Looking for advice
Contractor · MO · Member since 2024 · 20 posts · 11 votes
Looking for advice
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Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
2yQuote from @Michael Tompkins:
Quote from @Nathan Gesner:
No. The best option is to keep what you have and save up for the next step. Increase earnings, reduce expenses, and save up for the next investment. The most successful investors sacrifice, at least getting started.
Sounds like you take the Dave Ramsey approach of not borrowing money. But paying cash for real estate investments takes a LOT longer to build wealth than borrowing money to invest in real estate.
Michael I don't think Nathan is suggesting a Dave Ramsey approach. You are right about real estate growing wealth faster than your two hands. The magic formula is portfolio size x time.
Selling does not move you forward. The market you sell in is the market you buy.
Refi into 8% kills your cash flow.
HELOC is great for short term borrowing. 6 to 24 months max.
You are single, so financially your best move would be to house hack a 2 or 4 family home. Save up 5% down payment. Buy a property that needs work. Move into the worst unit and rent the other ones. Fix them up one by one. (actually exterior first, also lawn, landscaping) You can pay for the materials using money from your HELOC. When you are done updating all the units and renting them for more money refinance the property. They will give you 75% of what the property is worth. This has to be enough to pay off the old loan and your HELOC.
This is called a BRRRR and it works on a 2 or 4 family just as well. Be careful to not run up more money on the HELOC than you can get back from your refi of the multifamily.
28 Replies
- 2ySean RossPro Member1031 Exchange Qualified Intermediary · Denver, CO · Member since 2017 · 174 posts · 96 votes
Quick note on your 1031 exchange hypothetical:
If you sell a property that you currently live in, it will not qualify for a 1031 exchange. Only current business/investment properties are eligible for tax deferral under Section 1031.
Luckily, if you have lived in this home for at least two years, you can sell the property and use Section 121 to exempt up to $250K in capital gains (or $500K if you are married filing jointly). This is a much better deal than a 1031 exchange in most circumstances. You simply sell the property, take the cash, and you can reinvest it into whatever you'd like without any of the restrictions that come with a 1031 exchange.
Best of luck!
- 2yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
What is your current mortgage rate? How much would it sell for vs what you paid for it? If you sell it as a primary residence, capital gains are very different than if it has been a rental.
- 2yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
When you're starting out, cash flow doesn't do you much good. It gives you a false feeling of success, but really slows you down.
- Contractor · MO · Member since 2024 · 20 posts · 11 votes2y
Quote from @Brandi K.:
@Michael Tompkins get a HELOC
I suppose a HELOC makes more sense than doing a cash out refinance since I would keep my current interest rate and wouldn't have to pay closing costs. Are there other benefits of the HELOC that I didn't mention? Possibly a lower interest rate with a HELOC?!
- Contractor · MO · Member since 2024 · 20 posts · 11 votes2y
Quote from @Theresa Harris:
What is your current mortgage rate? How much would it sell for vs what you paid for it? If you sell it as a primary residence, capital gains are very different than if it has been a rental.
Current rate is 5%. Bought it for $45K, loan balance is $35K, current market value is approximately $150K
- 2yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
A 5% interest rate is ok, not great. I’d do a cash out refi and use all that cash to buy as many C+ class rentals as you can with 20-25% down. I did that with my primary 6 years ago and now making a killing off the 3 rentals I bought with the 80k I got from the cash out. It’s an easy way to pick up rentals with no $ out of pocket. Then do cash out refis on the new properties you buy in about 4 or 5 years when they appreciate to scale up. Thats how I’ve scaled up over time. I’ve done 4 cash out refis in the last 6 years to buy 12 rental houses with the cash. It’s like buying houses for free with zero out of pocket expenses. And all this cash is tax free! Refi til you die!
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes2y
Quote from @Michael Tompkins:
I disagree with the others. HELOC is a form of borrowing money. Why would you borrow money against House A and use it as a downpayment for House B? That's two loans to purchase one house and is a great way to over-leverage.
I also disagree with selling. Hold on to every property, unless you can sell it and invest in something else that produces a better return.
I would consider keeping the current house as a rental. Save the cashflow - and everything else you can - to build a pile of cash for another investment. Rinse and repeat. Keep putting the cash flow right back into building your portfolio. At some point, you may decide to pay off properties so you are 100% cash flow and living off the income.
The DIY Landlord Book4.7248 Reviews - Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes2y
One thing that hasn't been mentioned so far here are the psychological red flags and possible pitfalls involved in the process of moving out of and then turning your old home into a rental property. I've done it, and so I believe I can say something useful about it.
You mention in your profile that you have 20 years of experience as a contractor. You're not a spring chicken. Are you married? Do you have children? How do they feel about your idea? If they're all behind it, great! If not, this is going to add stress to your marriage and your relationship to your children, and typically significantly more than most people expect.
Your house is inevitably going to be damaged and changed during the time that it's a rental. Seeing the place where you made so many memories with your family trashed, and then going through the emotional turmoil of repairing and remodeling it, knowing it will eventually just get trashed again...are you prepared for that? Is your wife prepared to come home to "her" granite countertops, the ones she pleaded with you for year after year before she finally got them, and find multiple chips in them? The carpet you both picked out, stained and ruined? Someone scrawling all over the accent wall you put up so many color swatches for to find the right paint? It takes a toll.
As a contractor, you may not have the same reservations someone else would have, knowing you could fix it. But rest assured, any built-ins, any woodwork, doors and windows, anything "nice" in the house that you put it once upon a time for yourself to enjoy is going to get damaged.
I am closely related to a guy who moved out of his house five years ago to a new house, with the intention to fix up the old property a bit and rent it, and yet his old house has sat empty for five years and he's paid holding costs for out of pocket. It happens a lot. His wife talks all the time about how much she loved her old kitchen, which they paid out the nose to remodel in the years it was "their" house.
In our case, my wife and I both really disliked our old house, so it wasn't too much of a struggle to move and rent it out. But I still don't like going back there. I just like the rent money the place brings in more.
- Contractor · MO · Member since 2024 · 20 posts · 11 votes2y
Quote from @Jim K.:
One thing that hasn't been mentioned so far here are the psychological red flags and possible pitfalls involved in the process of moving out of and then turning your old home into a rental property. I've done it, and so I believe I can say something useful about it.
You mention in your profile that you have 20 years of experience as a contractor. You're not a spring chicken. Are you married? Do you have children? How do they feel about your idea? If they're all behind it, great! If not, this is going to add stress to your marriage and your relationship to your children, and typically significantly more than most people expect.
Your house is inevitably going to be damaged and changed during the time that it's a rental. Seeing the place where you made so many memories with your family trashed, and then going through the emotional turmoil of repairing and remodeling it, knowing it will eventually just get trashed again...are you prepared for that? Is your wife prepared to come home to "her" granite countertops, the ones she pleaded with you for year after year before she finally got them, and find multiple chips in them? The carpet you both picked out, stained and ruined? Someone scrawling all over the accent wall you put up so many color swatches for to find the right paint? It takes a toll.
As a contractor, you may not have the same reservations someone else would have, knowing you could fix it. But rest assured, any built-ins, any woodwork, doors and windows, anything "nice" in the house that you put it once upon a time for yourself to enjoy is going to get damaged.
I am closely related to a guy who moved out of his house five years ago to a new house, with the intention to fix up the old property a bit and rent it, and yet his old house has sat empty for five years and he's paid holding costs for out of pocket. It happens a lot. His wife talks all the time about how much she loved her old kitchen, which they paid out the nose to remodel in the years it was "their" house.
In our case, my wife and I both really disliked our old house, so it wasn't too much of a struggle to move and rent it out. But I still don't like going back there. I just like the rent money the place brings in more.
I'm single with no kids, and I initially bought the house four years ago with the intention of turning it into a rental someday. So I have no reservations about moving and renting it out.
- Contractor · MO · Member since 2024 · 20 posts · 11 votes2y
Quote from @Nathan Gesner:
Quote from @Michael Tompkins:
I disagree with the others. HELOC is a form of borrowing money. Why would you borrow money against House A and use it as a downpayment for House B? That's two loans to purchase one house and is a great way to over-leverage.
I also disagree with selling. Hold on to every property, unless you can sell it and invest in something else that produces a better return.
I would consider keeping the current house as a rental. Save the cashflow - and everything else you can - to build a pile of cash for another investment. Rinse and repeat. Keep putting the cash flow right back into building your portfolio. At some point, you may decide to pay off properties so you are 100% cash flow and living off the income.
So it sounds like you are in agreement with John that doing a cash out refi is my best option?!
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes2yNo. The best option is to keep what you have and save up for the next step. Increase earnings, reduce expenses, and save up for the next investment. The most successful investors sacrifice, at least getting started.The DIY Landlord Book4.7248 Reviews
- Contractor · MO · Member since 2024 · 20 posts · 11 votes2y
Quote from @Nathan Gesner:
No. The best option is to keep what you have and save up for the next step. Increase earnings, reduce expenses, and save up for the next investment. The most successful investors sacrifice, at least getting started.Sounds like you take the Dave Ramsey approach of not borrowing money. But paying cash for real estate investments takes a LOT longer to build wealth than borrowing money to invest in real estate.
- Member since 2024 · 5 posts · 1 vote2y
Michael, you have to just do what is right for you in whatever situation you're in. I've done both a HELOC and a cash out refinance on my current house to buy my 9 units and it may not be the most efficient way to purchase but it has allowed me to own 2.5 million in real estate and have 500k in equity that will grow at 3% or $75k a year with normal inflation. That's like another full time job. You just need to make sure when something goes sideways cause it will that you have your reserves and a plan.
- Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes2y
Quote from @Michael Tompkins:
Quote from @Nathan Gesner:
No. The best option is to keep what you have and save up for the next step. Increase earnings, reduce expenses, and save up for the next investment. The most successful investors sacrifice, at least getting started.Sounds like you take the Dave Ramsey approach of not borrowing money. But paying cash for real estate investments takes a LOT longer to build wealth than borrowing money to invest in real estate.
Michael I don't think Nathan is suggesting a Dave Ramsey approach. You are right about real estate growing wealth faster than your two hands. The magic formula is portfolio size x time.
Selling does not move you forward. The market you sell in is the market you buy.
Refi into 8% kills your cash flow.
HELOC is great for short term borrowing. 6 to 24 months max.
You are single, so financially your best move would be to house hack a 2 or 4 family home. Save up 5% down payment. Buy a property that needs work. Move into the worst unit and rent the other ones. Fix them up one by one. (actually exterior first, also lawn, landscaping) You can pay for the materials using money from your HELOC. When you are done updating all the units and renting them for more money refinance the property. They will give you 75% of what the property is worth. This has to be enough to pay off the old loan and your HELOC.
This is called a BRRRR and it works on a 2 or 4 family just as well. Be careful to not run up more money on the HELOC than you can get back from your refi of the multifamily.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes2yNo, that's not what I said. I have loans on all my properties and understand the power of leverage. What I disagree with is over-leveraging.
Quote from @Michael Tompkins:
Too many investors want to buy, buy, buy with no concern over how much they are leveraged. Books and YouTube gurus selling courses teach people to borrow money from one property to buy another with little or no regard for how heavily the investor is leveraged. Borrow against your primary home. Borrow from a friend. Borrow from grandma. Use a credit card!
Can one borrow their way to wealth? Yes, it's possible. But it's also possible that they will take a shortcut once, then the next purchase will be another shortcut, and eventually it will come back to bite them. Remember, Dave Ramsey was a real estate genius worth $12 million (in the 80's!!!), but it all came toppling down. And I would argue he's smarter than the average bear.
I have a rental that has been vacant for six months (I'm holding it for a charitable organization) and costing me over $2,000 a month. Three other units sat vacant for 3+ months during renovations. I had to replace a $9,000 furnace, a water heater, and a couple of appliances, and I am about to spend another $10,000 on excavation for my storage facility. It's been a rough six months, but it doesn't impact me at all because I have enough cash flow to handle it and I don't live off my cash flow.
I see so many people build portfolios quickly by over-leveraging and then living off the cash flow. When they get hit with expenses like my example above - or a couple of bad renters - they won't have the cash to survive.
Use leverage, but do so wisely.The DIY Landlord Book4.7248 Reviews - Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes2y
Quote from @Nathan Gesner:
No, that's not what I said. I have loans on all my properties and understand the power of leverage. What I disagree with is over-leveraging.Quote from @Michael Tompkins:
Too many investors want to buy, buy, buy with no concern over how much they are leveraged. Books and YouTube gurus selling courses teach people to borrow money from one property to buy another with little or no regard for how heavily the investor is leveraged. Borrow against your primary home. Borrow from a friend. Borrow from grandma. Use a credit card!
Can one borrow their way to wealth? Yes, it's possible. But it's also possible that they will take a shortcut once, then the next purchase will be another shortcut, and eventually it will come back to bite them. Remember, Dave Ramsey was a real estate genius worth $12 million (in the 80's!!!), but it all came toppling down. And I would argue he's smarter than the average bear.
I have a rental that has been vacant for six months (I'm holding it for a charitable organization) and costing me over $2,000 a month. Three other units sat vacant for 3+ months during renovations. I had to replace a $9,000 furnace, a water heater, and a couple of appliances, and I am about to spend another $10,000 on excavation for my storage facility. It's been a rough six months, but it doesn't impact me at all because I have enough cash flow to handle it and I don't live off my cash flow.
I see so many people build portfolios quickly by over-leveraging and then living off the cash flow. When they get hit with expenses like my example above - or a couple of bad renters - they won't have the cash to survive.
Use leverage, but do so wisely.The one and only time I've heard Dave Ramsey address the idea of "good debt" and "bad debt" with enough time given to make a complicated point, he talked about how difficult it is, specifically in real estate, to precisely calculate the risk of these investments. That uncertainty in risk calculation almost always ends up as the root cause of the worst real estate implosions, like his.
- 2yDave FosterBusiness MemberQualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
@Michael Tompkins, You have some time and flexibility to explore both keeping and selling that property right now. If you have lived in it for the last two years then you could sell it and take the first $250K ($500K if married) of profit tax free because it is your primary residence. The 1031 exchange is only for investment real estate. But the primary residence exemption is much better.
And here's why this is the perfect situation for you. If you want to test the waters on whether your property would be a good rental or not. You can move out and rent it for up to three years and still sell and get the primary residence exclusion. You only have to have lived in it for two out the five years immediately prior to selling.
So if you want to, go ahead and move out and rent your property and see how it goes. If you sell within the next three years you'll still get the primary residence exclusion (you will only have to recapture the depreciation during those years). If you want to keep it then it will always be eligible for a 1031 exchange. So either way you'll wont have to pay tax on those gains regardless of which direction you choose.
The 1031 Investor5134 Reviews - Investor · Sarasota, FL · Member since 2022 · 29 posts · 14 votes2y
This is a discussion that can go on for days, and it can be complicated if we want to make is so.
But Ill keep it simple.
My thoughts shared with you..
Keep the house! Don't sell unless you absolutely have to. You have great equity in it, keep the momentum going.
HELOC is an option, but whatever deal you are putting it into has to really make sense. You can always get a HELOC, don't use it, and have it ready. If a no brainer, absolutely amazing deal comes through and you need the money for down payment etc. jump on it! Otherwise be cautious taking that money out just to make some investment, overleveraging can kill you before you even start.
What is the goal here for you? Buy and hold? Flip? How involved do you want to be?
Make sure you ae confident with what you are doing and the time that it will take away from whatever else you have going on.
Don't worry too much about cash flow in the beginning especially when you are working with limited funds.
Do a few projects, take the cash, move on. Once you have enough cash to sparingly invest in different projects, put some in rentals, use the other to make more.
If real estate investing is your long term. Start the process, you will lose along the way, it wont make sense a lot of the time but you need to get through a lot of the hurdles, and processes to really understand what works for you and what does not.
But be careful with your home, make sure you don't lose the shirt on your back...
- 2ySamuel DioufBusiness MemberReal Estate Agent · Columbus & Cleveland, OH · Member since 2023 · 1k+ posts · 1k+ votes
Talk to some lenders about HELOC opportunities. I can refer you a few.
Reafco - Samuel Diouf528 Reviews - 2yCorby GoadeBusiness MemberInvestor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
You can't (and don't need to) do a 1031 on your primary, so that's off the table.
In 90% of situations, the best course of action is to take out a HELOC on your home and buy a BRRRR. You can pay off your HELOC when you refi the new property and do it all over again.
- Contractor · MO · Member since 2024 · 20 posts · 11 votes2y
Quote from @Corby Goade:
You can't (and don't need to) do a 1031 on your primary, so that's off the table.
In 90% of situations, the best course of action is to take out a HELOC on your home and buy a BRRRR. You can pay off your HELOC when you refi the new property and do it all over again.
Thanks for the advise. What are the benefits of a Heloc to buy a BRRR vs cash out refi?
- 2yCorby GoadeBusiness MemberInvestor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
People tend to look at a cash out as a better option because they are locked in to a rate. But closing costs are much higher- typically helocs are totally free AND those rates will go down as mortage rates recede.
In addition, that money will become available to you again as you pay it down or off- no need to apply for a new loan or pay more closing costs.
Almost always a better choice in the long run.
- Investor · Miami Beach, FL · Member since 2017 · 362 posts · 109 votes2y
Hi Michael, consider investment goals, market condition, financial analyst, and professional advice.
The best course of action will depend on your individual circumstances, investment goals, and risk preferences. :) - 2yJake BakerBusiness MemberFlipper/Rehabber · San Diego, CA · Member since 2020 · 1k+ posts · 694 votes
It depends on what you plan to do next. If you plan to Flip or BRRRR, I recommend a HELOC, because you can expect to pay off the loan fairly quickly. And you can keep your likely low interest rate.
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