Here's the catch 22. My house (primary residence) is paid off. I have perfect credit. Regular investment mortgages would be easy to get..... if only I had a down payment, because they only cover 80% most of the time. Because I have no debt, I have no savings. As a matter of principle, I will not use equity from my primary residence to fund the acquisition of others, and it will take many years to save up a down payment to get in to my first investment property.
I talked to hard money lenders/private money people today, and they will not only not fund a second mortgage for the deficit, but they also charge a large down payment. It seems that I have no recourse, and my hopes are dwindling. It seems like the banks intentionally stack things against the little guy unless he puts it all on the line and risks everything to even get started, or work many years for a down payment. It seems that private money lenders do not exist that will cover 100% of the cost How is somebody supposed to break through this problem while not risking a house that is paid off and trying to stay out of debt in that house? I'm starting to lose hope.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y
@Ed Goble There’s no judgment in what I’m about to say, so hopefully you don’t take it the wrong way.
First, congrats on having paid off your house. Sounds like that’s a goal you set for yourself, and then achieved. And not many people accomplish that.
Now, having said that, if you have a paid off house, but no savings, then you’re house-rich but cash-poor. And while having a paid off house can be a good thing, it can also be a problem, especially if you don’t have any money and you want to continue (or start) investing.
I understand the sense of safety and security a paid off house brings you, but frankly I’d rather have a mortgaged house and a boat load of cash in the bank. At least then I’d have options.
Sure, with a paid off house you might always have shelter, but you can’t eat your house, or buy clothes with it, pay for your kid’s college education or even your utility bills. (At least not without leveraging it, which you’ve already said you’re not willing to do.) You can, however, do all those things with cash. And cash can be used to provide housing for yourself and your family too. It could even be invested to make more of it.
My point is, both have value. You’ve just made a choice that having a paid off house is more valuable to you than having cash in the bank. Nothing wrong with that per se. It’s your choice, and I’m sure you worked very hard to obtain that paid off asset. Much like a private lender worked very hard to earn and accumulate his/her cash in the bank that he/she loans out.
So you see, it’s not a “Catch 22” actually. It’s just that it sounds like you’re wanting a private lender to risk 100% of the asset they worked so hard to accumulate (their cash), so you don’t have to risk any of the asset you worked so hard to accumulate (the equity in your house). And that’s just not generally how it works.
Most private lenders are going to want to see you risk a little of yours, if you expect them to risk a lot of theirs. Make sense?
Lender · Pensacola, FL · Member since 2015 · 17 posts · 8 votes
6y
@Ed Goble I know you kind of addressed this, but why not a line of credit on the house for liquidity? You would be getting money much cheaper and paying yourself back instead of an outside company. Once you get a deal or two under your belt outside financing is typically much easier to secure. Private money is always good if you want to develop terms with friends and family. With you being very food with money it seems they may be willing. Good luck to you man!
Thanks for the comment. The answer to the question of why not the home equity line is because I'm a Dave Ramsey-ite of a sort, and there has to be another way. I fought very hard to be in the position to have that paid off, and cannot. I realize that most here philosophically would think I'm crazy. But if I don't get too depressed and if I'm persistent, I may find another way someday. I realize that the skin in the game thing comes up over and over again. If I had money in the bank, then I would be perfectly happy to let that be the skin, but contractually, there ought to be some other kind of skin to figure out in some unconventional arrangement. And some people, including my real estate mentor who is a seasoned investor would tell me that risking my paid off asset represents the only rational way. However, another seasoned investor in my neighborhood tells me its an incredibly bad idea, which I agree with. How many people have lost that asset in this pandemic, and in 2008 because of hard times? Therefore I cannot and will not, even if some here think that there is irrationality involved. But for me, it boils down to the rationale that when I fall on hard times when the black swan comes around, I will not lose that precious asset, even with the worst of situations hitting me, because only uncle Sam could take it away now, but compared to other bills, taxes are cheap (at least relatively, my property taxes are cheap for now).
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y
@Ed Goble There’s no judgment in what I’m about to say, so hopefully you don’t take it the wrong way.
First, congrats on having paid off your house. Sounds like that’s a goal you set for yourself, and then achieved. And not many people accomplish that.
Now, having said that, if you have a paid off house, but no savings, then you’re house-rich but cash-poor. And while having a paid off house can be a good thing, it can also be a problem, especially if you don’t have any money and you want to continue (or start) investing.
I understand the sense of safety and security a paid off house brings you, but frankly I’d rather have a mortgaged house and a boat load of cash in the bank. At least then I’d have options.
Sure, with a paid off house you might always have shelter, but you can’t eat your house, or buy clothes with it, pay for your kid’s college education or even your utility bills. (At least not without leveraging it, which you’ve already said you’re not willing to do.) You can, however, do all those things with cash. And cash can be used to provide housing for yourself and your family too. It could even be invested to make more of it.
My point is, both have value. You’ve just made a choice that having a paid off house is more valuable to you than having cash in the bank. Nothing wrong with that per se. It’s your choice, and I’m sure you worked very hard to obtain that paid off asset. Much like a private lender worked very hard to earn and accumulate his/her cash in the bank that he/she loans out.
So you see, it’s not a “Catch 22” actually. It’s just that it sounds like you’re wanting a private lender to risk 100% of the asset they worked so hard to accumulate (their cash), so you don’t have to risk any of the asset you worked so hard to accumulate (the equity in your house). And that’s just not generally how it works.
Most private lenders are going to want to see you risk a little of yours, if you expect them to risk a lot of theirs. Make sense?
It makes sense according to your philosophical position and values, which are not mine. The one flaw, which is not judgmental of your position either, but rather a fact that bears itself out over and over, as pointed out by Nicholas Nassim Taleb, having studied his materials very carefully, is that with the black swan manifesting itself, as a bad roll of the dice in Vegas, I could end up not only cash poor, but house poor too at the same time, and then really in a bad position. Thanks for your input.
Certainly, my investment career will be more difficult with my values, but not impossible.
I can't blame you for not wanting to partner with someone with different values. That is your choice.
I have to find partners that are willing to take what I can bring to the table without risking what some, perhaps the grand majority, think as fundamentally necessary to risk.
The irony, of course, is that I actually pay my bills off entirely and completely when given the chance, almost obsessively. You would think that would be a virtue that is valued by those that lend. It is not necessarily valued when it it is a fundamental value that is not shared by those who lend. For example, if I had $100000 of credit card debt, but $80,000 in the bank, I would be a great candidate for a partner in your world perhaps. But mathematically, the money doesn't really exist.
Oh, and I should add, that I get it that some will say, "Sorry Ed, that's the way the world works." Ok. Fair enough. I guess I will find my partners after a lot of work that are willing from what I can actually bring to the table eventually.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
6y
@Ed Goble Just to clarify, it has nothing to do with a lender “not wanting to partner with someone with different values”. Personally, I have no problem with someone who values paying off a house, paying their other bills in full, and having good credit and no credit card debt.
In fact, you might be surprised to learn that I too have multiple paid off houses, also pay my bills in full, have a 830’ish credit score, and zero credit card debt. So our values are a lot more alike than you probably thought.
However, I intentionally chose not to pay off all my houses so that I’d still have money in the bank and could use that extra money for other things (i.e. buy more rentals, private lending, kids colleges, etc).
So, as important as your values are, money is important too when it comes to investing. After all, if a lender loans you money, you can’t pay him/her back with values.
Not to mention, whether you’re investing in flips or rentals, things will come up after you buy it that will require more money to fix/solve. Your lender is going to want to have the confidence that you’ll have the money to take care of those things and not just walk away (which is a lot more likely if none of your own money is invested by the way). Your values may make you the type of person to not want to walk away. But again, you can’t pay for repairs with values.
For what it's worth, I know you said you're opposed to leveraging your house for fear of a black swan event. However, you wouldn't have to leverage your house to the max. You could just do a 50% LTV HELOC and then only use even a fraction of that just for the down payment you need so that you're not over leveraged on your primary residence. (Then you'd also have the rest of the HELOC line in case you needed more for repairs until you could save up more.)
Anyway, that’s just one idea and perspective from from an investor and lender. I might have other ideas if you expanded on what you mean when you talk about “finding partners that are willing to take what I can bring to the table”. (I didn’t read where you wrote what it was that you were bring to the table.)
One way or another, it usually takes money to invest. But if perhaps you have some special skill set (like you’re a contractor), maybe there’s an opportunity for you to partner with an investor who has the money?
Best of luck and hope you find a solution that works for you.
"Because I have no debt, I have no savings" Unless you just paid off all your debt, you should have savings.
Take a look at your income and your expenses. Housing a a big expense and right now you have a house that is completely paid for which is great. You don't want to borrow against the equity in that which is fine, but if you are working and have very little housing expenses because the house is paid for and no debt, you should be saving most of your income. Where is that money going?
Lender · Boca Raton, FL · Member since 2014 · 1k+ posts · 957 votes
5y
@Ed Goble, there's no silver bullet here, unless you're willing to pull equity from the house you have paid off (which you don't) or sell it and buy something cheaper to live in (or a multi-unit) so you have a free and clear home (or cash-flow), and cash to invest.
Otherwise, start building up the war chest to invest in the future.
If you are paying no mortgage, no credit cards and no car payment you should be putting lots of money every month in savings. Without those payments, I would imagine that you should be saving $3000 per month. In a year that should be $36,000. That should be enough for a down payment.
OR if you can not or don't want to do that, look for people who are willing to owner finance. This way you will not need 25% down.
OR you could get an UNsecured line of credit. Higher interest rates, but will not bother your house.
OR you can do a combination of the 3 above.
My point is that there is not only 1 way to buy an investment property. IF you are so stuck on NOT buying a property, then you probably will NOT. If you have drive, desire and motivation, you will find a way to buy one keeping to your values.
Thanks everybody. Really good thoughts to open my mind to.
However, I was under the impression that unsecured debt could not be used to fund a down payment. Please elaborate on that if you could. How could that be done?
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
5y
@Ed Goble I'm also with Theresa's and Rick's posts above, if you have no mortgage or car payments, you should be saving thousands per month ideally.
To your point of how to buy an investment property, owner financing would certainly be a good option. I've purchased a number of deals like that, sometimes with little out of pocket. That said, I still keep about $10k in reserves per property for emergencies.
Reno/Sparks, NV · Member since 2018 · 1 post · 0 votes
5y
It seems to me like you could get a mortgage on your house (maybe even just 20% LTV?) and then use that as a down payment. Sure you now have a payment, but it would probably be less than $400 a month right? Then you can fanatically pay that down to 0 again in a couple years (with cash flow from your new property to help even!). Personally I would do 80% LTV with rates so low right now. ~1/4th of that would go to your new house and you would have 60% of your homes value in cash (tax free even!). Now you have plenty of security...lost your job? No problem, cause you have something crazy like 10+ years of reserves to make all your payments. You could potentially get 3 investment properties and have 20% of your homes value in cash for reserves still. I mean what's so scary about a payment that you can easily make for the foreseeable future? As long as you don't squander it gambling or getting new cars you would be much better off IMO.