Advice: Ways to Diversify Investment Portfolio/Find connections/Develop partnerships

[AnotherReader]

Ah! That makes a lot more sense than 45K. So your 473.5K in mortgage debt is only 4.6 times your income. That's still a fair amount of leverage but not nearly as much as it seemed based on your earlier posts.

Thanks for clearing that up.

That's not correct. The mortgage payments have already been subtracted from the income to get to the $100k income. If he has $30k a year of mortgage payments, your ratio would be $473.5k/$130k, or 3.6.

What he is saying is that each mortgage is neutral from the lender's perspective as long as 75 percent of the income from the property BEFORE debt service is more than or equal to the mortgage payment.

Fannie and Freddie decided about 12 or 13 years ago that offering an unlimited number of loans on this ratio was risky, so they limited it to four mortgages total. As things loosened up a few years ago, they expanded the limit to eight, but the interest rate on the last four is adjusted up to reflect the risk.

The OP's lender is doing portfolio loans or non-conventional asset backed lending that is somehow securitized, as well as conventional lending. The owner of the paper takes additional risk, so the rates are higher. The lender can make as many loans as they want to the borrower because the government is not buying the loans.

[scfr]

Pay off the credit card debt. (Why haven't you done so already?)

Listen to Fishindude about focusing on paying down some of the currently-owned properties before buying others.

If you have a LLC, do you currently have, or have you looked in to establishing something like a SEP IRA or Solo 401(k)?

[bjl584]

How do they allow you to pull out so much cash on a refi? Are there no fees involved?

So you are clearing from the rentals $20k/year. That you are using to leverage more properties. How do you qualify for $400k in mortgages though assuming $50k/rental income 75% = $38.5k income plus $40k income and part time $10k/year.

That still means you are "making" according to bank $100k/year and $400k in mortgages and still buying more? Isn't that the top end of leverage?

Does it never get capped? Does the bank never question it? That you couldn't carry it if something happened? Do they let it get assume to $900k in mortgage and $150k "income"?

It's all about networking. No one is building a real estate portfolio by solely using a traditional bank or lender. Once an investor gets established they can access other investors, hard money lenders, do all cash deals, etc.

Most people get to a point where they probably aren't using a bank anymore. It's faster and less costly to deal outside of the traditional lending world. The rules are a lot different in the alternative lending arena.

[ndwilli6]

Scheduled Gross Income: $14,400
Vacancy and collection @5%: (720)

Adjusted Gross Income: $13,680

Operating Expenses $5,472
Taxes -- included in payment
Insurance -- included in payment ($522.00 annually)
HOA -- no HOA
Property management -- I manage my own properties
Repairs and Maintenance -- believe I will spend around $1k annually (already purchased new appliances/heating and air/heat pump/water heater), so major things already completed and many have warranties.
Utilities while vacant
Advertising and lease fees -- none, I advertise via Zillow, Cozy
Reserves for replacement -- isn't this included in insurance? mine is...I thought that was common?

These typically run 40 to 45 percent of AGI, depending on taxes and how you reserve. Since OP self-manages, call it 40 percent.

Net operating income: $8,208

The net operating income is what pays the lender and the owner. OP has a mortgage payment of $706. Assuming the taxes and insurance are included in that payment and not knowing the principal or the interest rate, let's guess a $70,000 mortgage at 6 percent for 30 years. P&I payment is around $420 a month, or $5040 per year. The difference, $3,168, is what he is likely to net, given the assumptions. If the $706 is just principal and interest, then over time the OP will lose money. $8,208-($706 x 12)=($264)

Not sure what the OP is accomplishing by taking 25 percent of the rent minus the mortgage payment and putting it in business savings. Apparently his lender is counting 75 percent of the rental income for determining his income for lending purposes.

706.00 payment is PITI. It includes everything. Loan amount is $111,000.00. Home is worth $148,000.00. Two homes just hit the market similar floor plans for $162k and $149k which will allows for greater appreciation.

I love how you broke it down!

[ndwilli6]

Ah! That makes a lot more sense than 45K. So your 473.5K in mortgage debt is only 4.6 times your income. That's still a fair amount of leverage but not nearly as much as it seemed based on your earlier posts.

Thanks for clearing that up.

It's no problem. Sorry I wasn't clear earlier.

[ndwilli6]

Pay off the credit card debt. (Why haven't you done so already?)

Listen to Fishindude about focusing on paying down some of the currently-owned properties before buying others.

If you have a LLC, do you currently have, or have you looked in to establishing something like a SEP IRA or Solo 401(k)?

I focus on lenders paying off CC debt (when I refinance)

I thought about that...(paying off some currently owned) but as an investor I consider that financial suicide for me. I'd rather invest funds into other properties that I will appreciate in value and/or allow positive cash flow...by doing this I can potentially have the entire loan amounts saved.


I haven't looked at establishing a solo 401k because I have a pension through my employer. What would be the benefits? I honestly don't know much about SEP IRAs. Thanks for asking!

I appreciate it because I am trying to diversify my investment portfolio multiple ways and you're the only one that raised a helpful question.

[disneysteve]

I focus on lenders paying off CC debt

I haven't looked at establishing a solo 401k because I have a pension through my employer. What would be the benefits? I honestly don't know much about SEP IRAs.

As long as the CC is at 0%, I see nothing wrong with keeping it. Just be sure to pay it off before the 0% promo period ends.

As for retirement savings, don't count on an employer pension. They can change or disappear entirely. There aren't many left actually.

With a SEP-IRA, you control the money. You choose the investments. It's your money to invest as you wish (within the bounds of what's permissible in that type of account). I've had a SEP-IRA for years that I fund with income I earn from a couple of side gigs. I also have a Roth IRA and a 401k from my employer. I say take full advantage of any tax-sheltered account you can.

[ndwilli6]

It's all about networking. No one is building a real estate portfolio by solely using a traditional bank or lender. Once an investor gets established they can access other investors, hard money lenders, do all cash deals, etc.

Most people get to a point where they probably aren't using a bank anymore. It's faster and less costly to deal outside of the traditional lending world. The rules are a lot different in the alternative lending arena.

I have one that isn't financed by a traditional bank. (6.75%)

Other ones are conventional and I love conventional....interest rates are incredibly low/reasonable. All my investment properties are 4.875 and 5%. You can't beat it!

Once I reach 10...thinking portfolio a few at a time....what are your thoughts?

[ndwilli6]

As long as the CC is at 0%, I see nothing wrong with keeping it. Just be sure to pay it off before the 0% promo period ends.

As for retirement savings, don't count on an employer pension. They can change or disappear entirely. There aren't many left actually.

With a SEP-IRA, you control the money. You choose the investments. It's your money to invest as you wish (within the bounds of what's permissible in that type of account). I've had a SEP-IRA for years that I fund with income I earn from a couple of side gigs. I also have a Roth IRA and a 401k from my employer. I say take full advantage of any tax-sheltered account you can.

Thank you. I'd love to pick your brain about the SEP-IRA. I'm going to start doing my research.

[AnotherReader]

Portfolio a few at a time?

Nope. Cross-collateralization is dangerous. If one of your properties goes under, you can't walk away without handing over all the collateral.

Might be time to look at multi-family and other property types if they make sense in your market. Trade up and get commercial loans.

It makes sense to stop buying when you can no longer find deals that make sense. When that happens, you can improve your position by paying off existing loans and piling up cash for the next opportunity. I can't find anything in my picked over markets right now, so that's what I'm doing.

[ndwilli6]

Portfolio a few at a time?

Nope. Cross-collateralization is dangerous. If one of your properties goes under, you can't walk away without handing over all the collateral.

Might be time to look at multi-family and other property types if they make sense in your market. Trade up and get commercial loans.

It makes sense to stop buying when you can no longer find deals that make sense. When that happens, you can improve your position by paying off existing loans and piling up cash for the next opportunity. I can't find anything in my picked over markets right now, so that's what I'm doing.

What markets are you looking at? Charlotte NC is huge. Raleigh NC is huge.

[AnotherReader]

West Coast and adjacent states. Nothing to buy, period.

[scfr]

I haven't looked at establishing a solo 401k because I have a pension through my employer. What would be the benefits? I honestly don't know much about SEP IRAs. Thanks for asking!

The benefits of a SEP IRA are the ability to defer income taxes until you start making withdrawals in retirement, and the ability to choose from almost any investment (within limits, as disneysteve mentioned). It could be a way to diversify your investments while "saving" (deferring) taxes at the same time.

In very simple terms, you can put roughly up to 25% of your self-employment (real estate investment) income in to a SEP IRA. On the money you put in the SEP, you don't pay any income tax until you start making withdrawals years down the road. You decide where to establish the SEP, and what investments you want. (This is quite different from employer-sponsored plans where your choices are limited.)

Putting money in to a SEP would mean fewer funds available for other things (such as real estate investments), but part of that would be offset by the reduced taxes.

A couple other things to consider are that, under the new tax law, the value of a SEP may not be as great as it has been (but who knows what will happen down the road ... the tax pendulum will probably swing back and forth many times before you retire). Also, the long-term advantage of a SEP will depend on your tax rate in retirement vs. what it is now.

Although I now have "W2 employee" jobs and contribute to my 401k, I also have a SEP that I started it when I had a small business, and I continue to add to it when I have "side gigs."

My husband has a solo 401(k). He also has a SEP from prior years (we made the switch from SEP to solo 401k last year). With the solo 401k, he can contribute more than he could with the SEP. We choose to contribute as much as we are allowed to.

I do not know what the rules are regarding employees who have employer-provided pensions (like you) and solo 401(k)s, so I don't know if you'd be eligible to have one. But you CAN have a SEP.

Although I mentioned that you can contribute up to (roughly)25% of your self-employment income, you don't have to contribute that much. Since it's money that you won't be able to access (without paying penalties) for a long time, you could start small and see how it goes. And in case you're really interested, it's not too late to set up a SEP for the 2017 tax year.

The IRS web site has info: https://www.irs.gov/retirement-plans...stablish-a-sep

[LivingAlmostLarge]

This is very interesting thread on how to get into RE cheap. But I don't think easy. How do you identify properties? Did you become Realtor because you wanted to do this or do this because you were a realtor?

Have you ever made a mistake?

[bjl584]

This is very interesting thread on how to get into RE cheap. But I don't think easy. How do you identify properties? Did you become Realtor because you wanted to do this or do this because you were a realtor?

Have you ever made a mistake?

There are a few ways to identify properties. Most say, don't fall in love with the property. Look at the math only. A common one is the 1% rule. Some do 2%, but it depends on your market. If you can get 1% in rents of the total purchase price, then it is a good investment. So, a $70,000 home should fetch $700 a month in rent. That is just a rule of thumb of course. There are other formulas as well that take into account vacancy rates and upkeep costs.

It just depends what you are trying to do. There are lots of ways to approach RE. Some people look for cash flow up front. Others want to buy assets and wait it out. Some are flipping or wholesaling. Some are doing combinations of those things.

I can't speak for OP, but mistakes are usually part of the game. Something unforeseen always comes up somewhere eventually.

But, RE is a great way to build wealth. One can purchase and control a asset with only 10% down, leverage the rest, and achieve a monthly cash flow from it, appreciation, and tax benefits. It's hard to do all of that anywhere else.