500,000 cash windfall?

General Real Estate Investing
21

Ok, now I am a bit worried about this rental property thing after reading more post from the members.

I am currently buying multiple pre-construction properties at a discount myself in Charlotte NC.

I am using 10% down and have a property managment company lined up to handle the rentals.

I also have rental properties like these now in different areas all over the country. That are positive cash flow but not to a great extend. Some units have increased 50% to 125% in value over the last 4 yrs I have been doing this.

With $500K I probally could contol about 5 million in Real Estate?

Is this a poor way to build long term wealth.

22

I’m not to be honest.

23

High-
Seems like you know if enough to either be on your way or just enough to be dangerous. Read and read everything on here and you will learn the ways.

Wallace-
What do you numbers look like? I ask this because it would give High an idea of what the board considers a good deal.

24
sorry if you haven't been thrilled with the current opinions of what to do. Most of us simply assume that new members are also new investors (or wannabees), too. Obviously that's not the case with you (though there was no way for us to know that).

Raj,

You were right the first time. Anyone that must ask others what to do with their money is definitely a newbie.

Mike

25

I completely agree HighPoint. Good comment. Only a FOOL would think they have all the answers. You will only get a break like this once in a life time. Asking people for advise in a confidential environment like this is exactly what you should do.

You SHOULD put it in a CD, money mkt, or savings account in the beginning. Then start really slowly with something. If you want to put it in mutual funds then slowly move the money to an advisor. Then after you trust him/her, move more money to them, and then some more money. Or if you want to do real estate then slowly (very slowly) buy 1-3 small properties this year (no more than 2-3 your first year). Then build up your profolio as you build up your knowledge and experience. Do whatever you do slowly. It’s ok if most of it sits in a money mkt or cd for a while. With time you will figure out what is the right path.

26

Iron Range,

Sound advice. Although, I’m actually putting together at least one contract a month as it is now. Either holding them to refi and rent, retailing or wholesaling as my main exit strategies.

I’ve done pretty well for myself up to this point as it relates to real estate, but most of my projects had little to do with the types of deals that could be done after I receive this kind of money. That’s why I asked the questions that I did.

Unlike Property Manager, I wasn’t born into this world a professional investor. :biggrin

27

HighPoint,

Your going to be an interesting addition to this site. Be very careful about refinancing properties. The goal is to pay off properties, not to pull the equity out and spend it.

Most investors fail. How they invest their first 2 years is what will determine whether they are successful or not. If you study hard and learn as much as possible, you will only be held back by the MISTAKES you make your first year or two in real estate. An investor distroys themselves during those first few years that they decide to grow faster then their knowledge grows. Unfortunitely for many investors they don’t get a second chance after they distroy themselves and their families. Move slowly in the beginning, buy only great deals, and be stict on your leases. That is how you survive your first few years in real estate

28
Your going to be an interesting addition to this site. Be very careful about refinancing properties. The goal is to pay off properties, not to pull the equity out and spend it.

Why is the goal to payoff properties if not one dime of my money is in a deal and my tenants pay my mortgage and all other bills and I still have PCF left over? You don’t have to pull out the equity at closing on a refi if don’t want to. Plus, you dont need to spend the money (equity). I use the money to put into new deals or gain interest in a bearing account.

29

Want to make more money than a HML, have less risk and faster turn around time, like say 48hrs and earn anywhere from 10-15% in that time frame…

I can tell you how??? With 500K, you can triple that in less than 1 month…

Here is a old emerging side to real estate that is getting harder and harder to find, but knowing mortgage brokers in your area is all you need to do…

Lend people money for their downpayments only. Say I find a home for 200K and it is worth 275K. The buyer needs to put down 5-10% at contract. So he writes the contract with 5% down and the seller pays back the downpayment thru his proceeds to you as a lien postion. TOTALLY LEGAL and all paperwork which is simple is filled out 72hrs prior to closing date by buyer/seller and title company.

So say buyers need 20K, you charge him 10% interest…that is $2K, so on the day of close you wire 20K into title co accout for close. Loan is funded and the title co will wire you back 22K that day and you earned 10% interest on your money.

How can this be done. Well buyer does loan using a no seasoning downpayment and the title company knows how to do this. Important you tell broker about this so they can make sure its not a loan where title needs to show a cleared check, etc. Many banks allow this. A few forms are filled out and its all done. 100% secured since the money is always with title company really. No worries about the home not selling as a HML or rehab going bad. As for the 20K you lent the buyer. That goes to them as a 1099 during tax season and you just earned 2K in interest which you report of course. But you need to talk with a CPA on that topic…

Well my 2cents…better than a HML…easier…less risk and more profits…So companies charge as much as 15%, and one I know charges 10% of the money borrowed and 1% of the total purchase price of home plus $380 processing fee and they actually make you an employee how they do it…

30

The goal is to pay off properties because that is how you create an income stream, minimize your stress, and build a solid foundation. By pulling the equity out of properties and buying too quickly in the beginning, you will find the stress and mistakes to be overwhelming. Doing one deal a month is probably just enough to loss $500,000.

I once bought a property so cheap that I put it on a 5-year loan. The feeling I have about owning it free and clear in a few years is incredible. It builds a base foundation for real estate investing. Do any of your properties that you pulled the equity out of make you feel good, or smart. You don’t need to answer, because the answer is NO.

I’ll say it again because its important. Buy slow in the beginning, buy only great deals, and be strict on your leases. Then after you know what your talking about you can show the world what you’re made of. But first you need a base foundation of equity, credit, and experience.

31

Very, VERY sound advice Iron.

High, you’re not really focused in REI yet (from what you’ve said). You’re doing rentals, retails and wholesales. If you want to grow, it’s much better to focus on one thing and do it really well.

What is positive cashflow to you? This is important if you’re wanting to grow your net egg and you’re choosing rentals to do it.

Why pay them off if you can? What happens if you have only 10 rentals and 1 tenant doesn’t pay? No much, right? What happens when you’ve got 5 vacant? How about 5 vacant and 3 with major repair damage, and 2 non-paying “professional tenants?” Property owners with low/poor cashflows fail VERY quickly.

Part of growing a nest egg is protecting it. In REI, a good protection is to have as low a mortgage balance as possible on your properties. That said, I don’t think that it’s a good idea not to have access to that equity, preferably through a line of credit vs a loan. You said it yourself. You don’t need to spend the money. If that is the case, then why get a loan charging you 6-8% for money you don’t need immediate access? A line of credit makes more sense. You mention that you put the funds into an interest bearing account. Does it make more than the interest that you’d be paying back?

Here’s a thought. What is the ‘actual’ average paid interest rate for the first five years of a typical 8% mortgage? When do you actually pay the 8% interest as quoted? You math guys figure it out.

You mention that you want to get to where you “don’t have to work anymore” which would mean that you’re looking to get to a point where your ‘income’ from this initial $500K egg would be able to replace your JOB income. Yet you also say that you want the egg to grow in size. While both are possible to do at the same time, different strategies are needed to promote one over the other. Which is more important to you?

As stated, you can earn $25-40K a year on relatively safe, though lower yield, investments. Don’t know what you are trying to replace, but the national median income is $36K, so that’s not too shabby in it’s own right.

If you’re trying to get to a certain income point, then using the funds to get deep discounted rentals/investments with LOW mortgages will offer you the greatest returns. A property renting for $500/month with no mortgage cashflows better than one renting for $500/month with a $40K mortgage, correct? Creating a larger passive income WILL grow your nest egg, too. However, it will be a MUCH slower pace.

Another option for creating passive income is to look into buying notes. They can be bought at large discounts, too. Offer high returns, can be used as collateral for loans, or sold, and have the cashflow without the hassle of owning RE.

If you’re goal is to double the egg as fast as possible (without screwing up of course), then rentals aren’t the best option. Best option in RE there is to look into the wholesaling, retailing side of the business (focus leaning toward wholesaling for faster turnaround). Possibly look into what I like to call, “whoetailing” or wholesale to the public. Higher sales prices, little rehab, more profit. As an added bonus to this quick flip technique, you could also offer seller 2nd’s to help buyer’s qualify. This nets your cash in hand on the sell, plus a monthly income off of a property you don’t own anymore.

Raj

32

I’m 18, I’ll be starting my rental property business in the fall. This summer I’m going to be bird dogging for my dad as a jump start so I can get a better feel of real estate.

If I was in your situation I would do the same thing I am going to do and the same thing Mike (propertymanager) did. Learn your market, go to 100 (or how many it takes) houses for sale and memorize how much each is work. Therefore, when you are looking at deals you will KNOW if you are buying at a big discount or not. It will also tell you if the property will cash flow or not.

I wouldn’t buy properties with 5-20% down mainly because:

  1. When buying with no money down your ROI is INFINITE
  2. How many properties can you afford to put money down on? Obviously you have $500,000 but that can only go so far.

I would also join your local REIA. Real estate is a people business, actually most businesses are people businesses. It’s important to know people and network. The successful investors at your REIA will be able to give you leads, give you advice, and sometimes offer you deals! Just read Mike’s blog, there is an investor that has sold him many properties at HIS price.

Adam

33

HighPoint,

You are getting a once in a lifetime opportunity by receiving this $500,000. The majority of people who receive windfalls blow it very quickly and often end up in a lot of debt. Look at all the lotto winners who find out that winning the lotto was more of a curse than a joy. Even though they receive millions of dollars, they can’t keep it because they don’t have the knowledge to do so.

You are in the same situation. Obviously, you are not ready to invest this money in real estate or you wouldn’t be asking a bunch of strangers what to do with it. Like the lotto winners, you don’t have the knowledge. If you had the knowledge and ability, you would already be running your own business and out of the 9-5. It will be VERY EASY to start buying rentals with that money and then lose it all when you realize that you didn’t really understand operating expenses, cash flow, and tenant issues. That’s what happens to the vast majority of new landlords. However, it will be even a bigger shame in your case when you lose a half million dollars.

You say that you want to be able to not work. If you’re going to do that through rentals, you don’t need the $500,000 to accomplish that. As Roger said, I would put that money in a CD and earn the interest. That will go a long way toward having the cash flow you need. Then, do the work required to really understand the rental property business. Having a couple of hobby rentals is nothing like running a rental property business. With a hobby rental, you can survive even if you don’t understand the business. You can’t fake it with dozens of rentals - you either have real cash flow or you are out of business.

Therefore, I would suggest that you start studying; join your local REIA; meet and make friends with other SUCCESSFUL investors in your area; and then build your new business slowly. Unless you are expecting more windfalls, this is a once in a lifetime opportunity. DON’T BLOW IT!

Good Luck,

Mike

34

I currently am buying SFH at deep discounts with cash, rehabbing them and then refinacing them for equity or cash out.
Sounds good High. But you still want to watch the refi. Buying, rehabbing, selling is great. Even paying cash for a property has many advantages (fast closing, step discounts, save on closing costs, save on stress). But refinancing them with a cash out, is a good way to over extend yourself. If you want to sell the rehab, then sell it. If you want to rehab and then rent it out, then do that. But don’t pull money out too often, or all you will have is a bunch HUGE mortgages and no way to sell.

When I started I had two goals. Goal #1. Have an income that would allow me to quit my job. Goal #2. Create an empire.

The first goal was priority #1. How can I get enough of income to quit my job. ONLY then should I focus on accomplishing the 2nd goal. Too me it seems like your trying to accomplish simular goals. Just make sure to focus on goal #1 before you to try and conquer real estate.

35

Not over extending at all.

Small example:
Purchase property for $50,000 cash.
Rehab for $10,000
Total = $60,000

ARV= $100,000
LTV 80% = $80,000 @ 7.75% for 30yrs.
PPI= $559.37
6-10% property mangement fee (of rent)
Taxes
Insurance

I refinance the property with essentially my 20% down which is actually figured into the deal before it’s even considered. I can pull the equity out at refi closing or leave it in. Therefore, I’m only refinancing 80% of the value of the home but still pocketing roughly $20,000. Plus, If I would decide to sell a few months down the road, I have some wiggle room to make even more money. (Obviously there are costs that are not figured in exactly in this deal) Overall, I think you see the point I’m trying to make.

On a deal like this, I’m in the deal with $60,000 and refi based on appraisal which is based on an LTV of 80% of the ARV.

Not a bad deal if you ask me.

Of course, it goes without saying, you need to crunch the CF numbers to be sure that while taking rent, insurance, taxes, etc., into the equation it will still be a good deal.

36

HighPoint,

The majority of properties will not cash flow at with a mortgage at 80% of market value.

Mike

37

I look at rates and terms moreso.

30 yr vs. 20 yr.
7.5% vs. 8.0%

Care to explain why 80% LTV will not cash flow?

38
If you had the knowledge and ability, you would already be running your own business and out of the 9-5.

Actually, I’m currently running my own business and to most people I am out of the 9-5. But when you have a family running your own business, such as the one I own, it’s very taxing mentally. Not to mention, I have 25+ employees, which is no picnic either.

I just enjoy the thrill of getting deals together, so in all actuality, real estate is not like work to me. To some it may be, to me It just doesn’t feel that way.

However, in all aspects, I treat it like business, don’t get me wrong. I have tax advisors, lawyers, lenders, contractors, property managers, insurance brokers, realtors, etc., all in my corner. Including the LLC I’ve set up to protect my personal side along with my other business.

39
When I started I had two goals. Goal #1. Have an income that would allow me to quit my job. Goal #2. Create an empire.

You’ve added some great points Iron, I really appeciate it.

Would you care to let us in on your initial strategies that helped you accomplish priority #1? And what goals did you set as far as a time frame was concerned? What were your time frame goals? And how is goal #2 coming?

40

Goal #1:
Buying 1-4 unit properties at great deals that bring in $100 a month is great. But it would be difficult to own 80 units ($8,000 a month) to have both my wife and I not work full time. Plus it would take a while to build up the necessary knowledge and 80 units.

So if I can’t buy 80 units and work full time, then I need to keep buying while at the same time PLOWING money back into the properties in order to get some of them paid off. It takes TIME and MONEY to buy and buy. Plus its difficult to find good enough deals worth buying. So my goal was to buy a few every year, but also really pound on the smaller mortgages. Everything we have is used to pay off properties. It’s a stategy that is short term, not necessarily a super wealth builder. But it reduces risk, stress, and most importantly it works to get a person enough income.

Goal #2
I’ve had a few large deals fall through my finger tips. But I’m approved for a TON of money. I just keep looking for those BIG deals and keep low balling. Unfortunitley the deals are mostly found in the smaller properties (1-4 units). There’s more smaller properties, so naturally there are more deals. So smaller properties with less units are what get most of my attention.