Getting into real estate investing

[FireAnt]

My husband and I are interested in real estate investing. We've been doing research and exploring Bigger Pockets. I am not risk adverse, but I am debt adverse. Especially, since we've worked so hard at eliminating debt and in MMM words, "your debt is an emergency". My student loan should be non-existent within a month, and with the exception of a tiny car loan (with .99% interest) and our mortgage of our primary residence, we have no debt. We've maxed out our 401k (him), 457 (me), HSA and IRA's. We have extra income that has been going to a taxable brokerage account. 

Although interested, I get anxious thinking about the possibility of having debt with taking out a loan and the potential pitfalls of real estate. All of this to say, how do you mitigate creating more debt for the purpose of investments with the MMM mindset? Accumulating enough cash would take a long time since we're maxing out our retirement plans. 

[YttriumNitrate]

Mr. MoneyMustache isn't Dave Ramsey. Debt isn't a four letter word 'round these parts.* Here's one of MMM's posts:

Here is a real-world example with some numbers showing the fundamental reason that these things make you money:
– In my town, I can buy a 3-bedroom house in a fairly good neighborhood for about $200,000. I would put $40,000 down on it, and because of of today’s insanely low interest rates, my monthly costs for the $160,000 loan including insurance, property taxes, and a few bucks for maintenance would be about $950/month.

https://www.mrmoneymustache.com/2011/05/23/get-rich-with-owning-rental-houses/

**Figuratively that is.

[FireAnt]

Mr. MoneyMustache isn't Dave Ramsey. Debt isn't a four letter word 'round these parts.* Here's one of MMM's posts:

Here is a real-world example with some numbers showing the fundamental reason that these things make you money:
– In my town, I can buy a 3-bedroom house in a fairly good neighborhood for about $200,000. I would put $40,000 down on it, and because of of today’s insanely low interest rates, my monthly costs for the $160,000 loan including insurance, property taxes, and a few bucks for maintenance would be about $950/month.

https://www.mrmoneymustache.com/2011/05/23/get-rich-with-owning-rental-houses/

**Figuratively that is.

Thanks for the link. Good to hear his stance. I was hoping I wouldn't come off too DR. I need to get the emotion part out of this and not sure how. I see the benefits and especially when the math works. But it "feels" uncomfortable/bad to create more debt.

[srad]

I totally get you concerns regarding debt: what if the tenant doesn't pay or they damage the property, or the water heater goes out, or there's a roof leak, or the furnace dies?  You know what, if you are in this long enough all of that will happen. You need to have some money set aside to handle all of that, and it sounds like you do.

I listen to DR, his all debt is bad debt makes sense for someone who makes 50k a year, has 60k in credit card debt, 100k in student loan debt and 50k in car loans.  Where i disagree with him is on the cash for rentals.  Starting out, its very hard to acquire rentals without debt.  As your portfolio grows and you age, you can then look to wind down the debt.  When i do hit the FIRE button, I'd much rather have 10 paid off rentals than 30 financed at 80% LTV.
 

[Papa bear]

One of the things that makes residential real estate so lucrative is you can leverage with subsidized money. These loans wouldn’t exist except for Fannie or Freddie purchasing these loans.

So, take advantage of this.  Your cash on cash returns will be much better with leverage.  In fact, without leverage, it probably makes more sense just to invest in the market.  I for sure wouldn’t be buying another rental unless it was a screaming deal or I knew that I could add some major equity to it at $.50 on the dollar if I had to pay cash for it.

Now, you can get too aggressive and leverage yourself into a house of cards.  I’ve got one of my rentals paid off, but mortgages on the other 3 doubles.  I could pay them all off tomorrow, so it’s pretty risk averse.  But I’d rather have that asset “coverage” in the market or some in cash waiting for the next deal. 


Sent from my iPhone using Tapatalk

[Telecaster]

Thanks for the link. Good to hear his stance. I was hoping I wouldn't come off too DR. I need to get the emotion part out of this and not sure how. I see the benefits and especially when the math works. But it "feels" uncomfortable/bad to create more debt.

Look at it this way:  In the MMM example, you put $40K down, got a loan for $160K, and now you own a $200K house.   Your net worth stayed exactly the same. 

[FireAnt]

One of the things that makes residential real estate so lucrative is you can leverage with subsidized money. These loans wouldn’t exist except for Fannie or Freddie purchasing these loans.

So, take advantage of this.  Your cash on cash returns will be much better with leverage.  In fact, without leverage, it probably makes more sense just to invest in the market.  I for sure wouldn’t be buying another rental unless it was a screaming deal or I knew that I could add some major equity to it at $.50 on the dollar if I had to pay cash for it.

Now, you can get too aggressive and leverage yourself into a house of cards.  I’ve got one of my rentals paid off, but mortgages on the other 3 doubles.  I could pay them all off tomorrow, so it’s pretty risk averse.  But I’d rather have that asset “coverage” in the market or some in cash waiting for the next deal. 


Sent from my iPhone using Tapatalk

Thanks for your input. What subsidized money are you referring to?

[Papa bear]

One of the things that makes residential real estate so lucrative is you can leverage with subsidized money. These loans wouldn’t exist except for Fannie or Freddie purchasing these loans.

So, take advantage of this.  Your cash on cash returns will be much better with leverage.  In fact, without leverage, it probably makes more sense just to invest in the market.  I for sure wouldn’t be buying another rental unless it was a screaming deal or I knew that I could add some major equity to it at $.50 on the dollar if I had to pay cash for it.

Now, you can get too aggressive and leverage yourself into a house of cards.  I’ve got one of my rentals paid off, but mortgages on the other 3 doubles.  I could pay them all off tomorrow, so it’s pretty risk averse.  But I’d rather have that asset “coverage” in the market or some in cash waiting for the next deal. 


Sent from my iPhone using Tapatalk

Thanks for your input. What subsidized money are you referring to?

The government subsidizes mortgages through the purchases of those loans through Fannie Mae and Freddie Mac.  Basically, when you think of a mortgage, that loan wouldn’t exist except for the government agency buying it.  If you had to go off and get the loan on the market, it would be closer to a real estate commercial loan. Typically these are 5 year balloon payment loans but the payment amortization is based on 20, 25, or 30 years. After your 5 year balloon payment is up, either pay off the balance or refinance into a new loan.

Basically, you could never get a fixed rate loan for more than 5 years if not for the subsidies.  Take advantage of the extremely cheap money that you can pay off over 30 years.  You don’t get that kind of financing anywhere else.


Sent from my iPhone using Tapatalk

[Spitfire]

IMO leverage is one of the biggest reasons to do rental real estate. If you want to invest without debt, an index fund is much easier.

[FireAnt]

Okay, so a follow up question to this is what is an appropriate way to fund the investment for the best leverage? Certain % down? Conventional loan? HELOC? We also have a brokerage account in VTSAX (although with the current market the past couple of days, not the best time to sell it).

[Dicey]

Okay, so a follow up question to this is what is an appropriate way to fund the investment for the best leverage? Certain % down? Conventional loan? HELOC? We also have a brokerage account in VTSAX (although with the current market the past couple of days, not the best time to sell it).

Lenders typically require 25% down, and mortgage rates are typically 50 basis points higher, or half a percent, than owner occupied homes. I would be reluctant to use a HELOC.

I'm a LL, with three single family homes. Our primary home is paid off, because we sold two highly appreciated properties we had owned for years to buy this one. Each of our rentals has a mortgage, purchased with 25% down. We're not prepaying a penny on those mortgages.

I had a burning desire to own real estate, because after experiencing cancer in my very early twenties, home ownership equalled security to me. DH has major DIY chops and can fix anything. We renovate houses for fun. If you like expensive real estate porn, you can poke around in my journal for a link to our last project.

We are FI, and I am FIRE. I am certain that we would have come out ahead if we had just put our money in VTSAX or similar and let it grow. My advice to you and to my Past Self would be to do exactly that.

[Papa bear]

Okay, so a follow up question to this is what is an appropriate way to fund the investment for the best leverage? Certain % down? Conventional loan? HELOC? We also have a brokerage account in VTSAX (although with the current market the past couple of days, not the best time to sell it).

Conventional loan. 20% down if you can get away with it.  25% is typically the minimum for 2+ units.  You can only get conventional loans on up to 10 properties, but some banks will stop you at 4. So you may have to shop around.

I’m way further ahead with real estate than i would have been with just saving and putting money in index funds.  But I “house hacked” a few places to jump start the process.  Been doing well since, but I chase cash flow in “trendy” neighborhoods.  Buy low, rehab, rent back out at a premium.


Sent from my iPhone using Tapatalk

[FireAnt]

We are FI, and I am FIRE. I am certain that we would have come out ahead if we had just put our money in VTSAX or similar and let it grow. My advice to you and to my Past Self would be to do exactly that.

What leads you to believe you would have come out ahead? My husband feels that real estate would bump up our date sooner. Right now we're looking at 8-9 years until we are FI and can RE.

[Dicey]

We are FI, and I am FIRE. I am certain that we would have come out ahead if we had just put our money in VTSAX or similar and let it grow. My advice to you and to my Past Self would be to do exactly that.

What leads you to believe you would have come out ahead? My husband feels that real estate would bump up our date sooner. Right now we're looking at 8-9 years until we are FI and can RE.

Because owning RE always comes with hidden, unexpected and unpredictable costs. Stocks never call you to say the toilet has broken or that their roof is leaking. Your time is worth money and real estate takes time and effort that equities do not.

And by all means, you don't have to take my word for it. It's your life, you get to do it any way you want. Frankly, I like owning real estate. I just don't think rental properties are an easier path to wealth than equities and I say that based on years of experience.

[FireAnt]

We are FI, and I am FIRE. I am certain that we would have come out ahead if we had just put our money in VTSAX or similar and let it grow. My advice to you and to my Past Self would be to do exactly that.

What leads you to believe you would have come out ahead? My husband feels that real estate would bump up our date sooner. Right now we're looking at 8-9 years until we are FI and can RE.

Because owning RE always comes with hidden, unexpected and unpredictable costs. Stocks never call you to say the toilet has broken or that their roof is leaking. Your time is worth money and real estate takes time and effort that equities do not.

And by all means, you don't have to take my word for it. It's your life, you get to do it any way you want. Frankly, I like owning real estate. I just don't think rental properties are an easier path to wealth than equities and I say that based on years of experience.

Thanks- I like hearing everyone's input/experience.

[srad]

[/quote]
Because owning RE always comes with hidden, unexpected and unpredictable costs. Stocks never call you to say the toilet has broken or that their roof is leaking. Your time is worth money and real estate takes time and effort that equities do not.
[/quote]

^^

Yep, even if you are beating the market by a couple of percentages, what is your free time worth?  Because that is what you are trading, your nights and weekends for an extra percent or two (granted sometimes a whole lot more).  I don't know about you, but my free time is very expensive...

I'm like Dicey though, i really enjoy working on homes.  So owning rentals makes sense for me. 

[FireAnt]

Because owning RE always comes with hidden, unexpected and unpredictable costs. Stocks never call you to say the toilet has broken or that their roof is leaking. Your time is worth money and real estate takes time and effort that equities do not.
[/quote]

^^

Yep, even if you are beating the market by a couple of percentages, what is your free time worth?  Because that is what you are trading, your nights and weekends for an extra percent or two (granted sometimes a whole lot more).  I don't know about you, but my free time is very expensive...

I'm like Dicey though, i really enjoy working on homes.  So owning rentals makes sense for me.
[/quote]

Well, we'd hire a property manager :) I've done on-call in my employment history and it's not cool.

[Dicey]

Because owning RE always comes with hidden, unexpected and unpredictable costs. Stocks never call you to say the toilet has broken or that their roof is leaking. Your time is worth money and real estate takes time and effort that equities do not.

^^

Yep, even if you are beating the market by a couple of percentages, what is your free time worth?  Because that is what you are trading, your nights and weekends for an extra percent or two (granted sometimes a whole lot more).  I don't know about you, but my free time is very expensive...

I'm like Dicey though, i really enjoy working on homes.  So owning rentals makes sense for me.
[/quote]

Well, we'd hire a property manager :) I've done on-call in my employment history and it's not cool.
[/quote]

And that adds to your costs. Every person who uses a property manager can tell you horror stories of PM's who did crap jobs. Absolutely not stress free.

[FireAnt]

Okay, so a follow up question to this is what is an appropriate way to fund the investment for the best leverage? Certain % down? Conventional loan? HELOC? We also have a brokerage account in VTSAX (although with the current market the past couple of days, not the best time to sell it).

Conventional loan. 20% down if you can get away with it.  25% is typically the minimum for 2+ units.  You can only get conventional loans on up to 10 properties, but some banks will stop you at 4. So you may have to shop around.

I’m way further ahead with real estate than i would have been with just saving and putting money in index funds.  But I “house hacked” a few places to jump start the process.  Been doing well since, but I chase cash flow in “trendy” neighborhoods.  Buy low, rehab, rent back out at a premium.


Sent from my iPhone using Tapatalk

I was at the bank for an unrelated reason, but ended up talking to the branch manager. I could get a HELOC up to $83k with a variable 4.84% (PRIME plus .09%) and $60 annual fee or I could refinance my primary house at potentially a half percent lower and cash out around $73000 and only $500 closing costs (!). Wondering if either are a good idea to use it to buy an investment property in cash to have only 1 loan to pay down rather than 2 with the conventional route. In another thread someone talked about using a HELOC but then refinancing after, but I'm not sure I quite understand that yet.

[Dicey]

I'm not a fan of HELOCS for this purpose.
1. Variable rates
2. You are potentially jeopardizing your primary home, which is unnecessary, IMO.

[chicklets123]

Question about HELOCS, do you jeopardize your primary home if you can’t make the payments on the others? If that were to happen can you just sell the rentals?


Sent from my iPhone using Tapatalk

[Telecaster]

Question about HELOCS, do you jeopardize your primary home if you can’t make the payments on the others? If that were to happen can you just sell the rentals?


Sent from my iPhone using Tapatalk

It is a big, expensive pain in the ass to sell real estate.   Especially commercial real estate.  You don't want to be in a position where you *have* to sell it.

[Dicey]

Question about HELOCS, do you jeopardize your primary home if you can’t make the payments on the others? If that were to happen can you just sell the rentals?


Sent from my iPhone using Tapatalk

It is a big, expensive pain in the ass to sell real estate.   Especially commercial real estate.  You don't want to be in a position where you *have* to sell it.

^^Bingo.^^

[FireAnt]

I have maybe 7 options I found for our situation to help fund our first real estate investment. I will probably make another post and poll people. Pros and cons for each of them. We have the funds, it's just not liquid funds since we maxed out all of our retirement vehicles, and put the surplus in a taxable brokerage.