Testing the waters

General Real Estate Investing
1

Hi,
I am intrigued. I’m thinking maybe this is something I could do to raise enough cash to finance my comfortable retirement. Here’s my situation. I have a very stable middle class income from a trust account, do not need to work and about $60K that I could use to start real estate investing. The problem is that the trust will likely run out when I am around 75 and I plan to live to be 95! I am thinking that I could buy, live in and fix up for 2 years, sell and maybe do that five times until I am 65.

Here are the complications, I think. I have no experience in rehabbing properties, although I have lots of experience buying houses and have excellent credit. Wouldn’t the cost of hiring out the rehabbing negate any profit? Also, I live in a high priced area, Boulder, CO, and want to live here myself. I’d like to buy and sell here but prices are already so high. How could I figure out how much appreciation I might expect in two years?

Any response appreciated. I will keep reading and learning.

Thanks,
Oldbabe

2

When the trust fund dries up and you have no income, how do you plan to support yourself? Having a house with a lot of equity does not pay the bills – you can’t eat equity.

I sense that you are not working because the trust meets your lifestyle needs now. Maybe you are working, or did work until recently, but I sense that you are living off the trust. If you need to extend your support for 20 more years, then reduce your lifestyle now. Figure out how to live on less, and do it. Bank as much as possible for your future needs.

Next, figure out how to generate income. Get a job if you are not working – even a part time job will give you extra money to invest in income producing property. If you are working, then consider changing to a job in the real estate industry, so you can learn firsthand how to make more money in this business. The job will allow you to network – make contacts that can point you to deals.

Buying a house that you will live in does not pay the bills – it costs money to own your own house. Sure you can make a tax free profit when you sell every two years, but you still need a place to live.

Why not buy a fixer, live in it while you fix it up to use as a rental. Rent for a positive cash flow and annual rent increases will just improve your cash flow. Buy another fixer property and repeat the process every year or so. At the end of ten years you have at least five rentals generating a positive cash flow and you are fixing up another place while you are living there.

If housing prices in your area are an impediment to this strategy, then you need to look for deals in less upscale neighborhoods.

3

Dave, thank you so much for your quick reply. I should have been more detailed. I am investing a substantial part of my income from the trust, so I am learning to live on less. I also have other modest investments. And I do have a part-time job, as a teacher. I am a very careful person with money.

The idea of getting a job in real estate is a good one. I will think it over. My original idea was to fix up, sell at a profit, then bank and invest, and continue this process. Perhaps I should become a real estate agent. I have no desire to become a landlord (at least that’s my current point of view). You’re right that I’d need to invest in a different area. Thanks very much again.

I would appreciate any other input as well.

4

I certainly don’t know the Boulder market, but I can’t believe that ALL the houses are in good shape. There has to be some crummy houses in good neighborhoods. I act as my own general contractor, and I also do some of the work myself. But you can still make a profit if you hire a G.C. Since you’re planning on living in the houses, you will also get the benefit of appreciation. I rehab and flip.

So if you’re really interested, go for it. Read everything you can about RE investing. If you’re totally ignorant about construction, take a course at your local community college. Then you’ll be able to talk the talk with contractors, and know if they’re trying to BS you.

5

If you don’t need all the income you get from the trust, why not just reduce your draw? The trust will never become exhausted if you are just withdrawing the trust income, never touching the corpus.

A good financial planner should also be consulted. I have been with the same financial planner for the past 10 years. As I recall, my first consultation with him lasted two hours and was free of charge. I brought in my financial statement, two years tax returns, projected retirement income requirement, and my current year budget.

Your next step should probably be to consult a financial planner. If you can avoid being diverted into variable annuity accounts and get someone to listen to you and what you want to do, you will have someone who can get you quickly focused.

6

DDavis and Dave T, thank you once more for your input.

Dave, your story is quite impressive and inspiring! In answer to your question, the terms of the trust don’t allow me to change the draw. I had no control over the terms as it was set up by my ex-husband in consequence of our divorce. If I invest the payout myself, I also have control over it. I do have a financial planner who advises me on investments and I should take more advantage of him.

Do you still think it’s still a good thing to pay off one’s mortgage early, considering the 30 yr interest rate of around 5.6% and the interest tax credit?

The idea of investing in rental property and hiring a property manager is a good one. Lots to think about!

7

oldbabe,

Just some rrambling thoughts on paying off debt. Each individual situation is different, and each person’s need is different. Not all of the following comments may apply to you specifically.

Personal debt on depreciating or evaporating assets is not good debt. When the debt carries a high interest rate, get rid of it as fast as you can. Examples here are car loans and credit card debt. The car is a depreciating asset, and the things you purchase with credit cards are probably consumed or are short lived (such as groceries, hairdresser visit, vacation, gasoline, etc.). Credit card debt should be the first debt you attack with discretionary cash.

Paying off your home mortgage is dependent upon other factors. Do you already have an emergency fund at least equal to six months of income? If not, fund your emergency fund before paying off your mortgage. Six months reserve is nice, but 12 months is even better.

Do you have any upcoming major expenses – college tuition, child’s wedding, parent’s nursing home, etc.? If so, do you have an account well enough funded to pay these expenses? If not, then fund this major expense account before paying down your mortgage.

Have you invested in your retirement? Do you have a 401K with employer matching? If so, have you contributed the maximum amount that the employer will match? If not, contribute to your 401K before paying down your home mortgage. Same goes for your IRA – contribute the maximum allowed before paying down your home mortgage. Since you are a teacher, are you vested in the retirement plan?

How long will you keep the house? Is this your retirement home? If not, then at some point in the near term you will be selling the house. Paying down the mortgage loan for a house you will likely sell within seven years seems pointless.

Do you have other investment opportunities that will generate income for a return at least as great as your mortgage interest rate? If so, then perhaps investing discretionary cash should be your next priority.

If, after all the above concerns are addressed, you still have discretionary funds available that you can’t invest for a better return, and you will have the house you are in for the next 30 years, THEN pay down your mortgage balance. If you do not itemize deductions on your individual tax return, you might pay down the mortgage balance faster than you would when you can itemize deductions.

If you are nearing retirement, and a mortgage payment will put a crimp in your lifestyle, then aggresively pay down your mortgage balance – especially if the trust is exhausted and you will have insufficient income from other sources to make your mortgage payment. I don’t recommend you pay off your mortgage in a lump sum, but instead, contribute extra principal each month over time.

If you acquire rental property, you can pay down the mortgage loans from excess cash flow. Contribute a little bit extra each month to your highest interest rate mortgage until the loan is paid off. Repeat for the next highest interest rate loan, as often as you need to until you have a large enough cash flow to make you comfortable. Do not take money out of your own pocket to pay off rental property that is generating a positive cash flow. Instead, use the cash flow to pay down your investment debt.

8

Just another point of view…

If you have a good amount of cash available to invest. I would say learn as much as you can about REI and creative financing so you feel comfortable with what fellow REIs in this forum do. Then I would look at being the ‘Money Man’, er… ‘Money Babe’ to other REIs deals.

That and you may also find that purchasing notes at a discount would also be a great way to use all the cash you have to make great yields. Some of the notes you can buy will yield a FAR GREATER return than any ‘typical’ investment vehicle a conventional financial planner will offer. Also when buying at such a good discount you will always have built in equity of the underlying asset of the note. So even if you do end up taking back a property you should be able to flip it back to an investor or eager home buyer at a discount and still be able to carry the note with possible cash back to you.

As someone mentioned earlier you can’t live on equity, but I think in your situation you don’t care about cash in the NOW you care about having cash after 75. By that time you could liquidate all assets and have a great nest egg for the next 20!

Hope that throws a few more ideas your way.

9

In your situation, you should have no problem making millions! Good luck to you, the sky is the limit.