Do we use equity on our home to fund first flip?

Question

Hey folks. My wife and I are REI newbies and are looking to flip houses. Although new to real estate on the investing side we have flipped two homes that we've lived in with great returns. We are self-employed (contractor over 10 years), credit score is 680, very little debt and we own our home. Currently, we are in the White Mountains of New Hampshire and will be moving to Jacksonville, FL (where we'll be flipping full time), in the coming months.

Our plan is to use our current home as a vacation rental giving us rental income, (our area gets about $1500 to $1700 per week). The question is, we own our home outright and it is worth about $300k, so do we use the equity in our home to fund our first deal either in part or completely rather than going with an HML or portfolio lender? Or pull some equity and combine with other financing?

What would you do? Any feedback would be greatly appreciated!

Thanks,

Howard and Heather Johnston

Mike B. · Answer

@Howard Johnston if I was in your shoes, given current interest rates I would either cash out refi (take out a mortgage) or get a HELOC to use the equity from my home to have all the cash on hand. You'll likely get better interest rates having a personal mortgage or HELOC vs. the HML.  With the HELOC (which I like more) you can easily take out money when you need it and pay it back once you've sold ( or re-fi'd) your next project house.

Howard Johnston · Answer

Thanks Shawn! Appreciate the feedback.... I think we are!

Howard Johnston · Answer

Hi Kurt,

Thanks for your questions, it allows us to explore our own thinking.

Our other homes were not "flipped" intentionally they were homes we lived in for years. We never thought of them as "flips" until now.  However, we did buy them for much less or distressed and worked on them. We didn't just ride the appreciation rate up on them.  Home we are in now was bought with cash out of forclosure for 68,000.  Home before that was a 57 acre farm in KY, we brought the farm and home back (very distressed) and then worked the farm for 5 years, we bought that with 50% down (cash) financed the rest through a small bank in town.

Our credit score reflects years of no debt.  We were completely debt free for close to 10 years (Dave Ramsey).  We liked the freedom of no debt but it isn't good for a credit score. So for the past year we have been building credit again. Takes time... no credit seems to be a more difficult hurdle than bad credit.  We still don't have a lot of debt, we keep it low as we still like our freedom.

All that being said, we are sitting on money in this house which could be working for us now.  We could wait and save, but we aren't afraid of the "risk" we are more about the opportunity.  With our skill sets our time and money would be better used in an area with a much better economy (not here in the very north country).  We have planned for a 50% vacancy in our vacation rental here, which seems to be very conservative, as we live within 30 mins of major ski areas and in the summer these mountains are filled with vacationers from NY, MA, CT and RI.  Lots of rivers and lakes up here, great place to vacation. Even with a 50% vacancy rate this home will support itself and put money in our pockets (4 bed, 3 bath completely renovated antique cape sitting at the end of a dead end road surrounded by pastures).  Our daughter will be the property manager as she only lives 20 mins away.  We could take the vacation rental money and just use it to pay back any equity we have pulled out.  As long as we are as successful in FL with our homes, we should not need any income from this home.  The worst case scenario is we move back here and keep doing what we are doing.  We could pay the mortgage on this home without a problem.  Or we simply do in FL what we are doing here, as we get our REI off the ground.

Personal note- We drive upwards of 4-6 hours a day to do what we do here, because we work renovating and construction for others.  Our area does not have a booming economy it is very seasonal and mostly vacation area. All the money in this state is in the southern portion of the state and those are the folks calling us to do their work.  Our time is being wasted in drive time and it means really long days with no time with the family.  We could be working for ourselves, and doing much better (we aren't doing badly our company made 250,000 last year) but we have to spend twice as much time making that money as we would in a better area.  Tired of long winters that make our job and work harder.  And tired of working for others when we could be doing better working for ourselves.  So that is the personal side of our thought process.

We aren't afraid of the risk, we don't want to be foolish however, so we very much welcome anyone that would like to analyze our thought process and give us feedback.

Shawn Ackerman · Answer

@Howard Johnston that may be some of the softest money you can find to do a flip.  I'd say go for it.

Kurt K. · Answer

If you have very little debt, why not just save up? Also, not sure why your credit score is so low considering your other information of a paid for house. Also, if you've flipped 2 homes why do you keep calling this your "first deal". How did you fund your other 2 flips?

Not leveraging your current home (soon to be vacation rental) will allow both better cash flow in the future and less financial strain when the house doesn't rent during the off-season.

I personally wouldn't leverage that place, but I'm a little more risk adverse than others.

Howard Johnston · Answer

Oh, side note...  We also already have a Corporation set up as we have been contracting for many years already and running crews.

Anyone have any advice on Corporation versus LLC.  How do most REI folks work?

Howard Johnston · Answer

Hey thanks so much guys!  We knew we would get great advice from the Bigger Pockets community.  We hadn't even thought about a HELOC, we will look into that immediately.

Thank you for the early welcome! We can't wait to be there!

We are open to just about any flip, most probably distressed. We have all the experience needed to do just about any scope of work. Sister in law is a designer and she lives in Jacksonville. My son and his wife are coming with us and as they have worked with me for years, and I have trained them so we come with a crew as well. We have experience in everything from framing, trim, paint and even have done a good amount of custom cabinetry work, can't think of anything we haven't done. Although we do plan on hiring out work as well keeping things moving along quickly. Looking forward to networking and building a team down there.

We would be interested any property if it were in the right neighborhood, with the right comps and of course the right price.  We would be interested in flipping it in less than 2 months, so the scope of work would need to fit within that time frame (mostly because we would like to be doing at least 8-10 flips per year).  Would probably like to keep the first home in or under the 200,000 range, maybe less and don't want the rehab cost to go over 50,000-60,000, but could as long as the ARV and comps justified it.  We would certainly be open to paying 80,000 with only 30,000 in rehab costs.  As long as the ARV is good we would look at anything.

Getting my GC license and RE license before we arrive, so I really know the business and have the licensing behind everything we do (working on that now) and would like to get into some buy and hold properties as well, after our first few flips.

Thanks so much for all the feedback.  Having this community as a sounding board is worth a million bucks! We were nervous about pulling the equity out of our home (old school in our thinking) now we can't wait to get started.

Maxwell Lee · Answer

An early welcome to Jax! I'd definitely go the HELOC route. Should be no upfront costs, rate will definitely be much better than HML or private, and you just use it when you need it. Cash out refi would require sizable fees and you'll have a huge chunk of change all at once that may not be working for you the whole time.

Good luck!

Jeff Dulla · Answer

@Howard Johnston what type of property are you looking for next? Approx price? Scope of work to be done and cost?

Do we use equity on our home to fund first flip?

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