How will I buy my own house if I invest cash in properties?

18 Replies

I live in the bay area and we all know about its housing market. So instead of sinking all my cash to buy a home in silicon valley, I'd rather invest in properties in other places for some cash flow. But if the market cools down, then I'll maybe buy a house in the bay area. So here's my dilemma. After investing in a few properties, even with cash flow, it'll take some time to replenish my cash reserve. What if the market cools down and I don't have enough cash? I think I can take HELOCs out on the properties I have for a down payment, but wouldn't that still affect my ability to borrow for the rest? And even if I am able to borrow, the rate of HELOC is much higher than a traditional mortgage, I would want to refinance to a traditional loan. But again, unless I have actual equity in the house, it would be hard to refinance, correct?

To sum up. my question is, how would I be able to borrow and buy a house in the bay area (presumably much costlier) if I don't have enough cash reserve but have equities in investment properties?

And please.. let's not get into the topics of if bay area housing will ever cool down or if I should buy a house in bay area at all. I'm not predicting anything or dead set on anything. I would just like to know what you would suggest if things do happen this way.

Thank you!

Updated almost 3 years ago

To add more context. I'm targeting properties around $150k. I have $200k in cash reserve. So that'll get me about 5 to 6 properties. And I'm planning to acquire over time unless I come across some package deal. Salary wise, I can save about $25k every 3 months.

@Michael Cheng , ok lets skip the part about in Bay Area vs OOS or OOA.  If you are a squirrling away $25k every 3 months, you are way ahead of the game!  With reserves taken care of, what you need to keep your eye on is debt to income ratio.  If your ratio is bad, you will not easily get a loan if and when a good buying opportunity comes along.  Therefore, you need to increase income even farther, without taking on to much debt to screw up your ratio and have a big reserve stashed away.  If you can do all three of those you will be golden.  If you cannot, you will have a hard time getting a conventional loan.  Generically speaking, it is that simple.  In more specific terms, you need to figure out what the optimal DTR is and meet or exceed that if you want to be in a good position for loan.

If you're living on 100k less than you make every year most people should be asking you what to do. GOOD JOB. Beyond that... 

Your rental income will count, at least after 1-2 years depending on the mortgage source. Lets assume you're making at least $240k a year if you have a spare $100k after expenses and taxes in California. $20k per month means you have at least $7k per month in mortgage payments covered. 5 mortgages of $110k ($150k minus 25% ($40k) down) would only be $3,000/mo even at 5%. I think your golden, You have a spare $4k/mo plus 70% of the minimum $5k/mo rent is another $3500/mo. You have the same $7k/mo you started with for your home purchase.

Reserves should be a non-issue assuming you have retirement accounts with that kind of income. 6 months reserves is only $20k, a pittance. Start there and buy another house every 3 months. But I would raise your target after the first 5 or you'll use up your ten loans on what you might consider a very small amount. ($1 million give or take.)

You did at least bring an interesting "Problem" to the forums.

Originally posted by @Bill Brandt :

If you're living on 100k less than you make every year most people should be asking you what to do. GOOD JOB. Beyond that... 

Your rental income will count, at least after 1-2 years depending on the mortgage source. Lets assume you're making at least $240k a year if you have a spare $100k after expenses and taxes in California. $20k per month means you have at least $7k per month in mortgage payments covered. 5 mortgages of $110k ($150k minus 25% ($40k) down) would only be $3,000/mo even at 5%. I think your golden, You have a spare $4k/mo plus 70% of the minimum $5k/mo rent is another $3500/mo. You have the same $7k/mo you started with for your home purchase.

Reserves should be a non-issue assuming you have retirement accounts with that kind of income. 6 months reserves is only $20k, a pittance. Start there and buy another house every 3 months. But I would raise your target after the first 5 or you'll use up your ten loans on what you might consider a very small amount. ($1 million give or take.)

You did at least bring an interesting "Problem" to the forums.

Love how you analyzed it. Pretty spot on, actually.. Almost creepy. :) In an impressive way.

  • I'm sure I'm missing something. I feel pretty good about covering a mortgage if I do come to purchase a house in bay area. Also I do expect these properties to at least pay for themselves. I'm more concerned with not having enough cash for down payment, though. You mentioned retirement account. Do you mean borrow from it or just that it would help my ability to borrow? I'm also assuming 20% down. Maybe that's not necessary to buy?
  • Can you elaborate on "But I would raise your target after the first 5 or you'll use up your ten loans on what you might consider a very small amount. ($1 million give or take."? Not sure what you meant but sure sounds interesting.

Thank you!

@Michael

@Michael Cheng

I'm in a similar boat to you.   I missed out on fantastic appreciation from 2013 to present because I was so focused on out of state (houston, memphis, Indy, San antonio, chicago, atlanta) investing.

Just remember that real estate does not move fast like the stock market.   You can see the trends coming and going.   @Arlen Chou gave you some great advice.

Now, even though I did not get appreciation like I would have if I invested in California.   I did get some decent appreciation in Texas and everywhere else.   I bought a home in San antonio for 125K and sold it for 180K in 2 years!   Not bad.

#1  Real estate is a long game , not quick and fast like the stock market (unless you are doing flipping or wholesaling)

#2  Leverage - lending is becoming looser.   Shop around for different lenders.

#3  Make more or spend less.   I like "make more".   Work overtime, 2nd job, 3rd investment vehicles, etc..    It will all snowball.    When the recession hits 1 month from now, or 3 years from now-  you don't want to invest at the beginning of the recession.   so you got time, but we all need to get ready.   

I changed my strategy from traditional buy/hold to Airbnb and now making 3-4X rents.   So I like the "make more" method.

#4  Start growing your "network capital".   More important than money is knowledge.  More important than knowledge is relationships.   

#5  Talk to me.   I life in the SF bay area.   I'm super busy but always available during my commute hours.  

Wait a second...I re-read your post, you save $25K every 3 months?    you should do less buy/hold at 150K level.   Why bother with such low numbers?   Grant Cardone 10x it.    also, do private lending and other passive investing while you grow your capital.

also, with $$$ like that you are perpetuating the myth that everyone in the silicon valley/SF bay area makes BANK and saves $25K every 3 months.  

Originally posted by @Arlen Chou :

@Michael Cheng, ok lets skip the part about in Bay Area vs OOS or OOA.  If you are a squirrling away $25k every 3 months, you are way ahead of the game!  With reserves taken care of, what you need to keep your eye on is debt to income ratio.  If your ratio is bad, you will not easily get a loan if and when a good buying opportunity comes along.  Therefore, you need to increase income even farther, without taking on to much debt to screw up your ratio and have a big reserve stashed away.  If you can do all three of those you will be golden.  If you cannot, you will have a hard time getting a conventional loan.  Generically speaking, it is that simple.  In more specific terms, you need to figure out what the optimal DTR is and meet or exceed that if you want to be in a good position for loan.

Thanks! Good point. I suppose I can talk to lenders to get an idea what DTI Ratio is OK. I see that you're local. Any local lenders you would recommend that I can talk to about this? (Assuming it's not against forum rule.)

Originally posted by @Joe Kim :

@Michael

@Michael Cheng

I'm in a similar boat to you.   I missed out on fantastic appreciation from 2013 to present because I was so focused on out of state (houston, memphis, Indy, San antonio, chicago, atlanta) investing.

Just remember that real estate does not move fast like the stock market.   You can see the trends coming and going.   @Arlen Chou gave you some great advice.

Now, even though I did not get appreciation like I would have if I invested in California.   I did get some decent appreciation in Texas and everywhere else.   I bought a home in San antonio for 125K and sold it for 180K in 2 years!   Not bad.

#1  Real estate is a long game , not quick and fast like the stock market (unless you are doing flipping or wholesaling)

#2 Leverage - Did you buy your primary home in California? I did and I took advantage with a HELOC. Unfortunately interest rates are rising rapidly but still a good option.

#3  Make more or spend less.   I like "make more".   Work overtime, 2nd job, 3rd investment vehicles, etc..    It will all snowball.    When the recession hits 1 month from now, or 3 years from now-  you don't want to invest at the beginning of the recession.   so you got time, but we all need to get ready.   

I changed my strategy from traditional buy/hold to Airbnb and now making 3-4X rents.   So I like the "make more" method.

#4  Start growing your "network capital".   More important than money is knowledge.  More important than knowledge is relationships.   

#5  Talk to me.   I life in the SF bay area.   I'm super busy but always available during my commute hours.  

Wait a second...I re-read your post, you save $25K every 3 months?    you should do less buy/hold at 150K level.   Why bother with such low numbers?   Grant Cardone 10x it.    also, do private lending and other passive investing while you grow your capital.

also, with $$$ like that you are perpetuating the myth that everyone in the silicon valley/SF bay area makes BANK and saves $25K every 3 months.  

#2 is what I'm interested in! I haven't bought a house in Cali and that's why I ask the question. I am definitely doing long game. With all that said, though, if housing in Cali does cool off (big if), I would like to purchase a home here but I don't know if I'll have enough for down payment if the cash is invested in properties. Did you buy your home with only HELOC or also a loan? I'm concerned I can't get a loan if I can't come up with 20% down payment because the cash is invested..

#4, I definitely need to find time to meet the investors in the area..

From what I've seen, lower range homes have higher cash flow, which is what I'm after. But at the same time, I don't want to deal with "high risk" properties, either, so that seems to be good medium. By "grant cardone 10x it", do you mean buy 10 or a high value property?

I think plenty of higher income earners in bay area contribute to that myth. Hence I am thinking about investing elsewhere since I can't afford anything around the bay right now..

@Michael Cheng

28-33% Debt to income, 30% is a safe and easy factor to start with as you probably wont be close.

20-25% down payment will be required for non-owner occupied properties.

I would never borrow from my retirement accounts, I was just addressing your concern about having 6 months reserves required to get the investment property mortgages. They will count retirement accounts for that requirement.

The loan discussion involves...

A) Almost anyone will give you 4 loans

B) Almost any mortgage broker can get you loans 5-10 (They will probably cost you an extra 0.25-0.5% interest rate.) (Avoid big banks, try local banks, credit unions, or mortgage brokers.) 

C) So with your income and I assume net worth, you don't want to burn through those borrowing a small (to you) amount of money. Yes you can go to commercial loans after that but they usually reset ever 5-10 years, even if they are amortized over 30 and you want that in this interest rate environment. You want to lock in 30 years.

Let me tell you how easy you have it...

My wife is an RN at a local hospital, she doesn't make $100k/year, much less did we have a spare $100k.  I retired at 40 so I had zero income, nothing.  I acquired 10 loans for a little over $1.6 million with just her income and the rental income as I bought properties (2 -3 per year for 4 years.) 7 were 25% down investment properties 3 were primaries I lived in for a year and then turned in to rentals and repeated. We did this while living off less than your excess income.

Once we maxed out loans (Some married people get 10 each, but then again, I had no income.) AND prices started to skyrocket, we switched to living off her income and sending all the rental income towards paying off the loans. That wont provide maximum returns, but as we pay off one loan ever couple years our cash flow and income from rentals increases greatly. Now we're down to 6 loans (including our primary) and barely a million in debt. (Ps, that still sounds like a lot, 10X her income.) But the rental income is over $10k/month after expenses and that's managed by my PM. So again, I do nothing but "cash checks".

Sorry, Ps. We ended up with 13 properties as I did some cash out refi-s of paid off properties to buy more properties with cash when we found something we couldn't pass up.

PPS. With the right CPA and all the depreciation, almost all that income is Tax deferred. No social security tax, no Federal income tax or state income tax. 

You could take your $200K and buy a $1M home in the SF Bay. Then wait for it to appreciate 200K, take a HELOC and go invest that. Alternatively you could passively invest the 200K in more liquid investments if you think you know something nobody else does: i.e what will happen to the Bay Area real estate in the next 5 years! Personally, I believe investing is to support life and not vice versa. If your life dictates you would like to buy a home to live in and can afford it, Id say just go ahead and buy it. I have bought at all points in the cycle and have no regrets. You can always save up again for those midwest "deals". And finally, if you ask me which markets are more overheated: Rust belt cities or the Bay Area, I think there is much more risk buying at todays prices in the midwest than the Bay!

You’re also assuming your OOS will gain equity for you to heloc against. Big if, especially given that OOS stuff has been bidden up last few years by CA buyers with equity looking to invest. 

If you want to do this right IMO I wouldn’t f-around with OOS. Buy a home here. Look for a decent deal, maybe a value added play if you can. Then be patient. It may not appreciate much now, or even take a small short term dip, but several years from now you will be set. Then borrow against that to invest. 

Think of it. There is a reason OOS investment homes have been bid up- that’s to a large part by CA investors with lots of equity in their primary home with the ability to invest. You want to be one of those guys. 

Also, I’d bet on the stability of a Bay Area home over OOS right now, as markets are high almost everywhere. My2c. 

@Michael Cheng I personally bank at First Republic because I like the small bank atmosphere in the branch.  I think there are many smaller banks that are truly more relationship based, but getting into those are pretty hard if you are just starting out.  @Chris Mason is a broker who contributes substantially to the local BP ecosystem, I would suggest you reach out to him and see if he can help you.

As a small bit of advice, I would suggest you expand your thinking about the order at which you buy your properties and the effects they may have on your future self. Since you are talking about buying a SFR to live in, it is apparent that you want to put roots down in the BA. I am not sure if those are permanent roots, if you married or have kids, but all of those factors should come into consideration if you are thinking about buying a home for yourself. One major financial aspect that many people do not take into consideration is the effects of appreciation and property taxes. Property taxes on a home can be dramatically different, depending on when you bought it (purchase price).  As an example a home purchased 10 years ago for $2M would have an approximate tax burden of $20,000.  However, that same house purchased today at $4M would have a tax burden of approx $40,000.   

You have to have a S-ton of OOS rental income to offset that delta in taxes.  Without getting into the BA appreciation discussion very deeply, I think for a person who is pulling down a strong W2, it is worth the effort to consider longer term tax ramifications of your decisions.

I personally went the opposite direction of what you are considering.  I purchased a primary residence in a really nice area to lock my property taxes.  I did serious renovations on the property to get it to a point where it was "my home".  I let BA appreciation do its magic and pulled the equity out of my home to buy investment properties.  This process takes longer to get momentum on the investment side.  But I feel that in a longer view it is more tax efficient and therefore more NET profitable. 

Of course this advice is totally useless if you decide to physically move out of state ;-)

@Michael Cheng I also suggest staying in the bay area market. You have the funds to be a part of the strong market here. You could use HELOC for the construction costs.

If you want, I can send you some comps for add value projects. 

What exactly is your goal in investing. Based on being able to save 100K/year investing in low value properties is doing very little to increase your income. Additionally when the markets do turn you will lose all your equity and be back to earning 1-200 per door per month. 

If you are looking for retirement income simply invest your savings monthly into a income fund and within 10 years you will be much farther ahead without the headaches and considerably less risk than real estate. Assuming you own units in a income fund when the markets drop they will return far faster than the equity in a property. Additionally when the units values drop you continue buying and magnify your investment growth.

Not that I am trying to dissuade people away from real estate but for some with high income and high savings ability real estate investing is not necessarily the best option.

Thanks for all the replies and different perspectives! Definitely gives me more to think about. To add more context:

  • The ultimate goal is income => financial independence. To get to where I can replace 50% of my current income so I can pursue a different career.
  • I'm also not dead set on having to have a house in CA. It's just that if the market does cool off, I'd like to be able to jump on it and thus my original question.

With that said, again, really appreciate the different perspectives!

@Michael Cheng

Quick question:

Can you earn your income remotely now or in the future?

I had a friend who did network security (either remotely from home or onsite across the country )earning your ballpark income in the Midwest until I showed him he could buy a house here in Vegas with just the state income tax saved.  

I phrased it as now or in the future (maybe even the new career) as that would be a reason to lock in at least 1 property at today’s rates and prices.

Ps. Florida, Alaska, South Dakota, Wyoming, Texas and Washington state offer that same benefit if you wanted a city that wasn’t Reno or Las Vegas. (Miami, and Seattle city life or anything in Wyoming wide open spaces.)