What to do with $140,000 cash

[adamturner]

I have just sold my principal residence and walked away with $140,000 of tax free money.

I am making a huge move with my wife and 2 toddlers to the east coast, to live, be a carpenter and pursue a new lifestyle of being a real estate investor in the Atlantic provinces.

Question.

What options do i have if I want a home for my family, and an investment property to start my new career.

Any opinions please.

Cheers
Adam

 

[lanedry77]

My two cents;

Option #1
#1 - Buy your personal residence. buy as modest as you can, but enough that you won`t have to move in the next 5 years.
#2 - Put that $140k towards your personal residence.
#3 - Use the HELOC portion of your readvanceable mortgage on your personal residence to start your investing (so step #1 involves getting a readvanceable mortgage, of course).

Option #2
#1 - Buy your personal residence. buy as modest as you can, but enough that you won`t have to move in the next 5 years.
#2 - Put as little down as you can (no more than 5%) towards your personal residence.
#3 - Use the remaining cash you have left from the $140k to start your investing.

The less you spend on your personal residence, the more of the $140k you`ll have access to in both situations. With option #1 you`ll need at least 20% down before you have access to any capital. With option #2 you`ll only have 5% down, leaving more capital to invest with.

Both options will have different mortgage payments and qualifying issues.


David.

 

[EdRenkema]

QUOTE (DavidSandbrand @ May 27 2009, 06:14 PM) My two cents;

Option #1
#1 - Buy your personal residence. buy as modest as you can, but enough that you won`t have to move in the next 5 years.
#2 - Put that $140k towards your personal residence.
#3 - Use the HELOC portion of your readvanceable mortgage on your personal residence to start your investing (so step #1 involves getting a readvanceable mortgage, of course).

Option #2
#1 - Buy your personal residence. buy as modest as you can, but enough that you won`t have to move in the next 5 years.
#2 - Put as little down as you can (no more than 5%) towards your personal residence.
#3 - Use the remaining cash you have left from the $140k to start your investing.

The less you spend on your personal residence, the more of the $140k you`ll have access to in both situations. With option #1 you`ll need at least 20% down before you have access to any capital. With option #2 you`ll only have 5% down, leaving more capital to invest with.

Both options will have different mortgage payments and qualifying issues.


David.

Not to confuse the issue but option #1 is hands down the best financial strategy. Why? Simple, paying the maximum amount on principal residence minimizes non-tax deductible debt while using the HELOC for investing maximizes tax deductible debt.
All things being equal this assumes the rental property in question cashflows sufficiently to cover all costs including HELOC interest payments.

 

[wgraham]

QUOTE (EdRenkema @ May 27 2009, 08:17 PM) Not to confuse the issue but option #1 is hands down the best financial strategy. Why? Simple, paying the maximum amount on principal residence minimizes non-tax deductible debt while using the HELOC for investing maximizes tax deductible debt.
All things being equal this assumes the rental property in question cashflows sufficiently to cover all costs including HELOC interest payments.

I will second this with the added note that the CMHC fees are deductable on an investment but not on your personal residence.

Good luck!
W

 

[mortgageman]

QUOTE (wgraham @ May 27 2009, 09:07 PM) I will second this with the added note that the CMHC fees are deductable on an investment but not on your personal residence.

Good luck!
W

CMHC fees are significantly lower on a personal residence than on a rental property. CMHC fees will make it harder for the rental property to cash flow.
I suggest having the smallest possible mortgage on your personal residence and then getting a secured line of credit to access equity in your home and use as down payments on the rental properties.
All the best
Jason

 

[invst4profit]

My approach would be entirely different based on looking in my life`s rear view mirror.

I would not buy a personal residence at all for at least 5 years. I view personal home ownership as a liability and a luxury as it provides no income. I would reduce my expenses by renting a modest home which would be far less expensive than owning and would free up more cash to invest. Or you could start by purchasing a multi unit investment property and occupy one unit with your family.

This approach would see me concentrating on growing my wealth and avoiding the additional costs associated with home ownership until I had my business to the point of having significant enough positive cash flow to allow me that luxury.

I would see your move as a perfect opportunity to follow a new path. Concentrate on the business and postpone home ownership. Short term pain for long term gain.

From what I have heard $140000 will go a very long way down east to establish a substantial business in short order.

 

[adamturner]

QUOTE (invst4profit @ May 28 2009, 06:32 AM) My approach would be entirely different based on looking in my life`s rear view mirror.

I would not buy a personal residence at all for at least 5 years. I view personal home ownership as a liability and a luxury as it provides no income. I would reduce my expenses by renting a modest home which would be far less expensive than owning and would free up more cash to invest. Or you could start by purchasing a multi unit investment property and occupy one unit with your family.

This approach would see me concentrating on growing my wealth and avoiding the additional costs associated with home ownership until I had my business to the point of having significant enough positive cash flow to allow me that luxury.

I would see your move as a perfect opportunity to follow a new path. Concentrate on the business and postpone home ownership. Short term pain for long term gain.

From what I have heard $140000 will go a very long way down east to establish a substantial business in short order.
The option of buying a side by side duplex has been at the front of my mind lately. With us living in one side, not only can we get a fairly nice place to raise a family, but it gives me a good opertunity to ease my way into real estate investing.

What modifications would i make to the ACRE system if I was looking at a duplex to buy, but was going to live in one side of it.

Thanks for the feed back guys, this is helping a lot.

Cheers
Adam

 

[Thomas Beyer]

As a self-employed person a big reserve, say one year living expenses, is a good idea !

step 1: celebrate ! Also: Frame the 6 digit cheque on the wall .. as this may be your first 6-digit one .. and they don`t come that often that big !

step 2: settle down in new home, perhaps rent for a year as you may not like the weather or the people or your wife misses her family etc. .. thus don`t be too fast to invest the cash quite yet ...

Step 3: get new income stream established

Step 4: once new home is for sure .. and new income stream is pretty given .. THEN start investing .. with a variety of your own deals along a meaning full asset allocation model such as: 25-50% of cash net of reserve, stock market (25% or so) and less liquid, but usually higher yield private syndications in a field you understand (say real estate, or gold/mining, or oil/gas ..)

 

[invst4profit]

Thomas makes a very valid point with step #3. This is very important when considering getting into the income investment game.
You need to have a solid steady income that you can rely on.

 

[adamturner]

I think i would have a hard time renting for a year or so, because the rent in the Halifax areas for a 3 bedroom house is min 1200 a month. After owning my own home since i was 22 giving somebody else 15,000 for a years rent would kill me.

I totaly agree with establishing a steady stream of income first.

With just having one income for the next few years, i need to keep monthly mortage payments as low as possible (under 500 mth).

That being said i dont think its possible for me to rent at all.

I have to purchase something in order to get a low monthly home payment.

Buy rental, live in 1 unit....Invest it all in a home and get HELOC....

What else is there, and what would be the smartest thing to do for a guy with a family and one income only..

Cheers

 

[Thomas Beyer]

QUOTE (adamturner @ May 28 2009, 11:13 AM)
I think i would have a hard time renting for a year or so, because the rent in the Halifax areas for a 3 bedroom house is min 1200 a month. After owning my own home since i was 22 giving somebody else 15,000 for a years rent would kill me.




pay bank "rent" (i.e. interest on mortgage) or pay landlord ..



I do not know Halifax but I woudl venture to guess that a decent house in a decent neighborhood is 120-180K .. so close to renting / month with much higher transaction costs when selling and less flexibility ..




QUOTE (adamturner @ May 28 2009, 11:13 AM)
...



What else is there, and what would be the smartest thing to do for a guy with a family and one income only..






read this here:





5 ways to make money http://myreinspace.com/public_forums/General_Discussion/61-3347-5_ways_to_make_money.html



How to get started http://myreinspace.com/public_forums/General_Discussion/61-4391-How_to_get_started_.html



LOC vs. mortgage: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2302-What_is_better_a_mortgage_or_a_line-of-credit_.html



COVERED CALLS: http://myreinspace.com/public_forums/General_Discussion/61-8913-What_else_do_you_buy__besides_Apartment_Buildings.html

 

[housingrental]

Adam - The points others have made up above are very important - What if theres a particular neighbourhood you want to live in and realize this only after living there for six months? Renting first is the best way to go until your settled and know the area, know your income, and know your staying for a long time.



Also - Purchasing a multi-unit that you live in can be a lot of stress if things go wrong - If tenants are causing you problems do you really want them as your neighbours ?






QUOTE (adamturner @ May 28 2009, 01:13 PM)
I think i would have a hard time renting for a year or so, because the rent in the Halifax areas for a 3 bedroom house is min 1200 a month. After owning my own home since i was 22 giving somebody else 15,000 for a years rent would kill me.



I totaly agree with establishing a steady stream of income first.



With just having one income for the next few years, i need to keep monthly mortage payments as low as possible (under 500 mth).



That being said i dont think its possible for me to rent at all.



I have to purchase something in order to get a low monthly home payment.



Buy rental, live in 1 unit....Invest it all in a home and get HELOC....



What else is there, and what would be the smartest thing to do for a guy with a family and one income only..



Cheers

 

[lanedry77]

QUOTE (EdRenkema @ May 27 2009, 08:17 PM) Not to confuse the issue but option #1 is hands down the best financial strategy. Why? Simple, paying the maximum amount on principal residence minimizes non-tax deductible debt while using the HELOC for investing maximizes tax deductible debt.
All things being equal this assumes the rental property in question cashflows sufficiently to cover all costs including HELOC interest payments.
I completely agree with you Ed (and Wade) but depending on the purchase price of the principal residence, it`s possible that the large downpayment on the principal residence may only put the total LTV at 79% (let`s just say), which would leave only 1% for a HELOC. Granted, this is unlikely given the average home price on the East coast isn`t in the mid $600,000`s - but then again we don`t know what the principal residence in question is.

So if accelerating his investments is Adam`s main goal, he would definitely have more cash on hand if he maxes the mortgage on his principal residence (5% down CMHC insured) and uses the remaining cash from the $140k to invest. Additionally, there`s no HELOC carrying costs in this situation. If we assume he could access $100,000 in a HELOC after buying a home, it`s going to cost some $250 per month of his cash flow just to maintain that loan (assuming prime + 0.75%) and that`s going to rise over the next few years as prime goes back up to normal levels.

BUT - From a tax perspective, putting the entire $140k towards the principal residence and using a HELOC to buy an investment property does maximize your tax deductions and minimize your non-deductible expenses. But making the decision based purely on tax consequences seems like a bad idea to me.


David.

 

[JoefromTO]

QUOTE (invst4profit @ May 28 2009, 08:32 AM) My approach would be entirely different based on looking in my life`s rear view mirror.

I would not buy a personal residence at all for at least 5 years. I view personal home ownership as a liability and a luxury as it provides no income. I would reduce my expenses by renting a modest home which would be far less expensive than owning and would free up more cash to invest. Or you could start by purchasing a multi unit investment property and occupy one unit with your family.

This approach would see me concentrating on growing my wealth and avoiding the additional costs associated with home ownership until I had my business to the point of having significant enough positive cash flow to allow me that luxury.

I would see your move as a perfect opportunity to follow a new path. Concentrate on the business and postpone home ownership. Short term pain for long term gain.

From what I have heard $140000 will go a very long way down east to establish a substantial business in short order.


I bet we all have stories of "...if I could go back I would have..."

There are many times I wished I had invested sooner in my life...who hasn`t wished this. Here`s what I would have done.

I would have invested in a small apartment building, living in 1 unit and renting the others. With the rent and my income at the time (15 years) ago, I could have paid the place off in 10 years, give or take. Then I would have bought a primary residence with the equity from the apartment building...etc...

The difference is, I would have bought my investment BEFORE my primary residence.

So I agree whole heartedly with `invst4profit`...buy a rental first, if your wife and children understand and support what your trying to do...otherwise, it will just take longer.

I`d rent in the area first. This would give you alot of flexibility to "feel" your way around an area you may not know too well first. Then, the right property would present itself.

Man...if I could go back I would have...<input your response here>

 

[Goodstuff]

QUOTE (JoefromTO @ May 28 2009, 08:26 PM) I bet we all have stories of "...if I could go back I would have..."

There are many times I wished I had invested sooner in my life...who hasn`t wished this. Here`s what I would have done.

I would have invested in a small apartment building, living in 1 unit and renting the others. With the rent and my income at the time (15 years) ago, I could have paid the place off in 10 years, give or take. Then I would have bought a primary residence with the equity from the apartment building...etc...

The difference is, I would have bought my investment BEFORE my primary residence.

So I agree whole heartedly with `invst4profit`...buy a rental first, if your wife and children understand and support what your trying to do...otherwise, it will just take longer.

I`d rent in the area first. This would give you alot of flexibility to "feel" your way around an area you may not know too well first. Then, the right property would present itself.

Man...if I could go back I would have...<input your response here>

I think buying a multiplex and living in one unit is a great idea. If it turns out you don`t like the neighbours or the area you can then move out and rent the unit. This way you`ve gotten to know the town and what areas are good/bad and haven`t used up too much money in the meantime. You`ve also had some time to figure out which tenants are good (well behaved) and which might not be. Living next to them will make this clear in no time.

 

[AndyLuchies]

QUOTE (JoefromTO @ May 28 2009, 10:26 PM) I bet we all have stories of "...if I could go back I would have..."

Man...if I could go back I would have...<input your response here>

Man... if I could go back I would have NOT wasted time with 4 expensive years of University, invested in duplex as first principle residence, rent out basement...and off to the races.

The only way you could jump right in to RE investing out east is if moving there benefits you least of all in your family, e.g. if you`re moving back home to her family. That way you`re the one most likely to want to come back, but you`re invested there. Watch out if you`re moving at a disadvantage to your wife... I say this after 5 years of marriage.

I have a different take on principle residence though (although I have less experience than most here) We purchased in 2005 outside of hamilton proper and just had house appraised at $40,000 more than we bought it for (with no major renos, just weekend work on landscaping), and probably only going up over the next 5 years...so it was definitely a plus for us to buy when i started university instead of rent...use acre system to find a good area to buy in, then refinance to take out $$$ of residence in 5-10 years (or in our case 3.5 years) for investing. Plus, if you buy a fixer-upper, you can easily increase value right out of the gate! But make sure your wife is on board (obviously) with whatever decision.

 

[AndyLuchies]

would you consider being the money partner for a few years while you get settled out east? its a good way to learn ropes, if your RE partner doesn`t mind you tagging along, and you don`t tie up money in unknown area... just a thought.

 

[AndyLuchies]

another idea... would you consider buying an investment business? not really under the ACRE program but you could look at a turnkey business (one where you just "turn the key" to open in morning and close at night) like a laundromat. The only reason I ask is because with one income, if your wife was on board with this, she could run the business with you and it can provide more income per dollar invested, just make sure you`re building a systemized business, not just taking on a second job.

Also, while I`m here, what about distance investing? Especially if moving east for work, with all family/friends back home, invest here, where you already know area and then just moniter investments from a distance. Some RE investors i`ve spoken to, if they could start over, would have started out investing far away from where they lived... but no personal experience here so take it with a grain of salt.

 

[AndyLuchies]

QUOTE (adamturner @ May 28 2009, 10:17 AM)
The option of buying a side by side duplex has been at the front of my mind lately. With us living in one side, not only can we get a fairly nice place to raise a family, but it gives me a good opertunity to ease my way into real estate investing.



What modifications would i make to the ACRE system if I was looking at a duplex to buy, but was going to live in one side of it.



Thanks for the feed back guys, this is helping a lot.



Cheers

Adam




use acre system to establish whether it cashflows well by pretending you wouldn't be living in it. If it fits with reasonable rent projections, buy it and live in one half. Instead of you getting someone elses rent each month, you're saving yourself from paying out rent to others. Some people forget that while owning a home is a money drain, living under ANY roof is a money drain, so the question is what circumstance drains you the least money.



Also, buying a principle residence instead of renting seems like a no brainer if all other things are equal (e.g. buying a 3 bed 2 bath makes more sense than renting a 3bed 2 bath house, or buying a duplex and living in a unit makes more sense than renting one unit of someone elses duplex.) The bottom line is that if its profitable for someone to rent a house to you, its profitable for you to rent to yourself. The only reason I would NOT buy a principle residence is if renting would make me stick to a lower standard of living, e.g. renting a small appartment instead of buying a big house.



When buying a place, if property taxes, insurance, and INTEREST portion of mortgage on your new house are more expensive than renting the equivalent property from someone else (also factor in whether utilities are included), it might STILL make sense to own your own place because you can buy it low to gain immediate equity, improve it with renos, gain from yearly appreciation, etc. The only downside is yearly maintenance.



Anyone with other ideas please fight back on this, I want to know why some of you wouldn't buy a principle residence first.

 

[invst4profit]

Based on monthly expenses it is always less expensive to rent. Although you do not have the benefit of appreciation I would guess there may be very little of it down east over the next few years.
Rent now, concentrating on income and settling in, then make a decision on what to use the $140,000. Don`t try to go in too many directions too fast.