What would be the best use of 80K?

Question

Hi guys,

I need some words of wisdom from those who've done it.

I've bought myself a primary residence in 2012 and now it's been over two years since I live there. I am half way done with rehabbing the place and plan to finish everything up and put it on a market in March 2015. Having a fixer-upper to start with I will be able to clear around 80K.

My log term goal is to have enough rental properties to replace my day job income. I really need some help to start it right. Living in Greater Seattle area doesn't leave me with too many options and returns are not the best.

So here are my ideas:

• 1. Sell the house. Move to apartments and buy 4-plex to start with. Something that would require some TLC (being a carpenter I can do a lot myself). It would be my primer residence and would rent other 3 units. 80K would be used as a down payment and money to bring it up to shape. Since I only can have 4 loan on my name I though it would be good to maximize the use of them.

• 2. Pull out equity and use it as a down, but keep a primary residence. This way I won't have 80K since bank usually evaluates lower than selling price and give only 80-90% of home worth.

• 3. Sell PR, buy a duplex, keep some money in pocket and look for next duplex in 6 months.
• 4. 1031 Exchange?

In case of getting 4-plex as a primary residence, I would consider something within 1 hour of drive to Seattle, since I work there. If I were going to keep my PR and use equity I would consider anything within 2 hours of drive, which would give me a chance to get something for a better price and manage the property myself.

What you think would be the best way to reach the goal and am I on a right track?

Please share your thoughts and advice.

Kevin Davenport · Answer

You're definitely on the right track. I would set a goal of how much it will take to replace your monthly income and work backwards to find out how many rentals you might need. This will help you look long term and help with short term decision making. I agree with Viktor, ask a real estate CPA what your tax might be because my guess is it will be very small or $0 since it's your primary residence.

I've always purchased single family homes as investments because there are more good deals to choose from, easier to sell because a homeowner or investor could purchase, less tenant management due to other neighboring tenants and you can sell them 1 by 1 if you need instead of all the units.

What kind of rental market are you in? What is the average price of a 3br, 1-2ba in your area and what might it rent for?

I would use up your 4 conventional secondary market type loans but look to local community type banks for loans 5+. You might not get the 30 year fixed rate loans but they will be your best partner as you buy more properties.

If you're comparing living in your house to living in 1 of the 4 apartments, compare what your net rental income might be with each option. It could be that you make more per month staying where you are. You could then look into getting a home equity line of credit on your house to use as short term cash to purchase and repair.

My strategy has always been to use short term cash like a credit line to purchase a house that's at least 30% below market value minus repair costs. Then, go to a local bank and get a loan for 70-75% of the appraisal after I get it fixed up and rented. That way I get all my own cash back out of the deal and can go purchase another house the say way. My goal is to not have any cash in a property and have it cash flow 35%+ of the rent.

Viktor Stakhov · Answer

@Gerald Harris Viktor R. I would really consider buying something bigger than 4-plex down the road. Although, it would be considered a commercial loan and will require a bigger down payment. With a job I have it will take me a while to put those funds together. How did you grow so big in such relatively short time?

Brant Richardson · Answer

As previously stated, you should not consider only being able to get 4 loans as part of your strategy. You can get 10, after that you can move on to a portfolio lender and get more.

Viktor Stakhov · Answer

@Nick Fitzpatrick Exactly. 3.5% FHA is what I have right now and is what I would love to have for my next purchase.

Yes, I do plan to eventually get myself back into SFR so my kids would have a yard to play at.

Viktor Stakhov · Answer

@Kevin Davenport There are definitely benefits in buying SFR, but in my case I don't think the use of 4 loans would be maximized.

In order for me to have 80K I have to sell a house, instead of equity. I've been to a bank. They have their system of evaluating homes and they don't price it too high due to REOs previously sold in area.

I bought my house in 2012. It was bank owned and I paid 127K. Renting it out I would be able to get $1500 a month. In a current market I should be able to sell it for 220K roughly. Also being a carpenter and remodeling houses for living, I overdid my own house and it makes more sense to sell it instead of renting it out.

You've got a great strategy, but it seems like you might be working with somewhat cheaper houses in your area.

Nick Fitzpatrick · Answer

@Viktor Stakhov You can get up to 10 loan in your name with different lenders, just start calling around in your area.

Just my 2 cents, but I like the idea of purchasing the 4 plex as your primary and fixing it up for a few reasons, this would probably be the most expensive purchase option of all you listed and you would be able to get a larger assets with primary residence financing options like FHA loans and potentially only put 3.5% down allowing you to keep some cash free for rehab/reserves/or other investments. Then in a few years you could move on and have it be completely rented out.

Either direction you choose your in a great position, nice work and keep us posted on what you decide!

Joe Fairless · Answer

@Viktor Stakhov congrats on the good 1st deal and the anticipated profits from it. If you want to quit your job then you'll want to accumulate as many units as possible so I like Option 1 given those choices. Then maybe you keep that and then your next purchase you buy larger than a 4 unit.

Gerald Harris · Answer

Personally, Getting that 4-plex in an appreciating area and a demand for rental property would be Ideal. There are apartment owners out there that are hurting and would love for someone like yourself to come in and solve there problem. I believe your would be able to get a solid price or terms in your favor

Viktor is right. Consult with your CPA.

What would be the best use of 80K?

What would be the best use of 80K?

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