Cash vs. mortgages (or neither) for income investing

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Cash vs. mortgages (or neither) for income investing

Ken M.
Tampa, FL · Member since 2012 · 7 posts · 1 vote

The goal is to earn 8+% on my nest egg year over year. Ultimately I want to invest for income, income to live on. Thus far I've researched quite a bit about investing in tax liens, NNN leases, becoming a hard money lender, and of course buying rental homes.

Been in Tampa for a few months now, and I doubt those "2% rule" properties exist. If I put bandit signs on every street corner, I could probably find one. Just not sure I'm that ambitious. At the same time, it is probably safe to say that this market has a better chance of seeing appreciation in the future than towns in upstate NY where I know for sure those 2% rule properties exist. No data to back that up, but much like stocks, I believe the harder a price has been beat down, the better chance it has for a rebound barring some sort of fundamental collapse. As far as I can tell, the beaches are still beautiful, the population is still growing, retirees still prefer warm weather, and at least as far as Tampa goes, it's a city that can support some jobs.

Tax lien investing would seem ideal, but I have no idea how I'd acquire a substantial portfolio with all of the competition. That said I am going to give it a shot in a few months when the Florida auctions come around. NNN leases are a little more interesting, and I'll probably start another thread elsewhere to ask a few more questions about those. Hard money lending...well, I'd have a lot to learn, but in some ways it seems to be the most attractive option.

But I always seem to be coming back to buying rental homes with cash. Theoretically focusing on homes that can use some work, hiring a team to do the rehab, rent and hold. I say cash only because it eliminates a huge monthly expense and increases positive cash flow immediately. Anyway, it's not as if I can go out there and acquire 20 properties all with mortgages? From what I gather there are limits to that. But with money so cheap, I imagine it makes sense to leverage up as much as possible if your goal is to acquire as many units as possible over time...which would lead to more wealth over time.

Any insights would be much appreciated.

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Aaron Norris
Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
14y

Mix it up with rentals and trust deeds. Trust deeds will absolutely meet your 8% requirement and be less headache than rentals. The rentals will provide the long term appreciation possibilities.

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  • Steve K
    Investor · Orlando, FL · Member since 2012 · 431 posts · 106 votes
    14y

    I've not run across too much of the 2% options in this area at least as far as SFR is concerned. It's certainly not the norm in the Central Florida area unless its a war zone. If I was in Tampa and looking for a reasonable rate of return i'd probably consider a few things.

    1. Follow your plan and buy some SFR's with a combination of cash and leverage. Might as well use the leverage you can get to increase your options.

    2. Keep an eye out for some smaller multi family deals that will be showing up on the foreclosure dockets. Since you're a cash buyer this might be a good option.

    3. Consider acquiring some lots for spec investments. This obviously wont provide a steady 8% but even if you have to hold for a year or two before building i'd think it would pay off greater than 8% annually when it's all said and done.

    4. Invest out of area.

    5. If you've got a large net worth and significant tax credit appetite you could look at other investment avenues such as smaller investment grade solar projects which can pay out a nice and reliable return.

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  • Nathan Emmert
    Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
    14y

    Assuming your debt to income would support it, you can have 10 "cheap" mortgages. Your wife (if married) could also have 10. Beyond that, things get more complicated.

    The 2% rule is based on the desire to get a $100/door return with rents of about $500 a month. To achieve a 15% cash on cash return, regardless of purchase price/rent point... you need rents to be 1.5% of purchase price or higher. Those deals tend to be more easily found and would easily meet your 8% goal.

    As your post has demonstrated, there are a million ways to invest in real estate. Based on your modest goals, I would probably find a trusted turn key and buy with cash. The deals definitely won't be as good but it's very simple, very low risk, and you can do it very quickly.

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  • Aaron Norris
    Lender · California and Florida · Member since 2008 · 319 posts · 194 votes
    14y

    Mix it up with rentals and trust deeds. Trust deeds will absolutely meet your 8% requirement and be less headache than rentals. The rentals will provide the long term appreciation possibilities.

    1Reply
  • Ken M.
    OP
    Tampa, FL · Member since 2012 · 7 posts · 1 vote
    14y

    Thanks for the replies guys..

    I know nothing about trust deeds, but I gather that they are a way to get in on hard money lending without actually being the hard money lender?

    I have a lot more research to do on that, but who forecloses on the property in the case of default?

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    I'll suggest you look into transactional funding, lending money for 90 days and short term rehab financing. It's not the interest rate as much as the possible fee income. Your cash is the inventory and your inventory turn over is the key to much higher annualized yield than making a hard money 5 year loan.

    You might also look into purchasing discounted notes and holding them for awhile then offer a small concession to your borrowers to refinance, again turn that inventory!

    These are pretty simple financing ventures and you should get with a mortgage broker to start out with, IMO. Goodluck!

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  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    14y

    I just looked quickly on realtor.com, and there are 179 3Br SFRs, 1000SF+, listed in Tampa and environs, listed between 25k and 45k. Surely you can find 2% homes in this group that are in halfway decent areas. Also check CL to locate wholesalers posting deals.

    I agree that you can make 8-10% on first mortgage private loans for 5-10 yr terms, with 65% LTV, so quite secure. Look up Michael Zuber on this site. He's very reputable, and pays 10% for loans on properties he buys & holds in the Fresno area. I have no affiliation with him, he's just very established and has a very good track record. www.truewholesalehouses.com will also give you a 8-9% annual yield with back-end equity participation. Again, I have no affiliation of any kind with these guys.

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  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
    14y
    Originally posted by Ken M.:
    I know nothing about trust deeds, but I gather that they are a way to get in on hard money lending without actually being the hard money lender?

    I have a lot more research to do on that, but who forecloses on the property in the case of default?


    .

    You can find the borrowers and arrange the loan yourself, presumably using a broker to do the paperwork. Or, you can contact some local hard money lenders or note brokers and directly buy notes secured by trust deeds. These should already be seasoned (i.e. have a track record of on-time payments) and can be as long or short term as the inventory of the HML or broker dictates.

    The HML will have done the dirty work so the returns will be lower than if you did it yourself, but it's fairly easy to learn. It can also be be relatively safe, since you'll be secured by a 1st TD at a comfortable loan-to-value. That is, if done right, the property will be worth much more than you loaned.

    As the lender, which is what you are as the note holder, you get to foreclose -- congratulations. Some note sellers will "kiss" the note, which means they will provide a guarantee. I would talk to the HML about this and of course review the sales contract for all written details.

    The drawback (or benefit) here is that you won’t have any ownership rights to the property.

    Jeff

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  • Ying Xu
    Houston, TX · Member since 2012 · 4 posts · 0 votes
    14y

    You could contact hard money broker to put you in their individual lender's database. You could make around 8-10%. They usually handle foreclosure for you as well.

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  • Ken M.
    OP
    Tampa, FL · Member since 2012 · 7 posts · 1 vote
    14y

    Wow lots of great stuff here. Thanks everyone. Much for me to take a look at and start learning.

    This is always what I appreciated most about REI, there are just so many different avenues you can take. And just about every single time your investment is going to be backed up by a physical asset.

    So no matter what the style of investment is, as long as the property backing it was purchased at the right price, there should be money to be made.

    Thanks again!

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  • Bryan Hancock
    Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
    14y

    I agree with Aaron that 1st position trust deeds should probably be your dominant investment given you goals. Try to get good collateral and limit your LTC such that your security interest is pretty solid. 8%+ should be pretty easy with those investments provided there aren't sneaky local laws that get you in trouble.

    I also agree that mixing in a few rentals is probably a good idea. Be picky about these and make sure they will return well in excess of 8% to warrant the added hassle of managing them.

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