How to fund a $575k real estate investment? Player 1 is FIRE, P2 still working.

[KiloRomeo]

Recently laid off which forced my hand into joining the FIRE community. Now I am a SAHD while my wife still works (~$130k a year salary).

I found a $575k 10 unit rental property that seems to make a lot of sense for a lot of reasons and I am trying to figure out how to pay for this thing. Let's assume it's cash only because I don't think I can compete with these investors without being cash only. Open to suggestions on how to REFI after the purchase though.

My options would be:

Sell $575k from my brokerage account -  would end up with a $310k LTCG *15%
401k loan? Not sure if thats still possible since I was laid off (401k still with previous employer) but I guess we could look into my spouse's.
Liquidate IRA contributions - only gets me to around $150k
Liquidate HSA contributions - That only has around $15k of tax free space
I have about 600k in a 401k as well, 200k is roth and I would have to look into the make up of the rest.

Cash flow wise I am not concerned because we aren't currently touching investments and still saving $40k or so a year

What should I be looking into? I feel like I figured out the saving part of FIRE but now that im spending it's tough to wrap my head around.

[uniwelder]

Could you take a heloc on your house?  Assuming you own a home. That might get most of the funds needed. Then you can sell from your brokerage account to pay it off over a few years to avoid the 15% on long term capital gains.

[swirleyDude]

Sell $575k from my brokerage account -  would end up with a $310k LTCG *15%

How much do you have in your brokerage account? You can take out a margin loan. I try to keep my margin loan at less than 15% of my portfolio, so even in a 50% downturn, I don't get margin called.

[SilentC]

I would liquidate stocks to do it and pay the cap gains.  S&P is a bit expensive right now and if you are FI you don’t need to mess around with margin loans or helocs, that’s a good way to find yourself working again.

[uniwelder]

I would liquidate stocks to do it and pay the cap gains.  S&P is a bit expensive right now and if you are FI you don’t need to mess around with margin loans or helocs, that’s a good way to find yourself working again.

I think managing a 10 unit rental is what would cause OP to be working again.  Why would the heloc or margin loan do it?  Based on the numbers given, it doesn't sound like OP has sufficient funds for the margin loan though.

Compared to the certainty of paying 15%, versus what could be 8% or less, I don't see the harm in exploring options.  Until OP gives answers about their situation, you don't really know what's best.

[aloevera1]

Do you have a grasp on the financials of the property? Does it need work? What the income is like? What the vacancy is like? Is it currently 100% occupied? I think these are all relevant questions to ponder before you explore some heloc or margin options. You don't want to get in the arrangement and then realize you need 200k more because of some huge maintenance or vacancy issues.

[KiloRomeo]

I would liquidate stocks to do it and pay the cap gains.  S&P is a bit expensive right now and if you are FI you don’t need to mess around with margin loans or helocs, that’s a good way to find yourself working again.

I think managing a 10 unit rental is what would cause OP to be working again.  Why would the heloc or margin loan do it?  Based on the numbers given, it doesn't sound like OP has sufficient funds for the margin loan though.

Compared to the certainty of paying 15%, versus what could be 8% or less, I don't see the harm in exploring options.  Until OP gives answers about their situation, you don't really know what's best.

The 15% is one time where the 8% margin loan would be every year though right?

Could you take a heloc on your house?  Assuming you own a home. That might get most of the funds needed. Then you can sell from your brokerage account to pay it off over a few years to avoid the 15% on long term capital gains.

I could, but our loan is only like $130k and the house is worth like $400k or so. But that's a good idea for a partial funding.

Sell $575k from my brokerage account -  would end up with a $310k LTCG *15%

How much do you have in your brokerage account? You can take out a margin loan. I try to keep my margin loan at less than 15% of my portfolio, so even in a 50% downturn, I don't get margin called.

I have around $800k and my wife maybe another $600k. What kind of rate would I be paying on the margin loan? I dont supposed that would be deductible on the rental property financials right?

I would liquidate stocks to do it and pay the cap gains.  S&P is a bit expensive right now and if you are FI you don’t need to mess around with margin loans or helocs, that’s a good way to find yourself working again.

Thank you.

Do you have a grasp on the financials of the property? Does it need work? What the income is like? What the vacancy is like? Is it currently 100% occupied? I think these are all relevant questions to ponder before you explore some heloc or margin options. You don't want to get in the arrangement and then realize you need 200k more because of some huge maintenance or vacancy issues.

It's kinda weird, right now only the owner is living in it and it's not a rental property. The numbers originally mentioned include $60k of expenses to fix the place up a little. Otherwise the numbers seem to make a lot of sense for an investment. The idea is to diversify from the stock market a little.

[aloevera1]

Do you have a grasp on the financials of the property? Does it need work? What the income is like? What the vacancy is like? Is it currently 100% occupied? I think these are all relevant questions to ponder before you explore some heloc or margin options. You don't want to get in the arrangement and then realize you need 200k more because of some huge maintenance or vacancy issues.

It's kinda weird, right now only the owner is living in it and it's not a rental property. The numbers originally mentioned include $60k of expenses to fix the place up a little. Otherwise the numbers seem to make a lot of sense for an investment. The idea is to diversify from the stock market a little.

Even if the idea is diversification, the numbers should make sense return wise.

If 9 out of 10 units are currently unoccupied it raises some concerns for me. It might be an amazing purchase but it could also be very risky because you may not be able to correctly estimate the rentability of those units. Are they all the same or they are different? Are they studios, 1, 2, 3 bedrooms? I think this is also all relevant as some type of units are more desirable than others. I know you asked about financing but I feel like there are broader questions here.

Also, a bank will likely ask you the same questions if you go re-fi way at some point. With 10 units a bank will likely force you to take a commercial loan and your insurance will also be commercial. These are different (and likely higher) than standalone home products. This is also something that will impact your return.

[uniwelder]

I would liquidate stocks to do it and pay the cap gains.  S&P is a bit expensive right now and if you are FI you don’t need to mess around with margin loans or helocs, that’s a good way to find yourself working again.

I think managing a 10 unit rental is what would cause OP to be working again.  Why would the heloc or margin loan do it?  Based on the numbers given, it doesn't sound like OP has sufficient funds for the margin loan though.

Compared to the certainty of paying 15%, versus what could be 8% or less, I don't see the harm in exploring options.  Until OP gives answers about their situation, you don't really know what's best.

The 15% is one time where the 8% margin loan would be every year though right?

I'm not really sure how much margin loan costs.  I was thinking in terms of heloc, but its possible margin might be in the same ballpark, possibly lower.

15% one time vs 8% annually isn't comparable in the way you're thinking.  If you pay 15% on a lump sum, you no longer have that money invested which might make 8+% annually for you long term. 

[SilentC]

I would liquidate stocks to do it and pay the cap gains.  S&P is a bit expensive right now and if you are FI you don’t need to mess around with margin loans or helocs, that’s a good way to find yourself working again.

I think managing a 10 unit rental is what would cause OP to be working again.  Why would the heloc or margin loan do it?  Based on the numbers given, it doesn't sound like OP has sufficient funds for the margin loan though.

Compared to the certainty of paying 15%, versus what could be 8% or less, I don't see the harm in exploring options.  Until OP gives answers about their situation, you don't really know what's best.

My point is, if you have made it to FIRE why mess it up with margin leverage or a HELOC?  Margin loans are great until they get called and HELOCs at double digit interest rates are fine until rates don’t fall and they can’t be refinanced. 

[sonofsven]

Can you sell your house and buy it?
Personally, if I was going to take something like this on I would only do it with leveraged money. Liquidating assets seems shortsighted, given the information you have provided so far, at least. If you were a seasoned real estate investor who found a can't miss property, then maybe cashing in your 401k makes sense?

Are you experienced in real estate investing and landlording? The fact that it has a long time owner in one unit and nine units empty tells me that it will need some updating.
Maybe a lot of updating. Multiplied by ten!

Where will you get that money? And the tax bill for liquidating your 401k would wipe out your yearly savings.
The way to do it cost efficiently, IMO, if you are going to actively manage and fix these units yourself (can you do repair work?) would be to renovate one or two units at a time and rent them out to improve your cash flow, and then repeat.

But you could easily spend $10k per unit. Or way more if the building needs major work. Way, way more!

So I would get a handle on what the repair costs will be, first, by getting actual quotes, if possible, or at least walk through with some contractors to get a sense of what needs to be done. And then break that down to: what you can do, and what you will hire out.

A project like this could easily get out of hand, financially, if you can't make your monthly payments. It's one thing to think "oh, it's worth this much, and the monthly rent will be this much", but you have to be able to make your monthly payments throughout the project, for years, likely.

As to how to re-fi, go talk to brokers now and ask them what they would need to see from you to refinance.

So as not to discourage you too much, my BIL (partner in law?) is doing just this, but an 8 Plex, and loving it. Retired early schoolteacher, wife still working. They sold their house and moved into one unit and are slowly renovating the other units.

Eventually they will probably sell it, but I haven't talked to him about his long term plans. He needed something to keep him busy, lol. He's doing the majority of the work and hiring professionals as needed.

[johnnyqnola]

Have you asked the seller (or seller's agent) if they're interested in financing some or all of the deal? The terms can be whatever the parties agree to, and the seller will increase his profit from interest received and potentially lessen his cap gains taxes due. Assuming your wife will be party to the purchase, her salary should demonstrate ability to repay the loan. Of course, this only works if the seller has enough equity in the property, and doesn't need a windfall upon sale.

It could be set up as a 5yr balloon note, at which time hopefully you have stabilized it with a solid rent history and can pursue a standard commercial refi loan.

[KiloRomeo]

My point is, if you have made it to FIRE why mess it up with margin leverage or a HELOC?  Margin loans are great until they get called and HELOCs at double digit interest rates are fine until rates don’t fall and they can’t be refinanced.

I've been thinking about this since you've posted it and I think you're right. I'm a sucker for deals and according to my spreadsheets this is a great deal. On the other hand I'm loving this simplified unemployed life and catching up on projects so why put that in jeopardy if it's not needed.  The biggest reason why I think I am going to pass is because eventually we do want to move to a forever home and turn our current home into a rental and if I buy an investment property it's going to be that much harder to get the cash for the forever home.

Can you sell your house and buy it?
Personally, if I was going to take something like this on I would only do it with leveraged money. Liquidating assets seems shortsighted, given the information you have provided so far, at least. If you were a seasoned real estate investor who found a can't miss property, then maybe cashing in your 401k makes sense?

Are you experienced in real estate investing and landlording? The fact that it has a long time owner in one unit and nine units empty tells me that it will need some updating.
Maybe a lot of updating. Multiplied by ten!

Where will you get that money? And the tax bill for liquidating your 401k would wipe out your yearly savings.
The way to do it cost efficiently, IMO, if you are going to actively manage and fix these units yourself (can you do repair work?) would be to renovate one or two units at a time and rent them out to improve your cash flow, and then repeat.

But you could easily spend $10k per unit. Or way more if the building needs major work. Way, way more!

So I would get a handle on what the repair costs will be, first, by getting actual quotes, if possible, or at least walk through with some contractors to get a sense of what needs to be done. And then break that down to: what you can do, and what you will hire out.

A project like this could easily get out of hand, financially, if you can't make your monthly payments. It's one thing to think "oh, it's worth this much, and the monthly rent will be this much", but you have to be able to make your monthly payments throughout the project, for years, likely.

As to how to re-fi, go talk to brokers now and ask them what they would need to see from you to refinance.

So as not to discourage you too much, my BIL (partner in law?) is doing just this, but an 8 Plex, and loving it. Retired early schoolteacher, wife still working. They sold their house and moved into one unit and are slowly renovating the other units.

Eventually they will probably sell it, but I haven't talked to him about his long term plans. He needed something to keep him busy, lol. He's doing the majority of the work and hiring professionals as needed.

Yeah it sounds great and I'm pretty good with renovations, albeit a little slow. I think I have a good idea on the numbers but had concerns for financing with current rates. The MMM inside of me can't wrap his head around spending 8-10%+ for a loan.

Have you asked the seller (or seller's agent) if they're interested in financing some or all of the deal? The terms can be whatever the parties agree to, and the seller will increase his profit from interest received and potentially lessen his cap gains taxes due. Assuming your wife will be party to the purchase, her salary should demonstrate ability to repay the loan. Of course, this only works if the seller has enough equity in the property, and doesn't need a windfall upon sale.

It could be set up as a 5yr balloon note, at which time hopefully you have stabilized it with a solid rent history and can pursue a standard commercial refi loan.

Yeah that's a good idea, might need to give that a try.

[clarkfan1979]

Recently laid off which forced my hand into joining the FIRE community. Now I am a SAHD while my wife still works (~$130k a year salary).

I found a $575k 10 unit rental property that seems to make a lot of sense for a lot of reasons and I am trying to figure out how to pay for this thing. Let's assume it's cash only because I don't think I can compete with these investors without being cash only. Open to suggestions on how to REFI after the purchase though.

My options would be:

Sell $575k from my brokerage account -  would end up with a $310k LTCG *15%
401k loan? Not sure if thats still possible since I was laid off (401k still with previous employer) but I guess we could look into my spouse's.
Liquidate IRA contributions - only gets me to around $150k
Liquidate HSA contributions - That only has around $15k of tax free space
I have about 600k in a 401k as well, 200k is roth and I would have to look into the make up of the rest.

Cash flow wise I am not concerned because we aren't currently touching investments and still saving $40k or so a year

What should I be looking into? I feel like I figured out the saving part of FIRE but now that im spending it's tough to wrap my head around.

I don't understand how you get from selling 575K from a brokerage account to netting 310K with 15% LTCG?

Don't forget that you only pay tax on the gain, not the entire amount. What is your basis?

Even if you don't buy the apartment, you might have some space to harvest some LTCG at 0%.

For a married couple, the first $94,050 of capital gains is taxed at 0%. Then you have another $29,200 for the standard deduction. This is $123,250 of tax at 0%. However, income counts against it. If your wife is making 130K and after health insurance and retirement contributions, her taxable income is (110K?), you could harvest $13,250 worth of LTCG at 0% every year.

 

[tj]

Recently laid off which forced my hand into joining the FIRE community. Now I am a SAHD while my wife still works (~$130k a year salary).

I found a $575k 10 unit rental property that seems to make a lot of sense for a lot of reasons and I am trying to figure out how to pay for this thing. Let's assume it's cash only because I don't think I can compete with these investors without being cash only. Open to suggestions on how to REFI after the purchase though.

My options would be:

Sell $575k from my brokerage account -  would end up with a $310k LTCG *15%
401k loan? Not sure if thats still possible since I was laid off (401k still with previous employer) but I guess we could look into my spouse's.
Liquidate IRA contributions - only gets me to around $150k
Liquidate HSA contributions - That only has around $15k of tax free space
I have about 600k in a 401k as well, 200k is roth and I would have to look into the make up of the rest.

Cash flow wise I am not concerned because we aren't currently touching investments and still saving $40k or so a year

What should I be looking into? I feel like I figured out the saving part of FIRE but now that im spending it's tough to wrap my head around.

I don't understand how you get from selling 575K from a brokerage account to netting 310K with 15% LTCG?

Don't forget that you only pay tax on the gain, not the entire amount. What is your basis?

Even if you don't buy the apartment, you might have some space to harvest some LTCG at 0%.

For a married couple, the first $94,050 of capital gains is taxed at 0%. Then you have another $29,200 for the standard deduction. This is $123,250 of tax at 0%. However, income counts against it. If your wife is making 130K and after health insurance and retirement contributions, her taxable income is (110K?), you could harvest $13,250 worth of LTCG at 0% every year.

He was just laid off, so he worked for several months this year. They likely won't have any 0% LTCG this year.

[Archipelago]

I read the thread and I'm pretty much with @aloevera1 on this one. I think the question has less to do with how to finance the deal vs. what the plans are to improve and operate the property.

OP, have you done a pro forma on the property and would you post your numbers? If you can get a good grasp of all the numbers, you can to some extent reverse engineer your way into setting up the financing, eventual refinancing, etc.

My point is, talking about financing is putting the cart before the horse a bit. The deal comes first, then if the deal makes sense, financing should fall into place. This is especially true with commercial type properties because that's how the lender is going to look at things.

I'm a sucker for deals and according to my spreadsheets this is a great deal.

I'd like to take a look at your analysis. Feel free to comment again or add it to your original post. There may be a scenario in which you can get both the investment property AND the forever home. If it's a good deal, it's certainly possible.

I think I have a good idea on the numbers but had concerns for financing with current rates. The MMM inside of me can't wrap his head around spending 8-10%+ for a loan.

Your analysis should be taking into account those interest rates. It doesn't matter whether you can wrap your head around them. The right deal can absolutely be compatible with high interest rates. There are people out there using hard money loans and paying 12%+ interest rates plus points, and they still manage to make deals work.

In one sentence you're saying it's a great deal. Then in the next sentence you're concerned about interest rates. Which is it?

[Rockies]

What part of the country/neighbourhood do you find 10 units for 575K? I hear people online talking about real estate rentals and have yet to ever seen anything that pencils out rationally in this market. Maybe in the worst neighbourhoods of America's cheapest cities? Is this in a dangerous area?