97guns or other real estate investors

[riverwed070707]

I know what the general consensus on this forum will be but I'm going to throw it out there anyway. Been looking to add to our real estate portfolio for a while. Came across what appears to be a really great deal on 3 SFUs from a single seller. These will be rentals #s 3-5 for me so I know what I'm getting into. Currently thinking I'm going to finance via 2 traditional mortgages and one though HELOC on my primary. I have the cash for the down payment and have the assets to cover the 6 months expenses but its going to spread me pretty thin. I know its generally discouraged to borrow from your 401k but I have a relatively stable job, we live on 50% of our household income and I could repay the loan within 10 months or less, it would just give me a little more breathing room. I'd be giving up about $300 in interest to make an additional $34k/year.

If its relevant, I'm 29, have about 1.5x my annual income in my 401k and want to build my real estate portfolio to supplement retirement since I plan to retire well before I'm able to draw on my 401k.

If I don't borrow from the 401k, I might just take 2 properties, which would decrease the annual income to $24k -- still not bad but much less exciting! I'd like to have $5k/mo in passive income by 35 and $10k/mo by age 40. If I make a move on these 3 properties I'll be at $4300/mo putting me extremely close to my goal about 6 years ahead of schedule.

Secondary question - I'm currently contributing 15% to our retirement accounts. If my goal is to "retire" by 40 and sustain our living through rental property income, should I scale back my 401k contributions in order to boost my liquid savings and acquire real estate more quickly?

[disneysteve]

I know what the general consensus on this forum will be but I'm going to throw it out there anyway.

I know its generally discouraged to borrow from your 401k

Ok, I'll give the conservative answer since you know it's coming. And no, I am not a real estate investor.

I would not borrow from a 401k, withdraw money from a Roth, or otherwise dip into retirement accounts for anything short of saving a life literally. Borrowing to invest just doesn't cut it in my book. So I vote a big fat NO.

[riverwed070707]

Ok, I'll give the conservative answer since you know it's coming. And no, I am not a real estate investor.

I would not borrow from a 401k, withdraw money from a Roth, or otherwise dip into retirement accounts for anything short of saving a life literally. Borrowing to invest just doesn't cut it in my book. So I vote a big fat NO.

Thanks DS Just playing devils advocate, couldn't it be considered reallocating my retirement funds since my sole purpose for purchasing the real estate is to fund my retirement years before my 401k becomes available?

I've had a huge ah-ha moment in the past few months as I realized how hard I've worked to get ahead on my retirement benchmarks only to internalize that it really does me no good if I don't have a way to get from 40-65. I feel like with our income and ability to live below our means this is completely realistic but it definitely goes against the mainstream thinking of needing to contribute 15% to a 401k because that only works if I plan to work another 35 years.

ETA: The additional $34k/yr will boost our current income by 35%. Feels like a small risk to take for such a huge return.

[disneysteve]

couldn't it be considered reallocating my retirement funds since my sole purpose for purchasing the real estate is to fund my retirement years before my 401k becomes available?

Sure. I can't deny that the standard retirement advice assumes retirement at a standard age of at least 59.5 years since that's when you can access those accounts penalty-free.

If you are seriously planning to retire at age 40, you definitely need a non-standard plan to prepare for that. I honestly don't know enough about that topic to give a good answer. Your plan might be a good one. For sure, you need to have income-producing assets outside of retirement accounts whether that be real estate or other taxable investments.

[AnotherReader]

Hop on over to early-retirement.org or mrmoneymustache.com for better information on early retirement. You need to save/invest 50 percent or more of your income to retire really early. You can get to the money locked up in your 401k and IRA's before age 59 1/2 - look up the Roth pipeline and the SEPP.

I don't favor withdrawing from established retirement accounts for real estate investing, although I refinanced my house in 2009 to pick up some cash flowing deals that have almost doubled since then. Your assets should be diversified and you should let tax sheltered and tax free money do its compounding magic act.

Don't let impatience push you into buying something that does not have a return higher than the stock market. The deal of the century isn't, and there's always another deal around the corner. Leverage can be helpful or it can be disastrous. Borrowing against a 401k is especially risky, no matter how secure your job is today.

Real estate is a great wealth builder, bought and financed correctly. However, real estate is illiquid, and mistakes are often difficult to correct. Keep that in mind as you evaluate investment opportunities.

[phantom]

I wouldn't borrow money from anywhere just to minimize your feeling of being spread thin. This would basically be money just in case the emergency fund isn't sufficient, right? Why not wait till the emergency fund starts to run out to borrow money? If you really want to go through with this plan, I'd hold off on the borrowing till you need it. What would keep you from borrowing later, job loss? Isn't that exactly what you'd be betting against in taking the loan?

That said I wouldn't plan on getting into a situation where I was afraid I might need to borrow from a retirement account. In this case I think I'd just buy the two properties for now since that sounds like where you'd be comfortable. If you really want to invest more outside of retirement accounts, save up and do it in a manner that makes you comfortable. There will be other good deals.

[Rachael777]

If you are seriously planning to retire at age 40, you definitely need a non-standard plan to prepare for that.

Hoping I was able to pull that quote. we will see when I hit submit or whatever.

I have a similar approach to you. choosing a non standard approach to get to retirement faster w real estate. My approach is risky. maybe riskier than yours but has a huge payoff. If the #s work and you CAN pay back the loan in 10 months (w interest!) I say go for it.

I will be looking for more real estate once I get mine smoothed out.

Only caveats are the following

1. assuming you have money for emergency repairs lack of rent whatever and have estimated all costs correctly
2. Is the figure you are quoting your NET (like $36k NET per year across your 3 properties)? If so that is VERY good.. and is $1000 NEt profit per house per month so they must be very well priced. If that is the case... is that from day 1 or when paid off? What term mortgage are you going for etc. Think through all the potential issues. If that is NOT the case (like you do not make a NET of $36 per year across all 3 from day one) than I think you should use whatever that figure is and that that is the relevant risk comparison not gross and not how much you get once paid off.

I DO favor buying multiple properties at once from a single seller. easier and often better deals are found that way.

Good luck

[riverwed070707]

Glad to know I'm not the only one going unconventional! Thanks for the additional resource AR.

Some comments to your questions in red Rachael

Hoping I was able to pull that quote. we will see when I hit submit or whatever.

I have a similar approach to you. choosing a non standard approach to get to retirement faster w real estate. My approach is risky. maybe riskier than yours but has a huge payoff. If the #s work and you CAN pay back the loan in 10 months (w interest!) I say go for it.

I will be looking for more real estate once I get mine smoothed out.

Only caveats are the following

1. assuming you have money for emergency repairs lack of rent whatever and have estimated all costs correctly Have it yes. Stretched thin=our personal efund will also be our rental efund until I have a few months to bank income. Generally I'm extra careful and like to keep those separate but with it being such a short amount of time to be able to get back to a comfortable level, I feel like it would be worth it to move now
2. Is the figure you are quoting your NET (like $36k NET per year across your 3 properties)? gross If so that is VERY good.. and is $1000 NEt profit per house per month so they must be very well priced. If that is the case... is that from day 1 or when paid off? Net with 80% financed will be $18k/yr. Financing less than $150k for all 3 properties and they rent between $800 and $1175What term mortgage are you going for etc. Think through all the potential issues. If that is NOT the case (like you do not make a NET of $36 per year across all 3 from day one) than I think you should use whatever that figure is and that that is the relevant risk comparison not gross and not how much you get once paid off.30 year mortgage, 4.2% interest but plan to snowball them along with the current rental mortgage I already have. They will be paid off in 8 years. Ideally somewhere along the way I'd pick up another 5-7 properties, but the income from the first 5 will cover living, while the additional 5-7 will pad savings/additional retirement funds

I DO favor buying multiple properties at once from a single seller. easier and often better deals are found that way.This is the only reason I'm considering moving on 3 - would never get the same price on these properties individually!

Good luck

[autoxer]

Currently thinking I'm going to finance via 2 traditional mortgages and one though HELOC on my primary.

I'm not into real estate investing, at least not yet, but I do love the idea of an early retirement.

Have you talked to a mortgage broker? Your debt to income ratio will be much higher with multiple rentals. It may become more difficult to get traditional financing when you are highly leveraged.

[riverwed070707]

I'm not into real estate investing, at least not yet, but I do love the idea of an early retirement.

Have you talked to a mortgage broker? Your debt to income ratio will be much higher with multiple rentals. It may become more difficult to get traditional financing when you are highly leveraged.

I have. They said no problem to finance 2, 3 would be a stretch but could be done. The interest rate is more than a point lower and the closing costs less if we go with a HELOC for one of them, which is why I'm leaning toward that over just doing a third mortgage.

[AnotherReader]

If I read your post correctly, the gross income is $36k and the net income after the mortgages is $18k. Do the mortgages include property taxes and insurance? If not, I would be very concerned about your cash flow. Read up on the 50 percent expenses and one percent per month rent rules of thumb at Bigger Pockets and similar sites. Start following the best landlord blog I know of, http://www.nononsenselandlord.com/. If you did not properly allow for operating expenses and capital expenditures, you are going to feed alligators, not collect profits.

[riverwed070707]

If I read your post correctly, the gross income is $36k and the net income after the mortgages is $18k. Do the mortgages include property taxes and insurance? If not, I would be very concerned about your cash flow. Read up on the 50 percent expenses and one percent per month rent rules of thumb at Bigger Pockets and similar sites. Start following the best landlord blog I know of, http://www.nononsenselandlord.com/. If you did not properly allow for operating expenses and capital expenditures, you are going to feed alligators, not collect profits.

Thanks for your concern but I'm not new to real estate and I know how to calculate my gross and net income. I didn't say the mortgage was going to cost $16k/year I said my gross was $34 and my net $18 meaning the rent will bring in $34 and the net after all expenses including insurance, maintenance, vacancy allowance and estimated taxes will be $18k.

[LivingAlmostLarge]

Can I ask a crazy question but how do you get properties that are renting with $34k gross a year about $1k/month and you only owe $18k/year on it? I Mean it sounds nuts the return on investment. How do you find properties like that? Why do people sell it and why rents when buying is dirt cheap?

[AnotherReader]

So what you are saying is estimated GRI=$34k, vacancy and collection plus all operating expenses = $16k, NOI = $18k. OER not allowing for management (diy?) is 47 percent. Sounds quite reasonable, especially if there is a lot of turnover or you will have deferred maintenance to correct. Out of the $18k you will pay the mortgages. Total borrowed will be less than $150k. Using $150k, annual P&I is around $8,800 at 4.2 percent. Subtract that from $18k to get your cash flow, $9,200. Close? $9,200/12/3 = $256 per house per month. A little more because you are borrowing less that $150k.

I think the point of confusion is where the mortgage appears in your calculation. If you show a standard operating statement, distill the gross anticipated income down to net operating income, and then subtract out the mortgage or mortgage/HELOC payments, we can follow your reasoning.

Things become more complicated when you get more than four conventional mortgages in your name. The requirements are a lot tougher as you go from 4 to 10 mortgages. If you are pursuing conventional loans, the HELOC might be the only way to acquire all three properties.

BTW, good for you for living on 50 percent of your household income. Being able to invest the other 50 percent puts you on the fast track to FIRE.

[riverwed070707]

Things become more complicated when you get more than four conventional mortgages in your name. The requirements are a lot tougher as you go from 4 to 10 mortgages. If you are pursuing conventional loans, the HELOC might be the only way to acquire all three properties.

BTW, good for you for living on 50 percent of your household income. Being able to invest the other 50 percent puts you on the fast track to FIRE.

I'd heard that too about getting more than 4 mortgages but the CU I spoke with today said they would finance up to 10 mortgages as long as I had 20% down and 6 months PITI in reserves. The only reason I was considering the HELOC is because the rate is a point and a quarter lower and the closing costs would ony be $500. Also once the HELOC is setup, I can pay it down and then continue to purchase new with the same line, no additional costs which would be nice.