After reading Creative Financing in Real Estate 101, you should be on the hunt for tiny homes, mobile homes, RVs, or small apartments. As I said before, affordable housing is the way of the future. Also, finding deals in real estate my be how to leverage this asset class moving forward.
Let’s say that you find a lovely tiny home for $50,000. You can finance the house, but you need $20,000 cash to buy the land. You have $20,000 cash, but do you want to use all of your money to buy this asset?
I do not like the idea of using the last of your cash because it leaves you so close to the danger zone. If one thing goes wrong, you could be in the cold. Now it is time to get creative. The most important part of being creative is doing the math. It is not the imaginary math where everything runs smoothly, but the math which takes into account maintenance and vacancy rates.
Happy Cash Flow Retirement
The books “Zero Down” and “The ABCs of Real Estate Investing” are must-reads before you get into the business. They give run-downs on how to use capitalization rates (cap rates) and property numbers to calculate your future returns.
For example’s sake, your $50,000 home loan will be $400/month for 15 years. You have another $150 for maintenance and vacancy expenses. The total for debt service and expenses is $550. You can rent the home for $850/month, so you would be cash flowing $300/month, which is very good except for that pesky $20,000 for the land.
I would say there are three solid options for personal loans that you can leverage quickly and without much fuss. These options are credit cards, personal loans or lines of credit, and loans against retirement accounts. Let’s look at each individually.
Credit cards. Credit cards are the riskiest because they are costly, and the math that credit card companies use works against you instantly. The book “Real Estate Note Investing” talks about starting out using checks from credit cards to make home purchases. However, the author would then perform a cash-out refinance of the home to cover the credit card’s cost.
In our case, we would not be doing a cash-out refinance. We would have to be careful. I wouldn’t even attempt to use credit cards unless I knew that I would have an inflow of cash within 30 days. So, for now, let’s take this option off of the table. It would be viable with a cash-out refinance home-flip scenario. I think that is the only way you could use cards safely.
The Advantages of Adult Children Living at Home part II
Personal/Signature loans. These loans have high-interest rates but have more freedom of use—the better your credit, the better the loan interest rates. Let’s type in some average loan details into our simple loan calculator. $20,000 over 5 years @10% interest will equal $424. Adding this to our expense amount of $550 will bring our monthly total to $974. We would be negative cash flow. Is our deal over?
Now, this is where the word creative comes into play. This asset may be your first purchase. It could be an ugly situation, but if you don’t have any help, you will have to start somewhere. Let’s look at some options to get us positive cash flowing.
1) Use $10,000 from our personal savings and $10,000 loan. Reducing our loan amount would make the payment $212/month and a total expense of $762. We would be cash flowing $88/month. Not a lot, but it is positive. I recommend letting that $88 accumulate in an account until it reached at least $3,000. This money would be for emergencies and maintenance around the property.
The Road to Wealth
2) Take the $20,000 for the loan and get a roommate in your personal residence. I know most people won’t consider this an option, but the rich got rich for a reason. House hacking is the fastest way to wealth in American society. It is a shame most people do not use this free tool. With a roommate paying $800, plus the cash flow for the property (the $300), you can pay off the loan in 18 months. If you keep the roommate, you can repeat the process and have another property in 18 months. Too easy.
3) Take out a $20,000 loan but ask the tiny home company if you can finance two homes. Depending on the land’s zoning, you may be able to put multiple homes on your land. Doing the math: (home #1 cash flow $300) plus (home #2 cash flow of $300) equals ($600/month cash flow). With a loan payment of $424, we would be cash flowing $176/month. I would still take on a roommate just to pad all my numbers out. Just me.
Retirement Account Loan. Most retirement accounts, 401K and TSP allow customers to take out a loan against their total retirement account balance. Usually, the amount of the loan has to be less than 50% of the balance. So if you had $40,000 in your account, you could take out $20,000.
These loans are outstanding because the interest rates are usually extremely low, usually below 2%. In the low-interest-rate environment, we are in now, I have seen loans for 1.45%. The loans will cripple your retirement account because your money will not be growing in the stock market, so you will have to do the mental math on if it is worth it to take the loan.
Scarcity vs. Abundance
In my opinion, having two tiny homes paid off by the time you retire would be a massive boost to your retirement. That’s just me doing tabletop math, though. Using our same calculator, $20,000 over ten years @1.5% would give us a loan payment of $180. With our two-house idea, we would be cash flowing $480/month. What a difference the interest rate makes. I still would get a roommate.
Final thoughts. Real estate will take creativity. Unless you are a first-time homebuyer using the VA loan or with a 20% down payment, you will need to find a way to make the deal happen. Every single deal is different. It is important to remember that your goal is to get an asset, not use a particular way to obtain it.
Each house that my wife and I purchased was different and “difficult.” I don’t look back at any of the three places that we bought and say that any of them were easy. They all were stressful to some extent. Nothing comes for free, and some will eat at your sanity, at least temporarily. But they have allowed us to have three houses and build an investment portfolio of over $150,000 in two years.
Remember the big picture, don’t get too frustrated, run the numbers over and over, and stay creative. You will find a way to get it done, especially if you are willing to sacrifice a little, like getting roommates.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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