Today’s question from a new Investor:

************************************************************************************
October 31, 2009

As we have mentioned in various posts and on our site ( www.wealthbuildingpro.com ) we enjoy helping people get started in real estate investing. Over the years many of the questions we get are the same or at least very similar and as time goes by we will take stabs at answering all of them in posts or articles. Our goal is to provide a one stop shop for new investors to answer their early questions on the road to real estate wealth.

However, on occasion we get asked a question that we just have to write about. Today we were asked by a new/potential investor what they should do with $200k. First off that is a ton of cash and you could do a lot of things with it. After asking a few questions we learned that this new investor is very conservative and had planned to just buy a house cash and have no mortgage. In our mind the investor would be house rich and cash poor.

This is certainly one option and one that this new investor (home buyer) may move forward with. As you might imagine we had another recommendation.

The following is a rough outline of what we recommended as a second option for the 200K.

1) Take 40K and buy the 200K house with a 80% mortgage and get a 30 year fixed rate loan as close to 5% as they can

2) Then we recommended the client focus on buying 4 – Duplexes over the next 12-18 months. The goal being to find Duplexes that need some work and can be purchased for under 75K and produce greater than $1,300 in income each. Depending on rates (currently around 6.5%) and required down payments we estimate cash flow will be greater than $500 each once repaired and leased.

3) We estimate that depending on repairs and other miscellaneous costs the investor should be left with 20-30K in cash that they can tuck away for unexpected costs of being a landlord or new home owner.

The strategy above does a couple of things.

1) It produces a positive carry of over $1,000 a month (2,000 in Cash Flow from Duplexes - $750 Mortgage Payment from primary house)
2) It creates a larger foundation or real estate for when inflation picks up
3) It enables the investor to safely take advantage of the market while it is depressed (Buy Low – Sell High)

In the end we don’t know if the investor will become an investor or decide to pay cash for their primary house. However, we feel good about providing the alternative option.

Thanks for reading
************************************************************************************