After a recent conversation with a prospective investor on best places to put extra cash, it got me thinking. I’m sure most investors are probably in a similar position given the housing recovery of the past few years. Even as recently as last year, you could still scoop up cash cow properties if you knew where/how to look. Unfortunately, they are getting much harder to come by. So if you’re struggling with figuring out how else to put those little green soldiers to work for you, here are a few things to consider!
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
4 Things to Do With Extra Cash in a Low Inventory Housing Market
Pay down loans.
If you are a buy and hold investor with multiple mortgages, consider paying down your loans with extra cash flow. There is constant debate over whether or not it is mathematically feasible to pay down a loan in a market environment with historically low interest rates. However, by directing all excess cash flow toward ONE loan and then moving on to the next (i.e. the snowball method), you can make great strides toward owning your properties free and clear. For some investors, it’s worth it for the peace of mind of having a stream of cash that is not subject to the ebbs and flows of housing prices (until you go to sell, of course).
It’s also important to take into consideration your overall investment portfolio when making this decision, i.e. your stocks/bonds/precious metals/etc. Examining the opportunity cost of each option will help you determine what the best thing is for YOU. If you already feel overexposed to the real estate market, then perhaps redirect your excess cash (flow) to padding your investment accounts.
For me personally, this is always my inner struggle, as I am extremely debt-averse, but I am also very heavily concentrated in real estate. I own REITs (Real Estate Investment Trusts) in my portfolio, own several properties, AND my primary occupation is as a real estate agent. So while emotionally I want to get rid of the debt, it makes more sense to keep investing in the public market. It’s all up to your individual comfort level and your long term financial goals.
When housing inventory is low, it is the perfect time to sell, especially in areas where the overabundance of buyers and investors leads to bidding wars. Depending on how many properties you own and when you bought them, it may be in your best interest to unload a few while the market is so out of balance. In my area, even investment properties that in recent years have sat on the market for 30-40 days are now going under contract for full asking in a day or two. If you’re thinking of re-focusing your efforts elsewhere or just want to consolidate while you have the chance, it could be a good time to do so.
Make sure not to forget to examine the opportunity cost of freeing up your capital, though. What has kept me from selling my units despite a favorable seller’s market is that I can’t think of anywhere better to put the money (plus the costs of selling, though that is somewhat mitigated by the fact that I can just list my own properties). I could sell and reinvest the proceeds in another property, but long-term cash flowing rentals are even harder to come by right now, so it seems kind of pointless.
Consolidating would make more sense if your goal is to work on a bigger project, such as an apartment complex or an office building. Selling off a few smaller properties now to raise capital in that case could be a great business decision that would ultimately help you reach your goal. If you’re able to successfully do a 1031 exchange whereby you defer taxes on the capital gain you’ll incur, that’s even better for you!
Consider alternate methods.
The customary advice given to investors when there aren’t many deals to be found in one area is to simply invest in another area. For those in areas with a high cost of living and pretty crazy real estate prices, such as Manhattan or Silicon Valley, that is probably a wise choice. However, many investors are wary of out-of-state investing. It can be a little daunting to purchase a property in another state, especially if you’re just starting out. At the very least, you have to have complete trust in your real estate agent and property manager, and unless you already have some connection to the city you want to invest in, forging those relationships takes a lot of time and effort.
However, there is an alternate way that is gaining more steam — real estate crowdfunding. Platforms such as GroundFloor and RealtyMogul (just to name a few) are catching on as a way to match real estate developers/rehabbers with investors who are looking for a decent return on their money. In the very recent past, many of these opportunities were only open to accredited investors. However, Title III of the JOBS Act went into effect in May, effectively allowing non-accredited investors to invest their money via these crowdfunding sites. There are still limitations in place to protect the investors that restrict the amount of capital they can invest, but it’s a start.
While this may not directly be a “job” for all your extra cash, networking strategically can help get you access to off-market properties. Some sellers may not want their home on the MLS, or they may be talking to their friends about selling before they completely decide to list. Knowledge is power, and people talk. So the more people you know who know you are in real estate, the better.
When it comes to sitting on cash, it can be painful to have money lying around earning a pithy 0.1% rate in a checking account, so hopefully some of those ideas help spark a decision. Whatever you decide is best, there’s still no hurry! I’d much rather sit on cash for a while (even if it means losing some money in interest) if that allows me to capitalize on an opportunity that much quicker. You just never know when the next opportunity may show up. So while it is sometimes painful to sit on cash, don’t let that push you into a situation where you pull the trigger too quickly just to deploy some capital and end up stuck with a less than stellar investment.
Investors: What do you focus on when inventory is low in your market?
Let me know with a comment!