First time REI? What would you do?

[RealtyR]

Hi. I'm new to the forum and have a question I've not really seen covered.

I currently owe my own home with 100% equity. I'm looking to purchase my first investment property.

I could get a HELOC or HE loan on my home, purchase an investment property and have the rent cover the payments with a comfortable buffer for maintenance and repairs. In this scenario I would stay living in my current home. The investment property could be multi family or a single family unit. I'd be worried about the risk of losing my current home though.

I could use an FHA loan to purchase a multi family unit and move into one of the units and keep my current home. However I took the Homebuyers credit in 2008 and that would be due immediately in full if I moved out. I don't have that readily available.

My living situation is a little different too. My son and his wife and child live with me currently and would like to continue.

If I purchased say a four unit rental between us we could occupy two units and rent out the other two. I could also rent out my current home. I'd be open to selling it if that would be a good option. Although that does make me nervous.

My questions is, given that we all want to live together, what would be the best options? I'm not a great risk taker. I used all the cash I had to purchase my current property solely for security. That paid off. I lost my job four years ago and was unemployed for a year but didn't lose my home. My employment is stable now. My son and his wife don't make much but they are working and going to school.

I feel like it's time to use my original investment to my benefit.

Long term I would like to own more investment properties. The goal being too build a house abroad to use as a holiday home for now and retire there in 10 years living of rental income. I have family there and cost of living is a fraction of what it is here. I could use family land and building a home would cost about 20-40k depending. Could always start small and add on. I would also like to be able to give my son a house, ideally as a gift. They have a baby and would need to be out of the city in 5 years for a good school. My current home is in a great school area.

Some numbers. Where we live property prices are low. My current home, in the suburbs, is valued at around 140k. A four unit in the city would start at 80k but would probably want to pay more for something nicer.

Considering all that what would you advise? Are there better options I've not considered? I'm over thinking this I'm sure but it feels like I have so much to consider. I'm hoping an outside perspective with more knowledge will see a clearer path for me.

Thank you in advance for all and any opinions and advice.

 

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[RealtyR]

In an unrelated post I saw a comment where someone had used a HELOC to get the 20% down payment and then I assume gone with an investment mortgage.

More options!

 

[jon.a]

I would take this question to https://www.biggerpockets.com/forums. Many more RE investors there.

 

[Hooked]

You seem to have a decent grasp of a few of the basic options you have, and they can all work depending on your skills and action. I'd recommend doing some reading over at bigger pockets, great RE forum. They have all sorts of tools and investment analysis so you can do an apples to apples comparison of your choices.

One of the common themes you may find over there is that trying to mix investment and lifestyle can be very challenging. It sounds like you want to get the most from your asset, but you don't want to give up the lifestyle and security of just holding on to it. And you also want to be retired in 10 years from the growth of this asset. Very challenging to meet all of those requirements without risking much.

 

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[lleone]

@RealtyR

In assessing what you're looking to do, IMO you have to look at it in 2 ways. The first is financial. What is the best use of the equity I have to invest. Take a look at this form and calculate the different options you are considering (e.g. HELOC and a mortgage can be different when you take into consideration taxes, etc.) so this will give you a good idea of the pros and cons of all your options (from a financial perspective). If you want to be more conservative, I would assume zero appreciation and make sure you can make the numbers work on cash flow alone.

The second consideration is lifestyle related. I'm pretty sure you were glad when you lost your job that your home was paid off. Well, once you start borrowing off it, that will not be the case. If you're going to buy a multi-unit, try to be conservative. For example, putting in enough equity that you can make the payments even with 1/2 the units occupied. That will give you staying power if the market tanks. Real estate has been on fire in a lot of areas so it will vary. For example, places like Austin, Texas have seen enormous building in the apartment building sector and they are really close to being oversupplied. Once that happens, rental prices will come down, vacancies will go up and returns will suffer. Just be sure you know the market you're in and you should be fine.

 

[RealtyR]

Thanks for your responses. Will definitely take a look at bigger pockets too.

Just to add that I could forego the retirement in ten years and extend it another 5 years. It's on my wish list but I'm also seeing your saying that's not realistic if I'm not wanting to be more risky.

So I'm seeing I need to focus on the best way to use my equity and be conservative when it comes to any purchase.

Thank you and if anyone else has anything to add I would be grateful. Thanks.

 

[biophase]

My quick thoughts without thinking about it too hard. This is what I would do.

I assume that you have no downpayment money for a $100k 4 unit. Take out a small loan against your home, $20k. Buy the 4 unit for $100k. Rent out your current home, it should cashflow well. Live in 2 units, rent out the other 2. Calculate what you total cashflow would be from your 2 units + your SFH. Hopefully it's a nice positive number.

PS. If you do have $20k, then go buy the 4 unit.
PSS. I'm only suggesting you keep your current home because you don't like risk and would probably feel good knowing that you had a home paid off, or with only a $20k loan.

 

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[mosdef]

My quick thoughts without thinking about it too hard. This is what I would do.

I assume that you have no downpayment money for a $100k 4 unit. Take out a small loan against your home, $20k. Buy the 4 unit for $100k. Rent out your current home, it should cashflow well. Live in 2 units, rent out the other 2. Calculate what you total cashflow would be from your 2 units + your SFH. Hopefully it's a nice positive number.

PS. If you do have $20k, then go buy the 4 unit.
PSS. I'm only suggesting you keep your current home because you don't like risk and would probably feel good knowing that you had a home paid off, or with only a $20k loan.

where can you buy a 4 unit for 100k?

 

[CashFlowDepot]

The day you borrow against the equity in your home, is the day you no longer have equity in your home. You will reduce your wealth. You are also putting that property at risks. If there is a serious downturn in the economy, you could lose the property if you can't make the loan payment.

Keep the equity (wealth). Don't touch it.

Instead of getting a loan to buy real estate investments, look for opportunities where you can buy with seller financing or even start with master leasing the property. These opportunities are all around you but it is unlikely you will find them on an MLS listing or using a real estate agent to find the deals for you. Instead, you'll need to do some marketing and find motivated seller situations on your own.

The ideal properties are the ones which are not even advertised yet. You will have no competition.

Even if the property is not advertised that the seller will accept seller financing, it does not mean that they will not. YOU JUST NEED TO ASK.

There are a few websites where seller's advertise that they will accept seller financing. See www.GoSwap.org. I think www.REE.com also has a search field for seller financing.

 

[Rixter]

Thank you in advance for all and any opinions and advice.

Hi RR,


This is a post that describes my chosen Investment Strategy that involves Villas & Townhouses (multi-residential). It maybe of interest..

The capital growth averaging (CGA) strategy I employ utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell. So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas ( metro area capital cities), at or below fair market value, on a regular basis.

We've basically been purchasing an IP per year and to date we've built a multi $million property portfolio spread across Australia.

We've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order) -

1/ To maximise my Non-Cash deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential vacancy rates
4/ Ask a higher rent - thereby Maximising yields

Without getting into the "which is better debate, houses or Units??", I prefer to purchase Townhouses & Villas with courtyards of 30% or greater land area thereby eliminating multi story units / high rise apartments with balcony's, for several reasons. The mains ones being (in no particular order) -

1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Baby boomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness thus maximises cash flow.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak

I look to buy in areas with a historic Cap growth of 7%pa and/or are under gentrification. I look to where the Govt, Commercial, Retail, private sectors are injecting money. This ultimately beautifies the area and people like the looks so move in creating demand.

I have found this works well if you are looking for short to medium term capital growth so as to leverage against and build your portfolio faster.

Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7 - 10 years. Thats 7%pa compounding.

The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cash flow will be serviced via Wages in the acquisition stage, Rental income, the Tax man, an LOC and/or Cashbond structure, and any other forms of income you have available.

For ease of calculation lets say we buy a property for $250k, so in 10 years its now worth $500k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 250K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc. You systematically go right through your portfolio year by year until you have redrawn from each property up to year 20.

So what do you do after you get year 20 I hear you say ?? hmmm..well thats where it all falls into a deep hole - You have to go get a JOB - nope only joking!

You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value ($1M) yet again - so you complete the entire cycle once again. In fact chances are you never drew each property up 80% lvr max , so not only have you got entire property cycle of growth to spend you still have what you left in it first time round that compounded big time. Now you wealth is compounding faster than you can spend it! What a problem to have

Getting back to what I said in my opening paragraph about it does not matter where you buy within a property cycle just so long as you do buy, This is because you will not be wanting to draw upon it until 10 years later after its achieved a complete cycle of growth.

Well that’s the Basic Big Picture of CGA. Once set up & structured correctly it’s a self perpetuating source of tax free income indexed for life!

If you require any clarifications just ask.

 

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[errorunknown]

Hi RR,


This is a post that describes my chosen Investment Strategy that involves Villas & Townhouses. It maybe of interest..

The capital growth averaging (CGA) strategy I employ utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell. So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas ( metro area capital cities), at or below fair market value, on a regular basis.

We've basically been purchasing an IP per year and to date we've built a multi $million property portfolio spread across Australia.

We've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order) -

1/ To maximise my Non-Cash deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential vacancy rates
4/ Ask a higher rent - thereby Maximising yields

Without getting into the "which is better debate, houses or Units??", I prefer to purchase Townhouses & Villas with courtyards of 30% or greater land area thereby eliminating multi story units / high rise apartments with balcony's, for several reasons. The mains ones being (in no particular order) -

1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Baby boomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness thus maximises cash flow.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak

I look to buy in areas with a historic Cap growth of 7%pa and/or are under gentrification. I look to where the Govt, Commercial, Retail, private sectors are injecting money. This ultimately beautifies the area and people like the looks so move in creating demand.

I have found this works well if you are looking for short to medium term capital growth so as to leverage against and build your portfolio faster.

Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7 - 10 years. Thats 7%pa compounding.

The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cash flow will be serviced via Wages in the acquisition stage, Rental income, the Tax man, an LOC and/or Cashbond structure, and any other forms of income you have available.

For ease of calculation lets say we buy a property for $250k, so in 10 years its now worth $500k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 250K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc. You systematically go right through your portfolio year by year until you have redrawn from each property up to year 20.

So what do you do after you get year 20 I hear you say ?? hmmm..well thats where it all falls into a deep hole - You have to go get a JOB - nope only joking!

You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value ($1M) yet again - so you complete the entire cycle once again. In fact chances are you never drew each property up 80% lvr max , so not only have you got entire property cycle of growth to spend you still have what you left in it first time round that compounded big time. Now you wealth is compounding faster than you can spend it! What a problem to have

Getting back to what I said in my opening paragraph about it does not matter where you buy within a property cycle just so long as you do buy, This is because you will not be wanting to draw upon it until 10 years later after its achieved a complete cycle of growth.

Well that’s the Basic Big Picture of CGA. Once set up & structured correctly it’s a self perpetuating source of tax free income indexed for life!

If you require any clarifications just ask.

I'm pretty new to real real estate game and am trying to plan for my family's future. How are you "drawing money" tax-free out of the properties? Are you taking loans out on the equity that you have?

 

[Rixter]

I'm pretty new to real real estate game and am trying to plan for my family's future. How are you "drawing money" tax-free out of the properties? Are you taking loans out on the equity that you have?

Correct, equity is released via line of credit.

Basically this is how it works -In your portfolio acquisition years you release equity to invest further with, and once your portfolio's asset base is built, you harvest the equity to fund lifestyle instead.

Once you have structured your portfolio asset base for capital growth, your lifestyle drawings becomes out stripped by your portfolio's compounding capital growth and as such your net worth is increasing, allowing you further draw downs.

I hope this provide some food for thought.