100K Maybe 200K Cash to Invest

Suzette Lowery · 2011-01-29T12:49:18-08:00

I have been reading for a while and I am ready to take the plunge, but I have several options and dont know which to chose. I have 100K in cash and own my current home with no mortgage, value about 150K. I am closing on a new home on Monday, financed for 400K which will be my new home and will use my current home as a rental. These are my options. Option 1 Buy auctioned or foreclosed homes for cash, about 70K and sell it for 100K and repeat aiming for 2 sales a year just starting and depending on my success 4 sales per year. I still have a lot to learn about the capital gain taxes on doing this, but I will research in details if I chose this option. Option 2 Buy another home cash with my 100K and have two rental homes free and clear of a mortgage to pay for my new home. Option 3 Get a HELOC or mortgage on my current home and use that along with my 100K to buy two homes cash, and have now have three rental; one with a mortgage or HELOC loan and two free and clear. Option 4 Use my 100K as downpayment for 5 single family homes, with a mortgage on all five and continue to let my current home off-set the mortgage on my new home. Option 5 Use my 100K, rental income from my current home and future earnings from my day job to pay off my new home in about 5 years and continue to live without taking risk, but be debt free.

Bryan Hancock

Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes

15y

Hi Suzette...welcome to BiggerPockets!

Those options all sound good to me. What are your long-term goals? Do you want to keep working or do you want to leave your job to engage in real estate full time?

1 Reply

Mike G.

Rehabber / Flipper · Simi Valley, CA · Member since 2010 · 597 posts · 259 votes

15y

Hi, Suzette.

First of all, congrats on your financial situation - you are in a good place it sounds like. Like Bryan said, it kind of depends on your long term goals. However, I have a couple of extra things for you to think about based on what you've written:

Option 1
Be careful if you go the auction route. You can easily get very burned at a foreclosure auction. You have to consider the position of the lien, other liens that may affect you (such as IRS liens), back due property taxes and HOA fees, evicting owners/tenants, etc. Also, with the numbers you list (buying at 70k and selling at 100k), you're not likely to make much money if you have to renovate the home - you would probably need more of a spread. But, you're obviously smart so I'm sure when you sit down to look at the numbers you would quickly figure that out. And capital gains taxes don't apply when you're flipping houses - you pay normal income tax (and potentially self-employment tax on top of that). I'm not trying to discourage you from this path, I just want to make sure you do your research if you decide you'd like to go this route.

Other Options:
Many real estate investors would say you should use leverage to generate more income with your capital. An extreme of this might be combining your Option 4 with also getting a HELOC to do down payments on additional homes. Some people would be comfortable with that, others would find it far too risky.

You could also do something in between. For example, you could use the 100k for larger down payments on rental homes, so that instead of spreading that money out thinly among 5 homes maybe you have a little more equity in 3 homes.

Sorry, I realize I'm not really narrowing down your options, but it really does depend on your goals and how much risk/debt you are comfortable with. And also there are others on here far more competent who can give you better advice than I can! :)

1 Reply

Suzette Lowery

OP

Savannah, GA · Member since 2010 · 25 posts · 0 votes

15y

Originally posted by Bryan Hancock:

Hi Suzette...welcome to BiggerPockets!

Those options all sound good to me. What are your long-term goals? Do you want to keep working or do you want to leave your job to engage in real estate full time?

My long term goal is to make millions, and continuing to work will add to my bottom line and working is necessary for me to obtain mortgage financing. After success comes, this will be fulltime.

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Suzette Lowery

OP

Savannah, GA · Member since 2010 · 25 posts · 0 votes

15y

Originally posted by Mike G.:

Hi, Suzette.

First of all, congrats on your financial situation - you are in a good place it sounds like. Like Bryan said, it kind of depends on your long term goals. However, I have a couple of extra things for you to think about based on what you've written:

Option 1
Be careful if you go the auction route. You can easily get very burned at a foreclosure auction. You have to consider the position of the lien, other liens that may affect you (such as IRS liens), back due property taxes and HOA fees, evicting owners/tenants, etc. Also, with the numbers you list (buying at 70k and selling at 100k), you're not likely to make much money if you have to renovate the home - you would probably need more of a spread. But, you're obviously smart so I'm sure when you sit down to look at the numbers you would quickly figure that out. And capital gains taxes don't apply when you're flipping houses - you pay normal income tax (and potentially self-employment tax on top of that). I'm not trying to discourage you from this path, I just want to make sure you do your research if you decide you'd like to go this route.

Other Options:
Many real estate investors would say you should use leverage to generate more income with your capital. An extreme of this might be combining your Option 4 with also getting a HELOC to do down payments on additional homes. Some people would be comfortable with that, others would find it far too risky.

You could also do something in between. For example, you could use the 100k for larger down payments on rental homes, so that instead of spreading that money out thinly among 5 homes maybe you have a little more equity in 3 homes.

Sorry, I realize I'm not really narrowing down your options, but it really does depend on your goals and how much risk/debt you are comfortable with. And also there are others on here far more competent who can give you better advice than I can! :)

I bought about five books on buying foreclosures at auctions so I will not make a move until I know how to research titles. I have also read the horror stories here, with members rushing to the court house before researching the title or lien and sweating bullets months later to make sure they are in the clear. That will not be me. I plan to visit my first auction on Tuesday just to watch and learn.

Thanks for suggesting other options, but I first want to play it safe just starting out to learn and any mistakes along the way will have less of an impact. As I grow, I will probably take on more of a risk. Also i have been brainwashed that debt is bad, which is way I have made my house in full, so I have to relearn and accept the concept of using debt to build my portfolio.

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Bryan Hancock

Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes

15y

I would be partial to you doing something like the following:

1. Get the HELOC to free up liquidity as needed

2. Buy properties for cash at the auction or using any other real estate marketing technique you can find that will locate good deals. Note that the HELOC will help here too

3. Know your exit strategy as you buy the properties. Some properties make for good flips and some make for good buy-and-holds. For the flips you can procure bank financing to pull your money out post acquisition. Using all-cash will allow you to lower your bid prices using no financing contingency.

For your buy-and-hold purchases sequence the loans in a manner similar to what is described in this thread:

Loan Sequencing Primer

4. Immediately develop a relationship with a local banker that can finance properties for you once the FNMA financing starts getting more expensive

5. In general, keep your liquidity and leverage as much as you need to while still maintaining positive operating leverage on your buy-and-hold portfolio. For SFRs, this GENERALLY means you will need to stuff 30%+ equity into them OR buy really good deals all-cash and releverage

6. Have two separate legal entities for this effort. One will be a s-corp for your flips and one will be a LLC or partnership for your buy-and-holds. This helps with taxes and shields your liability from your portfolio properties

7. As properties are flipped keep some of the proceeds to cover the shortfall in cash you experience by funding each incremental buy-and-hold purchase. This makes your business model sustainable and keeps you on track to fund acquisitions going forward. As you stair step more portfolio properties you can decrease your reliance on your job as a large source of income. You may also consider keeping more cash for each flip to incrementally increase your ability to fund more (or larger) flips going forward

In general, that is what I would suggest doing. Use the flips to fund your buy-and-hold and KEEP your cash to enter properties at the lowest possible price. This will increase the attractiveness of your offers and your speed, which will decrease your purchase prices. The bank financing can be a tool to shore up your liquidity after each purchase. Know what you want to do with each property you bid on and execute according to your overall business plan.

1 Reply

Sammy Paul

Rental Property Investor · Memphis, TN · Member since 2011 · 10 posts · 2 votes

15y

Suzette,

I'm not sure how wise it is to take financial advise from a person that has significantly less money than you do - but I'll give it a shot.

I tend to be more risk adverse than most folks on here seem to be so option 4 is very scary to me. I used to be in banking and have underwritten deals on SFR and the margins/cash flow gets very skinny with just a little vacancy when the houses are highly leveraged. If you would be using most/all of your liquidity, you wouldn't have much buffer if something bad happened.

That said, you could get by the liquidity hurdle with a HELOC on your current house or something like that, but that's not cash, it's more debt.

It sounds like your knocking it out in your current day job, so you might have enough cushion there to overcome some of these issues.

Option 5 would be very appealing to me personally - but it would be a slow approach to building your portfolio. Somewhere in between might be the best way to go - taking on leverage that can be easily covered with cash flow from rents, your current income, or existing liquidity.

Good luck.

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100K Maybe 200K Cash to Invest

100K Maybe 200K Cash to Invest

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