impressed by this forum since I found it. There are some real heavy hitters on here that I highly respect. You can feel and see their experience and thoughtfulness in how they answer and freely share information.

Thanks for your thoughts on the matter.

Tony you could possibly rent and do a lease purchase on the house you want to live in and eventually own.

This way you lock the price today but purchase it at another time. This also give you the chance to live in a property and see if it works for you first.

You could keep your cash and use it to fund some flips. Hard money is expensive and you have draws and a bunch of other conditions placed on you that costs time and money. It's also seen as a loan by sellers as it has conditions tied to it to buy a property. That versus you showing money in your bank account that you have funds ready to go to get an accepted offer to buy a property.

No legal advice given. 

I think you are right, the first step is a modest home putting down 5%. I have no idea what the comps are in your area, but 200k isn't enough capital already? Pay cash for a rental then use a HELOC for a down payment on another one?

@Joel Owens

Thanks for your advise. I had thought about that, but the market in the area we are looking, which is actually in your area, Woodstock, Canton, and east of there in Cherokee county seems to be pretty hot and with a rather slim inventory. We should have a coffee together one morning after we get settled in. That is the only issue that has given me pause is in the environment are lease options even an option in the area, and do I have the time to find them. Granted, I have not spent any energy actually perusing that angle. Time has been a real issue as you can imagine trying to work a full time job remotely, travel internationally occasionally, and get this house ready to hit the market. It was worth it though. Sold the house in Texas in one day and got above asking price.

@Steven S.

Thanks Steven. Actually even with smok'in good credit (yes, proud of that having recovered from a health caused bankruptcy in 2003). I am still finding 20% to be the norm for a down payment. However, even with this, and buying a modest home, that still leaves us enough to start flipping in the $100K price range. You are correct in that assumption I think. 

I am not one to be held back by analysis paralysis, but frankly the REI brain power available here on BP is such that I still like to throw things out there as somebody will probably have an idea I have not considered. Please keep the comments coming.

Tony if credit is good you can possibly get FHA at 3.5% down or conventional anywhere from 5 to 15% down. Those avenues will have mortgage insurance attached. Conventional once you drop below 80% ltv you can request MI to be removed from the loan. FHA you are stuck with it now forever with the recent changes they made.

You could go 20% down and not have mortgage insurance at all.

If you want to buy a property as an investment and not to live in then banks typically want 20% down for that.

I grew up in Woodstock. Bells Ferry was about the only road at the time. The back of my house was the " thousand acres ". You could riding all the way down to lake Allatoona on old dirt gravel roads.

Woodstock had poor planning for development and traffic was a nightmare so I moved down to Canton about 10 years ago. I like Canton more as it had more infrastructure built in for future growth.

There are less L/O's now than before. If you need a smaller space there are nice 2 bed to 3 bed starter properties in Bridgemill for the 100k to 150k range. You could buy a larger house going 3.5% to 5% down but carrying costs will be more and DTI for future investing will be higher.

  

@Joel Owens

I have looked over that way, but the thing is I will have to run the gauntlet into and out of Alpharetta every day during the week. When you start getting west of HWY 5 you start getting into the 45 min plus commute zone. I have done longer commutes, but I really don't want to do that if I don't have to. You are dead on with regards to the price range I was looking at though. I have pretty much accepted going 20% down to stay away from the MI cost. 

I have even thought of buying a fixer with cash, fixing it and then refi it back down to 20% LTV which should get a lot of my out of pocket cash back in my pocket. I know this is done, and I plan to do this on buy and holds, but can this be done on your primary residence as well, and does the "seasoning" issue pertain in this case? I would think it could be done, but someone feel free to enlighten me too.

It does seem clear that the way forward is to take the pathway that is a compromise between satisfying short term needs intelligently while still keeping cash to work with to fund my own first flip not too far in the future and move up from there. 

@Tony Gunter welcome to Atlanta! Hopefully the southern hospitality has been good to you even before your arrival. 

I just wanted to throw something out there as an idea to consider. You are saying that you would like to flip first to gain more capital. Say you decide to use your own money for the first flip. You are all in at 100K and resell for 150K (you found an amazing deal). You walk away with 50K and you go on to the next one. On the completely opposite spectrum, something goes wrong. You end up losing 100K AND the property. Lesson learned! Expensive, but learned nonetheless. 

The beauty of using other people's money is you get to create relationships AND make money at the same time. Hard money is expensive, yes. However, if you find the right lender he will not give you the entire 100K all at once. He will monitor the progress guiding you towards success because some people understand that creating success takes more than one play maker. Those are my two cents on that. 

As far as your situation is concerned, consider buying a primary residence with 5% down. Buy something nice so that your wife will continue supporting you haha. After you settle in, find a great deal for either a duplex or a four-plex where you will put 20% down (50K down gets you a 250K property) and cash flow 200-300 hundred/month. Then start pulling out cash from either your primary residence or the four-plex, find a reasonable lender who will understand how to create win-win situations and go flip some houses. 

At this point you still have YOUR OWN money at the disposal and you are creating long term, successful relationships. 

I will follow this conversation, would love to see how your goals unfold. 

P.S. - Invest in an accountant and attorney before you invest in anything else. Made my life much easier with the most valuable experts one email away.

Damir 

If at all possible, without over burdening yourself, now is the time for LONG TERM DEBT. Rates are at levels that will not be seen again for a very long time. If inflation occurs ( and we all know it will) then having locked in low rates should produce greater cash flow. Keep in mind that rent is a factor of inflation so the more cost you can fix such as interest, the greater you cash flow will be. 

Good luck

Nicolas Paez

[email protected]

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