How to best position my personal finances for investing?
Involved In Real Estate · Isle 4, Target · Member since 2014 · 13 posts · 1 vote
Hello everyone! This is my first post to the forum now that I am finally a member (I've just been stalking the site for quite some time now). I am 26 and really excited about starting my journey in real estate investing. Here is the situation:
I currently own no (money making) assets, and the only debt I have is a 15yr mortgage (balance of 110k) and a 5yr auto loan (12k balance). My home is worth 190k so I have 80k in equity.
I want to free up cash to use for purchasing my first rental (strategy: buy/hold - niche: SFR or MF). In your opinion should I:
1) Cash-out refinance - free up the equity and move to a 30yr to minimize money going into liabilities, maximize money going into assets (Kiyosaki).
2) HELOC
3) Sell my home, buy a home half the cost and use the difference to invest?
I'm leaning toward the third option because I could really keep my mortgage payment low while freeing up the cash. My wife is on-board to downsize as well, so bases are covered!
Thoughts? Is there anything else I should move around or ways I could prepare my personal finances before I make my first purchase? THANK YOU :)
OK let's do the math:
1) If you sell NOW
List price: $190,000
less seller concession (3% or $)
Most likely selling price: $184,300
less RE commission (3% since you pay yourself since you're an agent)
less 2% closing costs
less loan balance $110,000
Equals $65,085
less 38% tax (if you're in the top tax bracket and you can't wait until the 2 year period is over)
Net after tax $40,352
2) If you sell until the 2 year-period...you'll get $65,085
3) If you refi...and say get 80% LTV
New loan: $152,000
less old loan $110,000
less closing costs (2% or $3,000)
Equals $39,000 --> this is tax free
Then you can rent your house and generate some cashflow already.
You can then use your $39K cash as downpayment for your next property (maybe a 4-plex). PLUS you still have $38K in equity in your current property which hopefully, you can rent for positive cashflow.
4) You can also do a 1031 exchange (same result as #2 less some fees to the 1031 exchange intermediary)
5) or you can pledge the equity in your current home as collateral for a building - to further convince an owner to do seller financing (I've done this once but this is too advanced and unless you have done seller financing deals...this is not for the newbie)
But on a more serious note. Learn to buy creatively. You're in a better place than most starting off but you'll be limited to doing very few deals if you focus on conventional finance with money down. Learn to do deals with no money down and you'll scale much faster.
This is like asking how to financially prepare to have kids.
The short answer is, you don't.
Actually, there is quite a bit you can do. We are currently expecting and once we re-evaluated our cash budget I decided to get into real estate investing. It's basically the reason I'm here. In addition, we have made adjustments to insurance plans and increased our HSA contributions, ect
However, I see your point. There is a balance and at some point you just have to do it. Thanks for the input on creative financing.
So, I want to provide a dissenting opinion: You shouldn't invest in Real Estate yet.
I'm among the more conservative investors you'll find, but my personal take is that if you want to hold RE as an investment, that you should have 3-6 months of your salary, plus 10K-20K to cover real estate capital expenses. I think that this should be sitting in a liquid fund, and should be there AFTER your down payment/closing costs.
Why? It's what I call the two-wrong rule. At some point in your life you should figure that you will have two big-bads happen at once - and it's the role of your personal finances to absorb those two-bads without going bankrupt. If you do any of your three initial ideas - and then lose your job and remain unemployed for 5 months (bad 1) and) have a crappy tenant who doesn't pay and damages the property (bad 2), you will run the serious risk of being bankrupt at 28.
I think your head is in the right spot. But, I think that you should pay off your car, maybe decrease your housing expense, and wait until you have more saved up before you buy your first property.
This is like asking how to financially prepare to have kids.
The short answer is, you don't.
Actually, there is quite a bit you can do. We are currently expecting and once we re-evaluated our cash budget I decided to get into real estate investing. It's basically the reason I'm here. In addition, we have made adjustments to insurance plans and increased our HSA contributions, ect
However, I see your point. There is a balance and at some point you just have to do it. Thanks for the input on creative financing.
Creative is the way to go all day long IMO. I've bought 24 units over the past few years with very little out of pocket up front. I've done several deals with less than a $1000 invested up front and that includes getting insurance started. Check out my posts in this thread to learn more. The next year or two I plan to crack 50 units.
Adam,
I'm a window installer. I cruise around to different houses on a daily basis replacing metal windows with vinyl. We do great work, too. Last week alone, I went to 2 different duplexes, and worked on a third person's single family rental. The week before that, a 20 unit apartment building in Seattle. I've seen how a lot of people live, and talked to a lot of land lords about their experiences house hacking. I've house hacked too.
I like the idea of keeping your first house as a rental. I did it. Re-fi and take the equity to buy another property, while cash flowing into your other pocket. Your house is a year and a half old?! No brainer, keep it.
I also like the idea of house hacking your second property. I did that too. I got $1400 per month to rent out my basement. It was sweet!. Congrats on the baby on the way, by the way. Everybody I've talked to, while installing their windows in their multifamily properties says that multifamily's are the way to go. "One side pays your bills, the other side is your cashflow," was a direct quote I heard from a land lord on Friday. A different guy today told me that the key is who you choose as your tenant on the other side. I definitely agree. This guy had a sweet set up too. Side by side, 3 bedroom ramblers, with huge back yards. His tenant is a family of four. Room for the kids, room for the bow target. Separated by deep garages. Excellent set up for sure.
House hack with your wife and new baby. Don't use the full $40k on a down payment. Keep the rest liquid. Your lender will require you to occupy the new place for a year. No worries, your baby doesn't need a huge back yard, yet. Take the opportunity to pay off your ride (I'd sell it. There are too many nice cars available that cost half of what you owe on your car.) and save up another down payment. By the time your kid is toddling around you'll be able to find property number 3. No Sweat.
You definitely added a different flavor to this post, @Jeremiah B.
I think there are ways I can get started now, but your post provided some necessary balance.
Awesome advice and thank you for providing your real-life examples! Clearly there are about 1,000 different ways I could go with this, and a lot will depend on the deals I run across. I will definitely follow up but I appreciate your conservative approaches because as someone just starting out I think they are more in line with my current strategy.