Stashing Cash away

General Landlording & Rental Properties
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Stashing Cash away

Account Closed
Accountant · Member since 2008 · 119 posts · 52 votes

I've got a question for all my debt-free investors. My strategy I'm employing is buy and hold rentals purchased with all cash. I've got my entity set up and have already begun contributing cash to accumulate to buy my first property (should be able to pay for my first $50-75k property in the next 2 years). Saving up cash is a slow process by nature, but I need to know, where do you suggest I hold the cash while I'm accumulating it? Business Savings and Business Money Market accounts aren't paying a squat and I'd like to make a little money on my money while I'm in the slow saving phase.

This is not a cash vs leverage post. My mind is made up. I've seen too many people lose their shirts being over leveraged. I'm trying to build a nice solid base here in my 20's to bring my cash flow to where I want it in my 30's.

It's simple, not complicated, and it works for me. If you want to run your rental business on the financial redline and be 2 months of vacancies away from bankruptcy, by all means go for it. I have been raised to focus on strong cashflow and mitigating risk. Running negative every month is stressful and hoping for appreciation to outweigh your cost of borrowing money is like playing the roulette wheel IMO.

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Steve L.
Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
15y

You are going to need to find a way to super-charge your return or find a cheaper price point entry-level property. Money market accounts don't even keep up with savings right now.

Small hard-money loans (1st, 2nds), mobile home, business investments would be what I would look at.

Anything where you can invest time + money and achieve a high double or triple digit return yearly (on smaller amounts) is where I would start.

This has to be one of the most naive paragraphs I have ever read on this site. Sounds like you grew up in the depression.

Money is cheap right now and deals are plentiful. Assuming because someone uses leverage means they are "2 months of vacancies away from bankruptcy" is ludicrous.

Buy a couple houses and maybe you will decide that a $400/mo tax deductible payment on $1,200/mo in rent actually has very little to do with playing the roulette wheel.

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    15y

    You are going to need to find a way to super-charge your return or find a cheaper price point entry-level property. Money market accounts don't even keep up with savings right now.

    Small hard-money loans (1st, 2nds), mobile home, business investments would be what I would look at.

    Anything where you can invest time + money and achieve a high double or triple digit return yearly (on smaller amounts) is where I would start.

    This has to be one of the most naive paragraphs I have ever read on this site. Sounds like you grew up in the depression.

    Money is cheap right now and deals are plentiful. Assuming because someone uses leverage means they are "2 months of vacancies away from bankruptcy" is ludicrous.

    Buy a couple houses and maybe you will decide that a $400/mo tax deductible payment on $1,200/mo in rent actually has very little to do with playing the roulette wheel.

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  • Account Closed
    OP
    Accountant · Member since 2008 · 119 posts · 52 votes
    15y
    Originally posted by Steve L.:
    You are going to need to find a way to super-charge your return or find a cheaper price point entry-level property. Money market accounts don't even keep up with savings right now.

    Small hard-money loans (1st, 2nds), mobile home, business investments would be what I would look at.

    Anything where you can invest time + money and achieve a high double or triple digit return yearly (on smaller amounts) is where I would start.

    I know it's not that extreme, but I do not want to borrow money in my strategy. I appreciate you calling me naive, thanks. I could donate $400 to charity and receive the same tax benefit as $400 in mortgage interest. Rentals can be had here for $30-75k. More than likely I'll be buying two owned outright at first. Trust me I see people everyday who are losing money annually in the the name of landlording. (I'm their accountant) I don't see much justification in adding the expense of borrowing money to the already slim margins. It's all about risk tolerances, I suppose. A little leverage I would be fine with, what I'm talking about are the 0 down guys. It all works on paper until you implement it in the real world and run into a hiccup. That's what I'm saying, but thanks for the constructive criticism...

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    15y

    I didn't call you naive. I called the paragraph you wrote naive. Your strategy is fine and if you execute it you probably will retire wealthy. BUT you made a very polarized statement just because you do accounting for what seems to be some extremely over-leveraged landlords.

    Like I mentioned in my first paragraph if you can find ways to get into the game now. Buying a cheaper properties, buying a mobile home to rent, making a 12 month or less loan, investing in a business to increase the returns on your idle capital until you have enough free and clear that is where I would invest my resources if I could not buy any properties with leverage.

    Once you get in the game you probably will realize most of the "hiccups" you mentioned happen to everyone. They keep life interesting. If you have 50-75k of additional income to invest with over 2 years + rental income there should be plenty of room to deal with some pretty nasty "hiccups."

    You might like the book about In-N-Out. The owner started with a very similar philosophy and I think owned the real estate and improvements on 10+ properties with no leverage. He would expand every year at the start and did it with cash.

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  • Kenneth LaVoie
    Rental Property Investor · Winslow, ME · Member since 2008 · 826 posts · 281 votes
    15y

    Hi there,
    Quick thing to point out then I'll move on. You said that this isn't a "cash vs. leverage" post, but then in the last paragraph you basically made a series of remarks that almost made it impossible for a leveraged investor to keep quiet! But here's my two cents!

    I invest some money in Lending Club. I'm earning a return of about 8.6% right now. You DO have to tie your money up somewhat. there are 3 year loans and 5 year loans. You put any amount of money in and people "chip in" to loan people unsecured money. I have 455 loans out totaling 15k. you DO get defaults, but with a little strategy (i.e. screening strategies) you keep them to a minimum.

    Other than that, I think they other posters are right about hard money. But be creative, like they say. buy something for $100 bucks and sell if for $150. I like your thoughts. I don't thinki it's completely silly to be 100% free and clear. The return on investment might be lower than being leveraged, but you can sleep at night, and if you do NOT need the cash flow now, putting it into more properties certainly can boost that return.

    (I put 25% down on every property and have 3 free and clear out of 11 properties that I will now do cash outs on to buy more property. I will NEVER be more than 75% leveraged though, and I have a plan to domino my mortgages for early pay off)

    1Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    15y

    Without using leverage, you won't make a great fortune in real estate, but you can still make a medium sized fortune. Using moderate leverage can kick you up beyond a medium sized fortune. However this is a risk vs reward decision,

    In a similar vein, I turned down institutional financing about 4 years ago for my hard money lending business. The institution was willing to lend dollar for dollar with my equity. When I ran the numbers the extra profit was not worth the risk, to me. Other investors with a greater risk tolerance, and perhaps younger might have reached a different conclusion.

    Private mortgage loans at 50 % LTV should allowe you to earn 12-18% on your money on 12 month loans. In fact, the return is so good on private mortgage loans that you might want to add them as a permenant part of your portfolio.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y

    As others have pointed out, there's absolutely nothing wrong with sticking with free-and-clear investments. It may take you 30 years to accumulate the same cash flow as it would in 15 years if you were leveraged to a small degree, but if you're that right averse, it may be worth it to you.

    I will agree with Steve that your extreme views display a degree of naivete. You act as if there are only two options -- free-and-clear investing or 100% leverage. You completely ignore the option of small amount of leverage and the ability to use small amounts of leverage to kick-start your investing.

    I won't waste the time doing it here myself, but I would recommend that you sit down one day and run an analysis of the ROI benefits of 20-30% leverage; then compare those benefits to the risk of *only* having 70-80% equity in your properties.

    I don't know too many people who have done this math and haven't determine that small amounts of leverage can be very useful, despite being coupled with very small extra risk.

    Of course, if it's just a philosophical or psychological issue that doesn't allow you to consider leverage, then the math really won't matter...

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  • Bienes Raices
    Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
    15y

    Dave Ramsey always recommends people only own rentals free and clear, but he is hyper-cautious on every issue relating to debt...that's his schtick.

    On the other hand, there are people who say you should always have all your properties leveraged to the hilt so that if a tenant tries to sue you, their lawyer will see that there is no money to be gained and give up. But my feeling is that they will sue anyway because they can go after your insurance, so why make your decision based on this?

    0Reply
  • Gregory Childs
    Flipper/Rehabber · Orlando, FL · Member since 2008 · 263 posts · 147 votes
    15y

    My partner made money years ago lending people money for earnest deposits. The investment was pretty safe, as the money was held in an escrow account, and as soon as the property was closed on he would get his cash back plus a nice fee; paid from the closing statement.

    He was mainly doing it in the commercial space (office/retail) - but it could work on residential also.

    Just a thought.
    TTFN,
    Greg

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y
    Originally posted by Bienes Raices:
    Dave Ramsey always recommends people only own rentals free and clear, but he is hyper-cautious on every issue relating to debt...that's his schtick.

    You need to consider who Dave Ramsey's audience is...

    The majority of them are not knowledgeable about real estate and the majority of them probably have/had money problems and aren't sophisticated when it comes to saving and/or investing their money. When your audience is unsophisticated, the message of "always do this" and "never do that" is probably the way to go...

    So, for Dave Ramsey, the recommendation of only owning free-and-clear rentals is probably a very good one for those that listen to him.

    Luckily, for more sophisticated investors, there are a lot more options (and opportunities) than the one simple suggestion of "always buy free and clear rentals"...

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  • Jeffrey K.
    Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
    15y

    I am not sure I would want to buy and hold if I had to grow my business so slowly. Being a landlord sucks. Owning one or two properties would be fine I guess, but once you own 10 or so you either have to go for it or sell some. There are days where it can be a full-time job.

    If you just want one or two SFRs your idea works. If you want to make money from this you will have to use the bank. It is not like you are starting with 5mm. You are starting with 50k and that does not buy you much.

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  • Bienes Raices
    Orlando, FL · Member since 2009 · 2k+ posts · 282 votes
    15y
    Originally posted by J Scott:
    Originally posted by Bienes Raices:
    Dave Ramsey always recommends people only own rentals free and clear, but he is hyper-cautious on every issue relating to debt...that's his schtick.

    You need to consider who Dave Ramsey's audience is...

    The majority of them are not knowledgeable about real estate and the majority of them probably have/had money problems and aren't sophisticated when it comes to saving and/or investing their money. When your audience is unsophisticated, the message of "always do this" and "never do that" is probably the way to go...

    So, for Dave Ramsey, the recommendation of only owning free-and-clear rentals is probably a very good one for those that listen to him.

    Luckily, for more sophisticated investors, there are a lot more options (and opportunities) than the one simple suggestion of "always buy free and clear rentals"...

    Good point. The majority of his callers who are LLs seem have major issues with their rentals. They need a set of black and white rules to live by.

    0Reply
  • Jeffrey K.
    Real Estate Investor · Milwaukee, WI · Member since 2008 · 1k+ posts · 671 votes
    15y

    Where is the OP? What is his plan after asking the question?

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  • Anthony Halstead
    Developer · Member since 2010 · 72 posts · 31 votes
    15y

    "I could donate $400 to charity and receive the same tax benefit as $400 in mortgage interest. "

    Lol, I discuss this so many times... "but I get the tax break..." Yeah, so you save 30 to spend 100, your cost is still 70 that you would not have if you did not have interest expense...

    But I am not against leverage, just the uninformed (stupid) arguments for taking debt because you "get a tax break". Guess who wrote that sales pitch (the threesome of bankers, politicians and realtors...).

    Do some modeling. You are against excessive leverage. You are an accountant. You can run some scenarios for growth with 0% debt, 20% debt, and 40% debt and see how much sooner you can pay off the properties. If you can buy two houses for 100,000 with no debt, you can buy 3 houses at 40% debt and have 10,000 left for a rainy day fund (which is an important part not discussed thus far). This should give you good cashflow, protect against going underwater if house prices decline further, spread vacancies (one unit empty is still two paying rent, instead of just one unit), AND you get some tax shelter from the income without needing to donate to a charity.. :)

    But the biggest advantage is that you now have three units to cashflow to save for the next unit, you do not need to save so much because you are buing at 40k instead of 50k, and your equity is growing faster. And your risk is much less than the 90% leverage guys.

    Keep 6 months in reserve, plus a fund for major problems, plus a bit extra, and you should be ok, not overleveraged.

    Just my two cents. I think you should take advantage of the interest rates offered today if you are buying houses...

    Tony

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    15y

    Daniel's strongest asset (of course if he is willing to use leverage) is his W2 income.

    Buy a primary residence with an FHA loan. Move-out as soon as allowed and rent it. Rinse-and-repeat.

    If you are against mortgage-insurance... pay 20% down and go!

    That is what I would do if I had it all over to do again.

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  • Dojo Kempin
    Member since 2011 · 9 posts · 1 vote
    15y

    Daniel,

    "My strategy I'm employing is buy and hold rentals purchased with all cash. I've got my entity set up and have already begun contributing cash to accumulate to buy my first property (should be able to pay for my first $50-75k property in the next 2 years). "

    Very similar to my model. This is a sideline that I wish to use to build cash flow for retirement.

    Question: Are you planning to do any rehab work, or do you wish to by properties that are ready to go . . . more or less? I am looking at small, distressed, foreclosures that need some work. Pay a smaller amount to buy the property, and use your cash flow to renovate it. Because you have no payment, you have the flexibility to keep it vacant. In the meantime your money is working for you, and you can gain the equity of any work you do yourself. You can then rent it and move to the next one or sell it for the cash to move up to your targeted price range. (You can also learn the painful lessons you must learn on a smaller scale before you start with bigger numbers.)

    Of course, that only works if you have the time, skill, and inclination, but it is the route I am taking.You might be surprised at the deals that are available on the low end right now.

    I am not opposed to debt used wisely and competently, but I support your idea to go without it. Start getting rich slowly at your age, and you are wiser than most.

    (I mean all those NOT on this forum, of course.) =)

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  • Zach SikesBusiness Member
    Residential Real Estate Broker · Edmond, OK · Member since 2011 · 452 posts · 183 votes
    15y

    @Dojo and @Daniel -

    I love you guys' philosophy. I like to have very little debt if any. I don't mind being moderately leveraged, as long as I am not taking any cash out and paying down debt as fast as possible.

    I've personally seen what too much debt can do, but the flip side is that all cash makes the acquisition of property much slower.

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  • Account Closed
    OP
    Accountant · Member since 2008 · 119 posts · 52 votes
    15y

    Thanks for the replies everyone. Sorry for the slow reply on my end..it's tax season! I am still looking for places to stash my cash away to earn the maximum return while I'm building up my savings, but I have definitely considered the benefits of leverage. I think I would be comfortable with about 60% of the property financed at most and I do see how my returns would be maximized, especially if I'm buying at 30% or better below market value. I'm going to keep playing with some numbers while I'm saving and get in the game as soon as possible.

    I'm designing my entire operation to run like a business with everything from marketing vacancies, property management, repair requests, etc. I'm not looking for this income to replace being an accountant for a long time, I'm just looking to increase my net worth over the next 20-30 years. I'd like to be 25 years from now (thatd make me 48 years old) with $5mm in equity and somewhere in the $200k ballpark of annual cashflow. I think this is reasonably possible and I'm trying to do without neglecting 401k and maximizing IRA contributions.

    Possible?

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
    15y

    Daniel -

    Personally, I think 60% is about the right amount of leverage (for me, at least), so I definitely agree with your thinking there. This is enough that you'll get a good bit of a bump in returns, but not so much that you'll be incurring a lot of risk should the market (or rents) continue to drop a bit.

    As for building up $5MM in equity and $200K in cashflow, I think both are reasonable. If you can put away $20K per year towards your investments and earn 15% cash-on-cash returns year-in and year-out during that time, you'll have about $4.9MM in equity in 25 years.

    As for the cash-flow, if you're earning 15% cash-on-cash on $5MM, that's $750K per year in income -- much more than your $200K target!

    Btw, if you didn't leverage, and cut your annual cash-on-cash returns to about 10%, your total equity (investing $20K per year) over 25 years would be just $2.1MM.

    The power of leverage + compound interest is astounding!!! :D

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  • Rob Gillespie
    Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes
    15y

    I agree with your strategy Daniel! I would look to park your money in cheaper single family homes and use the rental income to stash away to buy more. I would stay away form the stock market, unless you know a lot about it. Any savings accounts or CD's are not gonna pay enough to make a huge difference.

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    15y

    I don't mean to bring up an old thread, but I just ran some real deals and made a blog post on it with some numbers.

    Very interested to see the power of leverage especially if the market sees appreciation. http://buildbankroll.com/2011/04/the-power-of-leverage-or-not/

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  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    15y

    Very valuable analysis, Steve. In your description of the scenarios at the top, you said the most leveraged position would be 90%, but in the examples it shows 80%. What would 90% leverage do in your examples?

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  • Thorney Gibson
    Engineer · Bel Air, MD · Member since 2009 · 136 posts · 24 votes
    15y

    Interesting to see that infomation on a spread sheet Steve, Thanks.

    Correct me if Im wrong guys but doesnt it make more since when starting out to leavage your money? Then thinking long term down the road to then have everything paid off and maybe selling a few investments so you are debt free?

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  • Steve L.
    Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
    15y

    Thanks for pointing out the typo John.

    90% numbers: ROI Prop A 26%, disposition 254%, Prob B 28%, disposition 254%, Prob C 41%, disposition 334%.

    I did not factor in depreciation, but if you buy 2 properties at 50% leverage versus 1 property at no leverage you'd also get double the depreciation.

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  • Tammy R.
    Real Estate Investor · Southern, CA · Member since 2010 · 84 posts · 30 votes
    15y

    You can become a private money lender for another investor and make some good returns, with the knowledge that if they default for some reason, the property is collateral and would become yours. There is a way to put a deed into an escrow account that automatically records in the event of a default of over x # of days (you set the time limit) so that you don't need to go through a foreclosure process.

    To do this, though, you need to become familiar (best thing is to seek an SEC attorney for advice) on the SAFE act and how it applies in your state.

    You could also convert any old 401Ks into self directed IRAs and hold you a rental or 2 in your self directed IRA and let the cash flow directly into your IRA without tax consequence. It sounds like you are young though, and may not have this resource yet, but I wanted to throw it out there for others.

    I applaud your efforts, but don't be afraid of using OPM initailly. If you're smart with it, it isn't all that bad of a thing and will give you many tax benefits. But, I like your strategy, and hope to be there soon as well.

    Also, don't be afraid to get into fix and flipping. if you can find properties far enough below ARV and add your rehab costs, you can make several thousand dollars to help you buy your properties cash! :)

    It is CERTAIN we will SUCCEED!

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