What’s My Best 1st Move??

Question

Hi BP Community!

I am eager to get started on locking in my first investment property and have questions on what my best approach would be.

I own my home and have been making slow improvements to it over the last year I have had it. This has been with my own money and there are more improvements I'd like to make. It's a bit of a fixer upper, but in a great location. I have a 6.875% mortgage. My goal is to eventually hold onto this as a rental property. With the equity I have started to build I am thinking I could take this out and use it for a down payment on an investment property. Question 1: should I wait for mortgage rates to come down and then refinance and take out a HELOC and use these funds to buy another property? Or should I wait for mortgage rates to come down and do a cash out refinance? Or ?? Question 2: Should I be utilizing one of these approaches (or another way?) to have money to put into improving the property so that it can be evaluated higher?

I own an interior design business. I am looking to start a real estate investing portfolio and figure I can utilize my interior design business for needed material purchases on my properties. Question: should I be starting a real estate business (LLC, S-Corp?) so that this business is purchasing these properties? Should my interior design business purchase a multi-use space where I could have our office and rent out other spaces? Or should I be purchasing these investment properties on my own?

Thanks in advance!

~ Gabriella

Bradley Buxton · Answer

@Gabriella Pellolio

Taking out a second loan on your primary residence can be risky if for some reason your new investment doesn't work out. It might be better to do a cash-out refinance and then you would have a higher payment on your primary. If you're looking at commercial property then there might be other ways to get financing without leveraging your primary residence. Ideally, you can save more and use cash for the down payment. There is no guarantee rates will go down and stay down and with a HELOC your rate is variable. Talk with a few lenders and they can help discover some options.

Jake Andronico · Answer

@Gabriella Pellolio

Congrats!! You're already ahead of the curve. Being a homeowner (especially in your area) is impressive.

Debt adds potential risk and potential reward, so it's up to you on your comfortability.

I would continue to learn and explore different investment strategies to see what makes the most sense to you, and what you may potentially enjoy.

There are a ridiculous number of options, and all have success stories and horror stories.

With my experience with very wealthy individuals who have complete freedom of time, one common denominator is: Keep it simple and a little boring.

Nobody really pushes the strategy of buying single family homes and paying them off (besides Chad Carson and a few others who are awesome), but 2-5 paid off single family homes are probably pretty life changing.

Having an end number/goal in mind will better help you know the next step.

I grew up north of San Francisco but moved to Reno, NV to live and invest because of it's proximity to CA, low property taxes, stable job growth, diversified population growth, lower prices, strong rents, much more landlord friendly tenant/landlord laws, etc.

Congrats again and best of luck to you!

Eric DeNardo · Answer

@Gabriella Pellolio,

It depends on how much cash you have and where you want to invest. For an investment property you'll need 20-25% for the down payment vs 5% for a primary residence. Especially if you are investing in SF, thats a big down payment. I wouldn't wait for interest rates to come down, because they will slowly come down, and you'll be waiting for a long time. Also, you can refinance later when rates do go down. Think about buying another home for yourself that you can fix up like you did to your current home and rent out your existing property! DM me if you have any questions.

Ryan Cheek · Answer

Hey Gabriella!

It sounds like you’re in an exciting phase, and you’ve got a solid foundation with your home and your interior design business. For your first question, if your goal is to use the equity in your current home, a HELOC could offer you more flexibility to tap into your equity when you're ready. However, with mortgage rates where they are, it might be worth waiting for them to drop a bit to refinance and pull out equity at a better rate.

For your second question, improving your current property to maximize its value before a refinance or HELOC is a smart move. It’ll position you to have more cash available for future investments.

In terms of setting up a real estate business, forming an LLC could provide liability protection and allow you to keep personal and business finances separate. Additionally, having your interior design business involved in a multi-use property could be a win-win, allowing you to both house your office and generate rental income from other units.

The Indianapolis market is thriving for real estate investors, particularly in new build multifamily and duplex developments. I’d love to chat with you more about how your design background could pair well with investment strategies here!

Carrie Matuga · Answer

@Gabriella Pellolio I can’t speak to the strategy with LLCs, you should probably talk to a CPA but I think generally they would recommend that you have a separate LLC for your interior design business versus your real estate investments. But on the question of refinancing, well no one can predict the future. It does look like interest rates are headed lower in the future with the expected timeline of the next 12 months so given that you may want to consider looking into a HELOC now to tap into the equity that you have for down payments and then refinance as rates come lower but if you want to connect and talk through in more detail, I’d love that. send me a DM.