Remodel primary residence or buy rental..$50k Question

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Remodel primary residence or buy rental..$50k Question

Fiora P.
Philadelphia, PA · Member since 2016 · 8 posts · 4 votes

Hi everyone,

I’m new here, right now just reading and learning. My husband and I are very interested in starting out, but at the same time, we want or have to do ( Shocking right!!:-). Our biggest dilemma right now is if we should use money for home improvements on our main residence or buy a rental property. Let’s say we have $50k to spend…

Would what you do?

Here’s some background…

We bought our house in 2008, a single home in Lower Bucks County, Pennsylvania. The house is perfectly livable, but we want to add some living space by building an extension to our kitchen area and remodel the kitchen. This would increase the value of the house too, but that's not very relevant because we are looking to live here for a very long time.  We haven’t gotten any estimates yet, but we are thinking $50k might be enough ( or not..will see..). 

We are looking at RE investing as a retirement investment tool, rather than monthly income (of course, only if there is cash flow, but we are ok with minimal cash flow). The only way a rental is going to work for us is with a turnkey property. We don't have the time, the connections or the knowledge to do any flips. Now, from what I've read around, it doesn't seem like you can do much with $50K in Philadelphia area, or at least in NE Philadelphia and surrounding areas, therefore we are open to C neighborhoods too. We have excellent credit, so financing through a bank would be possible (as scary as a second mortgage sounds right now). We have enough income from our W2 jobs to cover second mortgage if property is vacant.

We don’t have any debt expect our mortgage on our house. We paid $32k in student and car loans last year. We also have around 6 months of expenses in our emergency fund. Right now, we can very easily save $25-$30k a year from our W2 jobs. So if we choose one option, the other one can be done in couple of years...what would you do?

Thank you so much!

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Zach KiddPro Member
Real Estate Agent · Clearwater, FL · Member since 2015 · 176 posts · 148 votes
10y

Yes on all of the above answers.

If you haven't yet (and if not, why haven't you!?!?!), read Rich Dad Poor Dad.  Follow-up with the section of the 4 Hour Work Week where he discusses Dreamlining.

I'll sum up here:  Buy cash-flowing assets, use them to pay for your liabilities. In your case, invest in rental properties, use that cash flow to pay for your home improvements. 

Focus on maximizing your leverage (smaller down payment amounts) and buying as much property as you can for X amount.  

I can't remember the specifics of this example at the moment, but with $100k, you can buy one house outright, get $1000 monthly cash flow. That sounds good, but the vacancy is an all-or-nothing situation. Losing one tenant takes you completely out of any cash flow.

Take that same $100k, split 5 ways, buy 5 $100k properties (leverage). After paying the mortgages (debt service) each unit only produces $300 / month cash flow, but your overall cash flow is $1500 a month.  Losing one tenant out of 5 is manageable.

Then take your cash flow and make your home repairs and improvements. After the improvements, you'll still have that $1500 / month coming in. 

There are other important considerations (minimizing taxes, insulation through a corporation, etc.), but most critical is understanding the overall strategy.

I also want to address using your real estate as a "retirement investment tool, rather than monthly income". 

That sounds like you are a bit stuck in "traditional" thinking, and I want to disrupt that before you throw the baby out with the bath water. 

Retirement means you no longer need to work. That your savings, investments, Social Security, etc., hopefully pay you at least as much as you earned in a W2 job.  

Take my above example, total cash flow of $1500 / month.  

Simply do that ten times.

You will have $15,000 / month income.  Taxed at a much lower rate than W2. 

Could you live comfortably off that? I don't know, but I'm guessing so.

If that scenario is more than your W2 status, guess what?  

You're done. 

You only go to work if you love it or are bored out of your mind. 

You can hire a housekeeper and bounce to Thailand for 6 months and not care.

That's better than any retirement plan I've ever been pitched by a "professional".

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  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    10y

    try and find a house in the 100 - $200,000 to buy, use your money as a down payment keeping a little for your self just in case. make sure you use the rental property calculator here on BP to run the numbers for the property to make sure you will earn some money on it before you buy it. you should be able to find something in that range and make enough rent to cover everything, just make sure to do the math.

    1Reply
  • Account Closed
    investor · McDonough, GA · Member since 2015 · 230 posts · 77 votes
    10y

    @Fiora P.

    I would definitely wait on the personal house and get some rental property, especially if you don't have kids yet. I wish I would've started a lot sooner! The sooner you start buying properties, the sooner you'll see cash flow, tax benefits, and the mortgage get paid off. 

    If you want to do turnkey and not be hands on, you could really invest anywhere in the country. There are plenty of people here on BP that do turnkey. Also, if you haven't already, you should listen to the BP podcasts. Sometimes, they interview turnkey providers. You might want to use their services or at least hear how it works. 

    1Reply
  • Scott C.
    Philadelphia, PA · Member since 2016 · 142 posts · 26 votes
    10y

    Just getting started myself. Look into attending the webinars. Good information.

    0Reply
  • Account Closed
    investor · McDonough, GA · Member since 2015 · 230 posts · 77 votes
    10y

    @Fiora P.

    I think if you could save $25k - $30k per year you should easily be able to buy a house per year in cheaper areas than Philadelphia through turnkey providers or partnerships. You could retire very wealthy at a young age. I would keep at least $5k - $10k in the bank per house for unexpected repairs/vacancies/etc. Then use the rest of your $25k - $30k per year as a down payment on a house per year. Use cash flow to pay down mortgages quickly or build up even more savings so you don't ever have to worry about having multiple mortgages in your name. Seems pretty safe to me. Good luck!

    1Reply
  • Stephen FrancoPro Member
    Scranton, PA · Member since 2016 · 201 posts · 44 votes
    10y

    Buy a two family rental in Scranton Pennsylvania area, where I live, for about $50,000 cash. That building should be making about $1,200 a month gross rent.

    It'll be able to afford a management company, all hard cost company  and everything plus pay mortgage of almost + - $50,000 plus give you some cash flow every month

    and then you can use the money from that mortgage to make improvements on your home. Boom, both things done at once

    3Reply
  • Josh C.Pro Member
    Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
    10y
    What do you want? Rental houses or a fancy kitchen? Where are you trying to go? If I was in your shoes I'd sell your cars you can't afford and buy some reasonable cars with cash. Sell your house and get a nice multi-family to live in so you can live for free. And buy another rental house. If you can save 25 now could you save 40 doing that? You could easily have 3-5 units by the end of the year if you really wanted to. When I first committed to real estate as my investment and income future I did this and had 10 units in 18 months and more money in my checking account than ever. No more car loans and no more consumer debt of any kind. My wife was able to permanently quit her job to stay with the kids. I've since moved back to the burbs and continue to grow. It was a ton of effort and definitely not easy, but I wish I would have started at 22. I think 2 young working professionals with no kids can save more money than anytime in their lives until you get to about 55. Don't blow it all keeping up with the Jone's. That might be too aggressive for you and if you guys plan to both work until retirement and have nice tastes get the kitchen now. A couple years postponement over a long span won't matter much. Either way have a plan and good luck!
    4Reply
  • Walker Clark
    Investor · Charlotte, NC · Member since 2015 · 27 posts · 12 votes
    10y
    It sounds like you answered your own question! As Josh said, you can attempt to keep up with your neighbors, or you can blow them out of the water by taking your money and being smart with it! 5 years down the road you will look back and laugh at what would have happened if you had bought a new stove instead :) All the information you need is available here on BP to make that a reality. Best of luck! Walker
    4Reply
  • Fiora P.
    OP
    Philadelphia, PA · Member since 2016 · 8 posts · 4 votes
    10y

    @Patrick Liska.What is discouraging me is that I cant seem to make the numbers work with how the prices are in my area (Northeast Philadelphia or lower bucks). But, I have only looked at properties listed online on Zillow or Trulia.

    @Scott C.Hi there. Good luck!

    @Account ClosedWe are looking at RE investment as another way to save for retirement, on top of maxing out our 401K and such. Our  cars are paid of. We don't have any debt other than mortgage in our primary residence. We are not open to selling the house, we have a 4 year that goes to kindergarden this year and this is a good school district. I admit that my risk tolerance is not high ( story of my husband's life lol). 

    Im starting to think I want my cake and eat it too, without too much risk..:-)

    Thank you so much guys for all your opinions. I like this site!

    0Reply
  • Leland Barrow
    Investor · San Marcos, TX · Member since 2015 · 272 posts · 360 votes
    10y

    If you look at it strictly from a business perspective.

    Remodeling for you has no value. Ideally you remodel or value add before you sell. If you remodel and decide to sell in ten years then you may have to do some remodeling again just to maximize your return. Primary residences are a liability which means they make you zero money. Equity is a false return because of the opportunity cost with paying a mortgage.

    Owning a rental, business or any other asset makes you money. Would you pay 50k for a nice dinner or pay 50k to go on a weeks vacation? Both of those will make you feel good and improve your quality of life but that feeling expires. Remodeling a kitchen will expire also. It may take ten years but eventually it will just be a kitchen or just be a bathroom. In ten years 50k invested properly with compounding interest, returns, cash flow, and gains at sell could be endless. 

    Instead of taking 100% of what you have to make yourself feel "happy", invest it and use 20% of the returns to start the project. Take 20% of all future passive cash flows and save it towards the remodel. When friends visit you point out your outdated kitchen and tell them "that kitchen makes me money...a lot of money". Just my 2 cents take it for what its worth.

    1Reply
  • Zach KiddPro Member
    Real Estate Agent · Clearwater, FL · Member since 2015 · 176 posts · 148 votes
    10y

    Yes on all of the above answers.

    If you haven't yet (and if not, why haven't you!?!?!), read Rich Dad Poor Dad.  Follow-up with the section of the 4 Hour Work Week where he discusses Dreamlining.

    I'll sum up here:  Buy cash-flowing assets, use them to pay for your liabilities. In your case, invest in rental properties, use that cash flow to pay for your home improvements. 

    Focus on maximizing your leverage (smaller down payment amounts) and buying as much property as you can for X amount.  

    I can't remember the specifics of this example at the moment, but with $100k, you can buy one house outright, get $1000 monthly cash flow. That sounds good, but the vacancy is an all-or-nothing situation. Losing one tenant takes you completely out of any cash flow.

    Take that same $100k, split 5 ways, buy 5 $100k properties (leverage). After paying the mortgages (debt service) each unit only produces $300 / month cash flow, but your overall cash flow is $1500 a month.  Losing one tenant out of 5 is manageable.

    Then take your cash flow and make your home repairs and improvements. After the improvements, you'll still have that $1500 / month coming in. 

    There are other important considerations (minimizing taxes, insulation through a corporation, etc.), but most critical is understanding the overall strategy.

    I also want to address using your real estate as a "retirement investment tool, rather than monthly income". 

    That sounds like you are a bit stuck in "traditional" thinking, and I want to disrupt that before you throw the baby out with the bath water. 

    Retirement means you no longer need to work. That your savings, investments, Social Security, etc., hopefully pay you at least as much as you earned in a W2 job.  

    Take my above example, total cash flow of $1500 / month.  

    Simply do that ten times.

    You will have $15,000 / month income.  Taxed at a much lower rate than W2. 

    Could you live comfortably off that? I don't know, but I'm guessing so.

    If that scenario is more than your W2 status, guess what?  

    You're done. 

    You only go to work if you love it or are bored out of your mind. 

    You can hire a housekeeper and bounce to Thailand for 6 months and not care.

    That's better than any retirement plan I've ever been pitched by a "professional".

    6Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    10y

    When you "spend" your money, it's gone.  When you "use" your money, and get it back...repeatedly, it can last forever.  As an investor, I have only two rules I follow:

    1 - Under no circumstances, ever, spend your own "seed" money. Use it repeatedly.

    2 - Under no circumstances, ever, forget rule #1.

    Invest that $50k...use it don't just spend it. Your new investment will return that money to you over and over.  Spend one or more of those "returns" on your addition.

    2Reply
  • Igor Avratiner
    Investor · Philadelphia, PA · Member since 2015 · 69 posts · 28 votes
    10y

    Hey Fiora I am very familiar with lower bucks and northeast philly. If you and your husband don't mind differing the home repairs, investing in an income producing property is probably the way to go. In the long run you should still be able to have your cake and eat it too. 

    There are probably 2 strategies you can research.

    1. Buy in an area where the total cost including rehab is 50k or less. This is what I currently do. One of my criteria is that I must feel comfortable enough with the street that I can visit the property day or night. 

    2. Use your 50k as a down payment in a better area. Calculate your project net cash flow after all expenses are paid set a minimum amount for what the net cash flow should be to determine what purchase price you can look at.

    Both are pretty competitive right now so you'll need to research.

    0Reply
  • Stephen FrancoPro Member
    Scranton, PA · Member since 2016 · 201 posts · 44 votes
    10y

    @Fiora P.I invest in the area of northeastern Pennsylvania, luzerne and lackawanna counties...not usually in the city of Scranton. 

    It's not a rough area at all, in fact this market has crime so minor it would seem not worthy of mentioning in any normal major market. 

    I invest outside the city more because I enjoy the way the townships handle codes and other things and anything to do with the city itself. 

    Regardless, whether you invest in the city or outside of it you get much better returns up in this market than in other markets elsewhere.  At much lower risk

     That's basically my general point. I love to talk with you more, please give me a call PM

    0Reply
  • Fiora P.
    OP
    Philadelphia, PA · Member since 2016 · 8 posts · 4 votes
    10y
    Originally posted by @Zach Kidd:
    Thank you so much for the detailed post. I am getting Rich Dad, poor Dad right now.

    What I meant by looking at REI as a retirement investment, was that we are thinking to have a couple of properties when we retire to supplement our 401Ks and such, when we retire at 60+yo Vs having a bunch of properties for monthly income. We maxed our 401ks, IRAs and such..and said, ok now what? And thats how we came up with the REI idea. 
    Maybe I because I still haven't tasted the sweet fruit of investment income..Maybe I need to expend my dreams and goals, since that new shiny kitchen is looking less likely to happen:-). 


    1Reply
  • Fiora P.
    OP
    Philadelphia, PA · Member since 2016 · 8 posts · 4 votes
    10y
    Originally posted by @Igor Avratiner:

    Hey Fiora I am very familiar with lower bucks and northeast philly. If you and your husband don't mind differing the home repairs, investing in an income producing property is probably the way to go. In the long run you should still be able to have your cake and eat it too. 

    There are probably 2 strategies you can research.

    1. Buy in an area where the total cost including rehab is 50k or less. This is what I currently do. One of my criteria is that I must feel comfortable enough with the street that I can visit the property day or night. 

    2. Use your 50k as a down payment in a better area. Calculate your project net cash flow after all expenses are paid set a minimum amount for what the net cash flow should be to determine what purchase price you can look at.

    Both are pretty competitive right now so you'll need to research.

     Hi Igor. 

    The initial area we were looking were Northeast Phila, Somerton etc, but it didn't seem like the numbers would work with how prices are in that area. Then we looked at Abington, Willow grove area. Same story. But...like I mentioned before, we only looked at online sites, didn't pursue any other routes. We haven't given up from that idea, but it made us realize that finding a good deal in those areas might be difficult. 

    As far as investing in areas where you can spend $50k for a property, that's not out of the question for us either. How has that been for you? Have you also tried investing in "better" neighborhoods?

    0Reply
  • Account Closed
    investor · McDonough, GA · Member since 2015 · 230 posts · 77 votes
    10y

    @Fiora P.

    I've heard that people fear what they don't understand or what they don't know a lot about. The solution is right here on BP! Read up on out of state turnkey investments. Listen to the podcasts! BP is on YouTube also. Take the mystery out of it. 

    I don't think turnkey companies offer guaranteed returns. You will still have vacancies, repairs, etc. You can have the same issues with the house if you live next door to it or if it is in another state. When you find a turnkey company you like do your research in them. I think if you find a good company, and have cash reserves, then there is nothin to be concerned about. 

    1Reply
  • Ed Matson
    Investor · Stratford, CT · Member since 2015 · 258 posts · 230 votes
    10y

    I look at rental property as an investment, and my primary residence as a housing cost.  If you want to grow your money to prepare for retirement, remodeling your kitchen will have very little benefit compared to the rental property. 

    0Reply
  • Zach KiddPro Member
    Real Estate Agent · Clearwater, FL · Member since 2015 · 176 posts · 148 votes
    10y

    @Fiora P.- You're quite welcome! Glad you're getting RDPD - best investment I ever made.

    I'll PM you with a different podcast episode that I think you might benefit from. 

    Did you know that you can take your retirement savings instruments and use them to buy real estate? This podcast episode covers it really well. 

    The tough part is wrapping our brains around the idea of cash flow being the solution. We've all been conditioned otherwise, that's it's a long, tough journey with only the hope of a decent outcome.

    Go to college, get a W2 J.O.B., get your 401k, it's the only way. When you retire, that 401k and SS will pay you enough to live.

    We never question the "get paid enough to live" portion. That's cash flow, plain and simple. 

    If you can develop other means to do that, especially before you hit 83 years old (or whatever it will be), then you are free of all of the other predetermined gyrations.

    Best of all, you control your pay. If you want to make more money, buy another property. 

    That beats the heck out of lobbying Congress for a better "Cost of Living" raise in Social Security.

    Make your money on autopilot, enjoy your life.

    2Reply
  • Troy Sheets
    Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes
    10y
    Originally posted by @Fiora P.:

    @Patrick Liska.What is discouraging me is that I cant seem to make the numbers work with how the prices are in my area (Northeast Philadelphia or lower bucks). But, I have only looked at properties listed online on Zillow or Trulia.

    @Scott C.Hi there. Good luck!

    @Account ClosedWe are looking at RE investment as another way to save for retirement, on top of maxing out our 401K and such. Our  cars are paid of. We don't have any debt other than mortgage in our primary residence. We are not open to selling the house, we have a 4 year that goes to kindergarden this year and this is a good school district. I admit that my risk tolerance is not high ( story of my husband's life lol). 

    Im starting to think I want my cake and eat it too, without too much risk..:-)

    Thank you so much guys for all your opinions. I like this site!

    Couple things. You need to sacrifice now so you can be wealthy later. I'm living in a MFH with tenants so I can live for free. This allows me to plow money into REI and still live well. If you're not willing to sacrifice, which I don't think is true considering you're nearly debt-free, then you should live like the rest of 'Murica and have everything you ever wanted...except true financial freedom. Sorry if this sounds harsh but I think you're using the "we're not young, can't take risks, want a new kitchen" stuff to veer away from jumping into REI. Stop making excuses, decide on a course of action, and make it happen.

    If you can be debt-free (except a mortgage) and save as much as you have, you already know how to sacrifice, so I don't think that's really the issue. You need to learn all you can about your niche in REI you're interested in, perhaps 6 months or more of reading about it, talking to other investors, going to meetups, listening to podcasts, etc., then pull the trigger. There's no better way to learn than to dive in (once you've got a solid foundation). 35 and 40 are not old. You could lose everything and still recover and become wealthy. That's just another excuse IMHO. Stop coming up with reasons NOT to invest and start finding solutions. Please don't take this as criticism, I'm trying to push you past your fears enough to see the other side, the side where you're living comfortably and buying a house per year, maybe two in a good year.

    1Reply
  • Walker Clark
    Investor · Charlotte, NC · Member since 2015 · 27 posts · 12 votes
    10y

    One other thing to add. If you currently hold a 401k, you should investigate self-directing it and using that money to invest in cash flowing properties. This would accomplish your goals to build money for retirement, and also preserve your current cash savings (although I think most would recommend using some of that to invest with as well!).

    Walker

    0Reply
  • Fiora P.
    OP
    Philadelphia, PA · Member since 2016 · 8 posts · 4 votes
    10y

    @Zach Kidd

    Thank you. Looking forward to checking out the podcast. 

    I agree, its very tough changing how you were raised and have until now seen your financial life and life in general. We went to college, got student loans, got jobs, I went to graduate school, got more student loans..etc...The "risk' part is what is tough for me deal with..at least right now.

    @Troy 

    @Troy Sheets

    No worries about being harsh, I appreciate your comment. REI scares me, alot!

    I also understand the importance of sacrificing. We got serious about our finances in July of last year. From July to December 2015 we paid $32k in student loans, car loans, and a other debt we had. I know that REI doesnt come without sacrificing, but at the same time there are things that I am willing to give up( my new fancy kitchen), and things I am not ( time of my son, selling my primary). I also understand that you get what you give, and I know that with I am willing to sacrifice right now, we will not own 100 doors any time soon and I am fine with that ( for now, at least).

    With the very little I know so far, its possible for us (with the capital we have and savings from W2 jobs in next few months) to start with a rental property and take it from there. I might be wrong, but I read people started with much less. 

    You are right, I have a lot to learn, we both do. 

    @Walker Clark

    I have briefly come across some info how it is possible to use your 401k to invest in properties. I will have to read into that seriously. Thank you so much. 

    1Reply
  • Zach KiddPro Member
    Real Estate Agent · Clearwater, FL · Member since 2015 · 176 posts · 148 votes
    10y

    I had to review the forum rules before I posted this.  I think it should be okay, and if not, I apologize in advance. 

    The following are links to a different podcast that I follow, Cash Flow Diary with J. Massey. I'm equally addicted to both BP and CFD.

    In Episode 33, he talks with Ryan Rippy, Business Development Manager at The Entrust Group in Mission Viejo, California about using retirement assets to create cash flow through real estate investing. 

    The information take-away is simply amazing, and I think you will be pleasantly surprised at what you can do with your retirement accounts. 

    If you like CFD, make sure you start with Episode 1. His backstory is very inspiring, and he refers to it often in later episodes.

    I included both links, because finding a specific episode on that site is difficult.

    I have no affiliation with J. Massey, the Cash Flow Diary, Ryan Rippy, or The Entrust Group.

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    10y

    @Fiora P.if you were serious about investing why would you got to a website for real estate investors asking if it is smarter to remodel your kitchen or buy rental property? I didn't even bother reading responses, because I don't see a single person telling you remodeling your kitchen is a better choice. 

    Ask your friends and family and they will all tell you to remodel your kitchen, which is probably what you will end up doing. 

    The difference is remodeling your kitchen is an expense and buying a rental property is an income investment. Most people let fear hold them back from investing and instead work 9 to 5 and chase shiny objects all their life. Your kitchen is the shiny object in this example.

    2Reply
  • Fiora P.
    OP
    Philadelphia, PA · Member since 2016 · 8 posts · 4 votes
    10y

    @Zach KiddThank you again

    @Joe SplitrockI dont think I was very clear. Jokes aside, I think I mentioned that the remodel would be adding living space to our house, which would increase the house value ( building an addition). 

    Anyway, is still an expense until its time to sell the house.  Thank you for the opinion.

    Just curious, what make you think I will go with kitchen?

    1Reply
  • Zach KiddPro Member
    Real Estate Agent · Clearwater, FL · Member since 2015 · 176 posts · 148 votes
    10y

    Again, you're quite welcome, and I'm happy to help. 

    0Reply
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