Mortgages & Creative Financing

How to Leverage Your First House into Multiple Properties (Even With Limited Capital!)

Expertise: Real Estate Investing Basics
26 Articles Written
silhouette of girl jumping in the sun

Whether you’re already living in a house you own or you want to buy your first house and springboard it into a bigger portfolio, I’m hoping to provide some useful information to make this easier.

There are plenty of ways to do this—plenty of exit strategies and lots of different names used for it on BiggerPockets. You may have heard it called house hacking, live-in flipping, live-in BRRRR investing, etc. Basically, we will be discussing how take a personal residence and inject some creative element or added value to produce a profit when you exit.

There are countless strategies to do this, and a lot depends on what type of starting resources you have access to. Even if you don’t have a lot of starting capital (like how I started), this is still very possible! You just need to find a deal that allows for a reasonable profit margin and be willing to get a bit creative.  

Know Your Leverage Options

Everyone starts out in different places. If you have never bought a house, then buying your first with a value-add is an effective way to get started. You learn the buying process, and you get to make your first purchase with an investor mindset: big advantage! If you already own a house, then you may have equity in it, or you may be able to refinance some of the cash out at a low interest rate.

If you have a house that has equity but can’t grab the equity, now might be the best time to sell. Many markets are currently inflated, and if you’ve been living in it for two years, you get to take the gains tax free. There are lots of options available—make sure you take time to consider them all.

If you already own a home, you may have equity that you can borrow against. A home equity line of credit (HELOC) is like a credit card against your house. It’s set up using the existing equity you have in your house, which allows you to use the funds at your discretion. The best part is that, just like a credit card, you don’t pay anything until you actually deploy the capital.

HELOCs are a great strategy that I highly recommend.

1031-exchange

To see where you may qualify:

  1. Use Zillow as a guide to see your home’s worth.
  2. Take that number and multiply it against 75% and 90%. This is the low and high of common HELOC loan-to-value (LTV).
  3. Take that new number and subtract your current debt service. This is how much you could be able to borrow in a HELOC.

For example:

You own a house worth $200,000.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

You owe $100,000.

200,000 x .85 = $170,000 – $100,000 = $70,000 potential HELOC credit!

Other benefits include the option to pay interest only or very low origination costs.

Sometimes it’s better to do a full refinance than a HELOC—for instance, if you need to finance a property that will be difficult to get its own loan or if you have access to reliable income and the increased house payment is less of a concern than access to liquid cash.

It’s also good to know that you can take out a HELOC and spend it on a house and then later convert that outstanding balance to a closed-end loan like any other. This is a fantastic option in situations where it can be applied usefully.

Related: The Real Estate Investing Strategy I’d Recommend to Newbies (As a Seasoned Investor)

Viewing a House as a Financial Transaction

Lots of people are emotionally afraid of debt. We live in a society where the word “debt” has a highly negative connotation, and people rarely get explained all the benefits. Now, I’m not saying that debt doesn’t come with risk—it does, but risk is something that should be managed, never feared. The point is, don’t fear using leverage to move forward where you can.

Use your resources effectively so they turn a profit. You don’t want to over-leverage or mortgage everything possible in order to get ahead, but realize that leverage can increase your growing power significantly when used wisely. Emotions make terrible debt decisions.

In addition to emotional fear of debt, we also suffer from emotional attachment to our homes. People feel compelled to “love” their house, but house hacking requires sacrifice by definition. It means you’re willing to buy and live in a non-retail house, that you’re comfortable with rehab going on day-to-day, and that you want the house to make money primarily—it’s not your dream home.

I always try to remember this great quote: “Never buy a home, only a house.”

I lived in my house hack for about three years. It wasn’t terrible by any means. For people looking to buy “starter homes,” this is probably not the path for you. But making a little sacrifice can be profitable, and it’s good for the soul!

Knowing your home is a financial transaction from the start also helps restrain you from doing unnecessary improvements. Maybe you want a glass enclosure shower, but you know it’s not going to increase the rent, and you’ll never get your money back if you sell it. If that’s the case, then restrain yourself!

If the point is to leverage profitable properties into a larger portfolio, then keep your eyes on the long game. There will be plenty of time for luxuries and amenities; don’t get caught up tricking out your rental property.

How I Did It

My first house was a lousy retail purchase that I made no money on. (Still own it and still don’t make money on it!) That deal taught me that buying homes at retail price doesn’t make money. I needed to buy something underpriced or distressed. So we started looking, and before long, I found a foreclosure that I was able to move into while still using an FHA loan.

After 18 months and a little rehab, I had a house that was worth quite a bit more than I paid, and many homebuyers had dismissed it because it was a foreclosure. In reality, the house was not in bad shape at all—it was a perfect house.

The original home price was $54.5K. I put $3,500 down and another $3,000 into it over my first year. My wife and I made a little sacrifice to move in this house—it certainly wasn’t brag-worthy, but when it later appraised for $115K, we knew to refinance it immediately.

We pulled out some of the created equity and got a HELOC to tap into the rest. So, my $6,000 investment had made $60,500 in under two years. Not bad for a first deal, especially when I was mostly winging it. This means if you’re diligent and focused, you can do a lot better.

Some of the details here are important to cover to better show the most important factors:

  1. I moved into a foreclosure with an FHA. This didn’t seem like a big deal at the time, but being able to find a foreclosure where the FHA will allow immediate move-in can be rare. So if you can find this type of deal, you might want to look closely at it. Being able to use FHA means two things: 1) the bank will finance with a low down payment and 2) the bank won’t allow you to move into a foreclosure if it’s in really bad shape. Combine these two things, and you get a discounted house, which is move-in ready, at low cost to entry. EASY!
  2. My initial strategy was to remove the PMI on the original loan, and I was able to lower the interest rate a small bit, so I could pull out $20,000 while keeping my payment the same. Looking back, I should have pulled out as much as they would let me.
  3. Not all markets are equal. People who live in large cities probably look at my numbers and think it’s impossible to replicate, and others might look at these numbers and decide it may be worth moving to capitalize. Sacrifice was definitely a factor in my progress, but to be fair, sacrifice is most likely going to be a big factor anyway if you are starting without a lot of resources and intend to make progress. Something will have to give.

Related: 4 Steps Newbies Can Take to Get Ready to Invest (Even if You’re Still Saving Up!)

Experience Creates Momentum

Using the first home as financial leverage to buy the next is a great strategy, but the momentum it creates should not be undervalued.

That first house hack I did, where I created $60K out of thin air, was much more valuable in experience than in cash. This is because cash isn’t usually the choke point for beginners. Cash might seem like the problem, but the real problem is usually talent, resources, or strategy.

Even if you have no shortage of cash, if you don’t know how to deploy it correctly, it’ll go to waste for sure. So the first deal or two, when you’re cash strapped and struggling, trying to grind out maximum returns from your deal is when you create the most momentum. It increases not only your return, but your self confidence.

I wasn’t a smart guy who figured this stuff out when I started making money, just a knucklehead who thought he could do it and wound up making a lot. That’s when the momentum hit me. I thought, “Oh, this is not only profitable, it’s very POSSIBLE.”

Now that I knew it could be done, I was unstoppable. This has been the true springboard in my business, not so much because of the capital, but the confidence! Once that first deal or two is in the past, the future starts looking quite easy.

Do you have that first deal under your belt yet? What’s your plan for scaling your investing?

Weigh in below!

Alex has spent his career in sales and finance industries and now invests in rental real estate along with working in the underwriting department at a bank in Las Vegas. Alex is an expert in long-d...
Read more
    Mike McDevitt Investor from Chandler, Arizona
    Replied about 2 years ago
    “A home equity line of credit (HELOC) is like a credit card against your house.” (an investor in 2006) What could possibly go wrong? There are plenty of leverage and funding options around (including using your own cash) without betting the farm. I’d dare say that if you’re looking at your primary to bankroll investment properties, you probably need to shore up your investment capital or collateralize other (existing) investments. ESPECIALLY if your working deal #1. If you can keep your fingers out of the primary residence cookie jar, you’ll at least have a dry place to stay if it all goes south.
    Shawn Landon from Bend, Oregon
    Replied about 2 years ago
    We/re about to sell our first for a sweet little profit. We bought an under priced house about 3 years ago for a very low $150k. Financed FHA and got all in for around $7,500 out of pocket. Did a few minor things like painting and landscaping and now we’re about to sell for $250k. Not bad for 3 short years and just a little bit of work. Now, onto the next one.
    Rebecca Jackson Rental Property Investor from Dallas, TX
    Replied about 2 years ago
    That’s awesome! We are about to do the same thing 🙂 Except we use VA loan, bought a smelly old house and now will reap over 100%+ return on investment! It didn’t make sense to keep as a rental since we can only use one VA loan at a time- which is hands down the best financing ever! So, while we do it again in the next house (with more experience), we can take our tax free capital and re invest elsewhere.
    Christopher Smith Real Estate Agent from Gulfport, MS
    Replied almost 2 years ago
    Rebecca, cant you refinance/switch your VA loan to a conventional? That was my plan around it
    Rebecca Jackson Rental Property Investor from Dallas, TX
    Replied 6 months ago
    Yes, we thought about that. But the property would not cash flow, we would lose money every month if we rented it out. Honestly it was too nice for a rental anyway. We preferred to cash out tax free and do it again. I would never keep a property that is cash flowing negative.
    Justin Wigg
    Replied over 1 year ago
    You absolutely can! I’m about to use my VA loan to close on a multi-family property. I currently live in a condo that I purchased with my VA loan a couple years ago. Good comps allowed me to refinance to a traditional loan without paying PMI, freeing up my VA eligibility for my next deal.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied about 2 years ago
    Great article Alexander and well done!
    Ezichi Oha Wholesaler from North Hollywood, California
    Replied about 2 years ago
    Yep! Something got to give
    Francine Brown
    Replied almost 2 years ago
    What if we sell our personal residence and rent while we are using our capital from primary to purchase rental property?
    Brian Adamo
    Replied 6 months ago
    Francine, this is what I did and I think its a terrific way to go. Live where you want to and invest where it is profitable. Brian
    Rob Johns
    Replied almost 2 years ago
    Thank you for the confidence boost!
    Joe Hammel Real Estate Agent from Southfield, MI
    Replied over 1 year ago
    Great Article. BRRRR takes a few times to understand as a new investor and this article seals the deal. Good job explaining.
    Yulaw Jackson
    Replied 6 months ago
    Great info. I'm currently in a situation where I'm trying to figure out the best strategy for me to access more capital. I bought a SFH a year ago that I want to figure out the best way to leverage. Funding is low because I was able to leverage other resources these last two months to acquire two duplexes out of state. Moving into this next place (hopefully a tri or quad) locally is also on the table
    Amy Turnbull from Great Barrington, Massachusetts
    Replied 6 months ago
    This article is eleven years old!
    Robert Ruschak from Chicago, IL
    Replied 6 months ago
    Alexander Felice— Great job utilizing the HELCO! Interest rate are still near historical lows.
    Janice Reynolds from Dunbar, West Virginia
    Replied 6 months ago
    This is how I plan to start my journey, great article
    Rena Barron
    Replied 6 months ago
    I’m house hacking right now I have to remind myself of the greater good. Even though I have a retail house somewhere else I still believe this will pay off.
    Greg Clatterbuck Rental Property Investor
    Replied 6 months ago
    One thought on HELOCs. I love HELOCs, great revolving credit. If you are planning on future purchases; your debt is considered the maximum capacity of the line of credit which could negatively impact your future debt to income ratio.
    Brian N. Rental Property Investor from Minneapolis, MN
    Replied 6 months ago
    If I use some of my equity as a HELOC to let’s say make some repairs on my house. Finish the basement etc. When do I have to pay that back by and what is the interest generally on a HELOC
    Claire-Marie Cyprien
    Replied 6 months ago
    Mine($456 K on a $187 K property)was obtained at the market high in 2006. It took 10 years to get to repayment and I utilized the heck out of it. It paid my student loans($164 K), helped pay off my present home, helped me catapult into real estate investment(I bought a total of10 properties, 3 of them unimproved) and I started my other business all while paying interest only. I do not understand the hesitation in using HELOC. To me it is the best use of OPM assuming you are a dynamic investor.
    Brian N. Rental Property Investor from Minneapolis, MN
    Replied 6 months ago
    Hey thanks! So you have essentially ten years to get it paid back? Just trying to understand if there’s interest and repayment right away is all :)
    Account Closed
    Replied 6 months ago
    This is all old and basic news.
    Amelia BlakeGarner
    Replied 6 months ago
    Well this sounds very impressive, but my husband and I are both self-employed, and make very little money. In the local investing groups, and on this site, they constantly say, "money isn't the problem, find the deal". But when you find the deal, even hard money loans want you to show you have a track record, and we don't qualify for conventional loans. Several said they used OPM - "other people's money", but again, no one wants to invest their money with someone who doesn't have a track record. I cannot qualify for a HELOC for the house I presently own that has about $80K in equity because of our low income.
    David Green Rental Property Investor from Fullerton, CA
    Replied 4 months ago
    I know your comment is 2 months old but I wanted to add something that may assist you if nobody gave you an answer. Your best option would be to find a great deal and partner with someone. You bring the deal and they bring the money then split the profits. That would help you build experience while profiting on deals you find. You seem like your already attending your local investing groups so I'd say you start there in your partner search. Good luck and wish you well on your future deals.
    Eva Oliver Investor from Norcross, Georgia
    Replied 6 months ago
    Yes, I am in the same situation. Own a house free and clear. However, credit took a hit due to being left holding all of the credit on a deal. Want to pay off the bills but tough to find a bank to do it because credit took a hit. I understand what you are saying and the only way would be to attend local meeting and ask if investors would be will ing to allow you to work with them to gain experience. I also used my home as leverage to finance a cosmetic flip. I am working with a community bank in Atlanta to assist with the refi.
    Kim Marie
    Replied 4 months ago
    Great article, thanks for the info! I have a question regarding your second point in "important details": Aside from creating emotional momentum, why is that? I currently live in a hot real estate area, where deals can be challenging to find. I own two houses, would like to own more, but do not have a specific property in mind. I am about to refinance one of my houses to capitalize on a lower mortgage rate. My plan is the same as yours was - pull just enough to keep monthly payments the same as they currently are, and use a HELOC later if needed (will still have $100,000+ equity). This strategy makes sense to me - it pulls cash without increasing payments, and allows future capital to be accessed. I was surprised to see you say you wish you would have done it differently. Why?
    Tamar Hermes from Los Angeles, CA
    Replied 3 months ago
    Great article! There are so many ways to get started. Thanks for sharing. The bottom line is to get rid of the "buts" and stay in the game asking how until you find a way!
    Hank Rhule
    Replied 2 months ago
    Don't know yet maybe more ready than think a bit concerned abot the time.
    Hank Rhule
    Replied 2 months ago
    Right to keep focus and to study realestate is at the heart of the matter.