Posted by R. on September 07, 2003 at 21:53:34:
Great advise Ron!!
Thank you!
New Investor - Posted by Marc E.
Posted by Marc E. on September 07, 2003 at 17:18:13:
I am im the process of purchasing a new primary residence and currently live in a foreclosed townhome I purchased 7 years ago for $78,000 and rehabbed. The townhome is worth $105,000 and I owe $33,000 on it. I need the cash to put on my new home which will cost $250,000. I have about $50,000 in cash plus other securties and retirement accounts worth $100,000. I am planning on putting down about $40,000 of my cash and the balance from the sale of my townhome ($65,000) and then mortgage $145,000. My credit score is a little over 800 (excellent). I am thinking about renting my townhome which could fetch $800-850/month which would cover the current mortgage ($720/mnth). The problem is I would not have the $65,000 in cash to get out of my townhome. I would like to get into REI but I’m not sure this should be the way to start. Any advice would be welcomed. I have not purchased any real estate course but am thinking Whisnants. Should I sell the townhouse or rent it and how should I finance if I rent the townhouse?
Re: New Investor - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on September 07, 2003 at 19:05:17:
Marc E--------------
Well, moving on up to the high-priced part of town? Good for you.
However, it does mean putting a lot of your resources inth the property and keeps them tied up, preventing your investing them elsewhere.
A problem here is you don’t tall what you mean by “REI.” There are many different ways to make money with real estate but most can be put under one of the three categories of C cash flow, A appreciation, or T tax benefit. What are you after?
Are you looking for a part-time investing career or would you like to get into real estate to earn your living expenses also? Do you favor long-temr hold and rent or quick turnover for a profit?
You have to have aprogram that works for you and works where you are. If you haven’t read my post for beginners, I recommend it. Put “beginners success” into the search function on the main board of this CREONLINE.COM website.
In general, I lean toward as little down as possible on your own home and use the money you don’t put down to buy rental prperties that will provide cash flow to help you with your bigger home mortgage. You condo is perhaps ok as a rental. I suspect you can find some other investments that provide a higher rent to property value ratio, producing more cash flow. If so, sell the condo as your profit it tax free, at least at the federal level. Then use the money to buy othe rental properites in the downscale areas.
Good InvestingRon Starr******
Re: New Investor - Posted by Katie
Posted by Katie on September 07, 2003 at 17:49:47:
Marc,
You have several options available to you. My first question: Are you planning on staying in your new $250K house longer than 7 years? If not, there are some excellent 7-year ARM products on the market that could make a significant dent in your mortgage payments and free up a lot of your equity to invest.
Also, you mentioned another $100K or so in retirement accounts. If these accounts can be converted to a self-directed IRA (and most can), the IRA can purchase (even carry a mortgage) an investment property. Talk to your financial advisor about the details.
There are more ideas, but I’ll let some of the others here cover them.
Re: New Investor - Posted by Marc E
Posted by Marc E on September 07, 2003 at 19:23:59:
Ron,
Thanks for the follow up. I earn about $90k/yr and do not like what I do. I’d love to earn my living working hard but loving what I do and being my own boss. So to answer your question it would be cash flow and secondly appreciation. I’d love to quit my job tomorrow but I have a family that I must provide for.
When you talk about downscale areas what are you referring to (section 8, urban areas, ??). What is a good rent to prpty value ratio (10, 15??)? I will read your suggested reading but do you recommend a Sheets or whisnant course?
Thanks!
When you
Re: New Investor - Posted by Marc E
Posted by Marc E on September 07, 2003 at 19:12:10:
Katie,
Thanks for the information. I am planning on staying 5-7 years. Since rates are so low, I was planning on getting a 15 yr mtg to maximize principal reduction on the $250K home. Without the cash downpayment, the mortgage on my new home is too steep at 15yrs but I hate to throw the money away on a higher interest rate on 30 yrs. The rates I was quoted by my mtg brkr on Friday (9/5) for 15yr 5.25%; 20yr 5.75%; and 30yr 5.875%. The townhome I mentioned was financed with a 15 yr mortgage and I have made additional principal payments which has given me a decent amount of equity. I didnt have her quote me on a ARM since I thought they were much higher in costs than a conventional 15 or 30 yr mortgage.
My retirement is made up of $60K in a 401K and $40K in IRA’s. What is your advice on renting or selling the townhome? Thanks!
Re: New Investor - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on September 07, 2003 at 21:17:55:
Marc E.---------------
I can appreciate your position. I just quit my day job on the ides of March, this year.
From your income level, it sounds like you are a successful person. That bodes well, I feel, for your doing well with property investing.
My suggestion for those who want to invest for cash flow is to buy in as low-priced an area as one can stomach. The lower the area, the higher the ratio of rents to property values. Actually, in areas where the average price is lower, you don’t have to go into as bad of areas to get pretty good cash flow. For instance, near Oklahoma City, where I now invest, you can buy properties for $35-40K which might rent for $400-550 a month. These are not the worst areas around. They are somewhat below average.
I like to use the percent of the property value which one can get in rent each month. These days, with low interest rates on loans, one can probably break even or get positive cash flow with a ratio of something like 0.85 of one percent. If you get 1.0% or more you probably will be ok with cash flow. I like to get at least 1.2% a month.
I bought on e-bay for less than $10 the 16 audio tapes of Sheets “No Down Payment” program, without the books or videotape. I have listened to them and think that they are decent. It is nice to have something to listen to when driving or exercising.
I do not know about David Whisniat’s progam. Some people have said good things about it. You might want to look at the archives for the “carleton sheets” board2 of this CREONLINE.COM website to see other’s evaluations, plus other “gurus” evaluations on there.
I think that part-time investing in long-term hold rental properties makes sense for the person that likes his/her job and plans to keep it. The job provides income for living expenses. However, usually in the first few years of long-term rental investing there is not much cash flow. So it is not a good program for those who want to earn their living with real estate.
For those people, buying bargains and then quickly reselling them for a profit makes more sense. Then, as the money starts coming in from those operations, one could slowly accumulate some rental properties to provide money in the future. The buying/selling game provides money while you do it, but usually no residual income when you stop. So you have to keep scrambling for deals unless you have some rental properties to support you.
Good InvestingRon Starr*
Re: New Investor - Posted by Katie
Posted by Katie on September 07, 2003 at 21:17:30:
Marc,
Since you’re only going to be in the new home 5-7 years, reducing your principal balance is a non-issue. Besides, property appreciation at just 5% annually is about $1K/mo. That far outpaces any principal gains you might realize. Remember, the name of the game is leverage.
On the townhouse, I’d take out a home equity loan, pay off the mortgage on it, use the rent receipts to pay back the equity line, and put a large chunk of the proceeds from the equity loan into an investment property. If the cash flow from another investment property evens out the difference on what you would be paying with a larger down on your new home, then you come out ahead by having yet a 3rd property appreciating for you.
Re: New Investor - Posted by jeff
Posted by jeff on September 07, 2003 at 19:51:10:
The key to a big down payment and a 15 year mortgage is rate of return on your money. Can you get better return than the 30 year rate? I am sure you can. You are planning to stay 7 or so years, in other words never pay the loan off. How about this.
Home equity line the town house, you owe 33K and value is 105. Use the line to pay off the townhouse mortgage, the line is a little above prime so your payment should be a lot lower on say $45K. Than your current mortgage payment. You are in your new home spending a little of your cash, and equity from the townhouse. Say a 5% or 10% down with no PMI should be available (or a 80-15-5) The townhouse payment should be cut because interest is not front loaded and anything above interest is direct pay off. Interest only on 45K at current rate will be around $250 per month (Thats a high guess), but is does rise with the prime. Now you have a better cash flow on the townhouse. $300 to $400 dollars per month. This extra cash can A) pay off the equity line on the townhouse quickly, or B) pay extra on your new home to make the 30 year a 15 year. By paying extra on a 30 year you have some margin of safety, if you go 15 year you have to pay a higher payment (have to not by choice). I think you are in a real good position, with so much equity you can move your debt around and lower your payments for the same term, while incressing cash flow from a rental. The tax deductions on the 30 year interest and owning rental should work in your favor also. Thats just my idea, good luck.