Author Topic: What would you do with $300K cash to use for housing/real estate investing?  (Read 4221 times)

riotnerd

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Hi everyone.  Right now my wife and I have a home in San Diego with a mortgage.  We're currently renting it out while we are traveling for a year, but I envision selling it eventually for 2 reasons. 

1) If we return back and live in the home, there'll be a significant monthly expense in mortgage interest/property tax that will make it that much harder to reach financial independence.  I am itching to quit my job ASAP and this would stand in the way of that. 
2) If we keep it as a rental, it fails the 1% rule by a long shot....since homes in the area are so expensive. 

Assuming we sell the house in a year or so, we should be able to extract about $300K of equity.  We would need to use some of that money to buy another home, most likely in a much cheaper part of the country....and I'd like to use the rest to invest in other real estate ventures...maybe another single family rental house or two, maybe a duplex, maybe a "flip", etc.  I'm still trying to educate myself on all of the options...and just brainstorm in general.  Like I said, we won't actually be doing anything for awhile.

That said, what if somebody took away your house and gave you $300K, and you were not bound to any one area.  What would you do with it if the goal was to provide housing for yourself and make money to pay the rest of your expenses?  Where would you live? 

Thanks!

warbirds

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I would buy with cash two newer rental homes outside of a major military installation like Ft. Bragg NC.

The housing is cheap (you could buy 2 and sit on $10K to manage them), you would always have renters with steady income, and they would be afraid to be late on rent because you would report them to their chain of command.

arebelspy

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It's quite a loaded question (like "What should my AA be?"), which is why I avoided it yesterday and I'd guess why there's not many replies yet.

(One so far, and warbird seems to have missed the "owner occupied" part.)

So first you'll have to determine the area you want to live in, and what price your owner occupied place will cost based on your size, location, and amenity requiremeents, so you can determine how much you'll actually have to invest.  If the owner occupied place costs $400k, you're looking at getting a mortgage.  If it costs $50k, you'll have 250k left.  So that's a crucial piece of info.

Next you'll want to decide if you're okay living in a smaller place near your tenants.  A small multiplex (say, a fourplex) where one lives in one unit and rents out the others is a common way for people to get started in real estate.

The key thing though, after determining the amount you have to invest, is to determine the type of investment that interests you.  That will vary based on your knowledge, skills, goals, amount of return you're shooting for, amount of time you'd like to put into it (or not - i.e. how passive you want it to be), risk tolerance, willingness to invest long distance or not, thoughts on appreciation vs. cash flow, etc. etc.

Do you want to be a landlord?  Are you handy?  Do you like fixing up places (flipping)?  How much money are you shooting to have that equity make you?  Are you interested in carrying paper (notes)?

There's a lot of options, but it'll start with identifying what resources you have, as well as all of the above questions (and more) about you as an investor/person.

Hope that helps get you thinking!  :)
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riotnerd

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It's quite a loaded question (like "What should my AA be?"), which is why I avoided it yesterday and I'd guess why there's not many replies yet.

Thanks for the reply arebelspy.  I understand it's a loaded question...which is why I tried to phrase it as "what would YOU do?", not "what should I do?".  If you had the flexibility to start over anywhere, where would you do it...and what would be your first few moves...based on your own living requirement, comfort levels, etc.  Think of it more of a poll.  In any case, you provided a very useful list of questions to think about. 

Thanks again!

arebelspy

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I understand it's a loaded question...which is why I tried to phrase it as "what would YOU do?", not "what should I do?".  If you had the flexibility to start over anywhere, where would you do it...and what would be your first few moves...based on your own living requirement, comfort levels, etc.  Think of it more of a poll.  In any case, you provided a very useful list of questions to think about. 

Gotcha.  Again it will depend on goals and situation.

(For example: I'm planning to FIRE in 2 years.  If I were planning to FIRE in 10 years, my answer would change.)  So what I would do is not necessarily what advice I would give.

If the question were "What advice would you give to someone X years old, in Y situation, earning Z dollars, with M free time and N skills..." I'd probably have some advice for them.  But they'd first need to answer those questions, thus going back to my earlier post.  :)

But since that's not as satisfying, here's a simple answer as to what I would do (or rather would be on my options to consider):  Performing firsts, nonperforming seconds.

(But again, that's specific to me - giving advice to someone younger I'd probably be advising them to get rental properties with low low mortgage rates locked in for the long term.)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

SDREMNGR

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As a fellow San Diegan who has traveled a fair bit (15 countries, 28 states so far) I can't get myself to leave SD.  It's too comfy here.  It really has the nicest weather in the US and a good mix of culture and outdoors.  I thought it was a country bumpkin town when I first got here in 2001 but it's really grown on me.   Of course, housing is more expensive here but cost of living isn't too bad compared to other major MSAs.

I have wondered about what I would do if I were to FIRE, but it's not an easy answer because I don't think I hate my job and life as much as many people on here seem to hate theirs.  So the real question is what would you want to do with your newly found free time?  Start a new business? New job? Sit around and watch TV all day?

The answer to the question, "what do you want to do with your life" will better help you than just "where can I get the best returns on my real estate investments."  If the answer to the RE question were that you'd get best returns investing in a 4 plex in Detroit in the drug slums, renting to Section 8 tenants and living in one of them, would you do it?

Also, not sure how much money other than the $300k you have stashed away, but $300k probably isn't enough to retire on, just enough to start your next phase of life.

If you are looking for a low cost way to live and contemplate your next phase of life, I have given thought to this option.  I own a RV and haven't had the chance to use it as much as I'd like to.  But if I were to sell my business and GTFO,  I'd park it in a BLM managed desert land in CA, pay 180 bucks for a year pass and just spend a year, or however long, just reading and planning my next adventures in life and business.  Cost of living would be really cheap (I think I can live on less than $5000 for the year). I I have a lot of ideas on new business ventures and I'd want to get started on those after a few years off.

It's fun to think about FIRE, but life doesn't end when you do.  There's lots more to do and lots of time to fill between retirement and death.

jba302

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If the question is solely "here's 300k go buy something", I'd probably buy a small hobby farm in North Carolina / Minnesota / Idaho / (maybe middle northern california if it wasn't perpetual drought conditions) with a small house or blank land to build on. Although that is an extremely active "investment" so probably in the polar opposite direction of what you are thinking.

riotnerd

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@SDREMNGR - I know San Diego in general will be very hard to beat....but if it helps me ditch the day job several years earlier...I think there must be other places out there we could be happy. 

As I said, we are actually doing some traveling around the US now....partly to see all these other areas we've never experienced and see if any would be suitable to settle down in. 

To answer your question about the rest of our net-worth outside of the current house....we have almost another $300K in the stock market...so if we could "liquify" some or all of the home equity...we're not that far away. 

@jba302 - Now that's an idea I hadn't thought of.  Not sure it's something I'd end up doing as I currently know nothing about farming....but it's an outside-the-box idea.  Thanks. 

Workinghard

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I would take the money, invest it, and rent by our youngest son who will probably be getting married in a year or two.  Can anyone say grandkids? Our other grandchildren are in high school. We missed out on their lives and don't want that to happen with our younger son.

My napkin math figured the sale of our home, when my husband retires, would pay for rent. My brother's Excel math crunched the numbers. If we only got 200k for our home, a return of 5%, a rental at 1k (which I can't imagine starting with)and escalation of 5% in cost, the 200k would last 16 years. If we got 300k, it would probably last the rest of our expected lifespan. I just don't know how to add additional rows of calculations in Excel. Living expenses would come from 401(k)s, Roth, and after-tax investments and SS since we're not retiring early.

DoubleDown

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Here's what *I* would do, not sure how it will align with your own goals/temperament/etc.:

I'd move to a vibrant, mid-sized, and affordable city that has all the amenities I want. A city with at least one good sized university, decent weather, good schools, low crime, a large trauma hospital, some culture, not too conservative/backwards, and that is not dependent on one industry. A military base as suggested by warbirds would be a plus, but I would not want it as the primary/sole "industry" in town. This city would have SFR's with a median price of ~$200k.

I'd buy one of those ~$200k houses for my family to live in, putting 20% ($40k) down and financing the rest since rates are still so historically low.

I would use another $160k as down payment(s) on a couple of duplexes or 4-plexes in good local neighborhoods, and rent them out. I'd probably want to own about $500k in properties, putting $160k down. If no multi-family residences are available, then I'd invest in a couple of single family residences. All the usual "rules" would apply on getting good cash flowing properties. I would only want to own/manage rental properties if they were getting 12%+ return annually on my $160k, net after all expenses and reserves, etc. If that's not available, then I'm not owing rental properties and would just invest all the money in equities/etc. So, I'd be looking to generate about $20,000 + annually as profits, and hoping for about 2-4% average annual appreciation over the long run (if it's higher than that, great). I'd expect to own these properties for 7 years minimally, likely longer.

I'd invest the remaining $100k in a balanced mutual fund or ETF. That would serve as a safety net, plus I wouldn't be interested in owning/managing too many rental properties or being too heavily leveraged in that regard. Since I'm ER'ed, I'd manage the properties myself, seeking good long-term, stable tenants.

Over the years if I was enjoying owning these rental properties, and the area continued to be vibrant and profitable, I'd consider purchasing another and building my real estate empire a-la Arebelspy, who does not believe in real estate empires despite having one.

Mazzinator

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I would buy with cash two newer rental homes outside of a major military installation like Ft. Bragg NC.

The housing is cheap (you could buy 2 and sit on $10K to manage them), you would always have renters with steady income, and they would be afraid to be late on rent because you would report them to their chain of command.

Fyi, if this is your strategy, please be aware of bah reduction.

http://www.militarytimes.com/article/20140304/NEWS05/303040021/2015-budget-released-How-cuts-affect-pay-BAH-per-diem-Tricare

To answer the question, i'd buy sfr in or near the area where i'm going to fire with 20-25% dp that meet or exceed the 1% rule. For example, 10 sfr at $150k each with $30k dp. I realize this may not work (can you even get 10 mortgages??) if not, then i'd split it. 5 houses with $30k dp, and invest the rest or use the rest for a dp on a house for yourself. Depends on how much of a stache you already have.
« Last Edit: March 26, 2014, 04:51:51 PM by Mazzinator »

arebelspy

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(can you even get 10 mortgages??)

Yes, if you have decent credit and income, 10 is the limit from most traditional lenders (and it is the fannie/freddie guideline).
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

SDREMNGR

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I don't know if you have been to the Portland area but my wife and I really liked it.  Very reasonable home prices,  culture,  outdoors, very good food for really cheap, and the ocean nearby.  If it's the shitty job that you are trying to escape, then I'd say travel until you find a new direction. 

A favorite quote of mine that seems to fit your situation is,

We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.

T.S. Eliot