Hello everyone! I'm new to real estate investing and I am considering using the equity in my existing home to start out. My current home value is between $350-370k and I have a mortgage balance of $142k. I estimate that I could rent out my existing home for about $1750/ month. I have been considering the following options:
1) Refinance my home and rent it out. Purchase a fixer upper, move in, rehab. Repeat.
2) Sell my existing home. Purchase a multifamily property and live in one of the residences there.
I don't feel that the current BP calculators quite match my situation and I want to be as thorough as possible when I figure out which path is best. I don't suppose anyone out there has a spreadsheet or some other guideline that they would lend me to help in my analysis? Or perhaps there is an alternate path for me to consider?
Thank you for any help/suggestions!
Run an analysis of cash flow if you were to rent it. What is your PITI? Add 150/mo for cap ex and maintenance, add 170 per month for property management fee. Also don’t forget your insurance and taxes may increase a bit now that it is a rental not OO.
Next, after calculating your cash flow, run it against your equity in your house to determine your ROI (per annum). If less than 6% I would sell.
Unless you believe your property should be held for long term due to location, school, future appreciation. Etc
My guess is you could do much better with selling and putting the money into new deals.
Keep in mind when you sell you pay RE fees. You need to account for that in our ROI numbers. What about doing a cash out redo to buy more?
Another consideration is that even if you refi to get max equity out of the home, you'll still have 20-25% equity tied up in it (assume it's ~$80k). Cash flows and returns on that $80k, given your projected rents and estimated expenses, likely won't be as much on that home as if you were to sell and use that $80k and househack a 2-4 plex. And you'll still be able to take the rest of your equity and apply toward more properties.
The numbers on your house stink as a rental even if your mortgage payment is low enough right now for you to cash flow.
You are in a great position to use a home equity line of credit. Most banks will lend up to 80% LTV on your primary residence. This leaves you at least 138k to play with if your house appraises for 350k, potentially more. You could then pay cash for a fix and flip or BRRRR. You could also use that money for a 20% down payment on one or more investment properties.
You could also think about selling it to recapture all the equity, minus 6% realtor fees and closing costs, and putting that equity to use on investments with higher ROI.
Thank you everyone for your input!
Using your numbers for analysis, my property produces a negative monthly cash flow as a rental... Did I fail to mention the $75/mo HOA fees in my neighborhood? Even if I self managed the property I still come out negative. Guess my home isn't such a great rental after all! Thx for the advice!
My market has been very strong these past 2 1/2 years and I calculate that selling my home and paying 6% fees still puts me ahead by more than 20% on my initial investment. Based on what Logan mentioned above it doesn't appear to make sense to do a cash out refi... I don't see how owning a home with negative cash flow would help someone like me starting out. But maybe I'm missing something here that you understand and I don't?
Your suggestion seems to be the most sensible course of action. My existing home just doesn't pencil out as a rental and the equity I have in it could be put to much better use in a 2-4 plex house hack. I just need to find one! I live in the suburbs SW of Portland, OR and the market here is quite hot right now. Ideally I'd like to stay in the general area so I guess I'll have to work hard to find the right deal... ;)
You nailed it... The numbers stink! I find the BRRRR strategy a bit intimidating right now, but I will keep it in mind as I look for deals in my area.
Thank you everyone for your help!
do not be intimidated by the brrrr strategy. It is very simple. Read J Scott’s book on flipping properties so you can get an idea of repair costs.
You have time on your side if you plan to move into it.
Ok. Thx for the tip. I'll check out the book. Thank you!
Do you think that your current home would cash flow with a a new loan on it? If it would make for a good rental, then I would keep it. If you're going to be feeding each month, I would probably lean toward selling it and buying a multifamily unit (maybe with an FHA loan, then you could but it and another property as well).
Andrew, thx for the advice. I'm looking for multifamily units in my area now. I'll have to do some research on the FHA loan... I've never had one before. What advantages are there with the FHA loan?
It sounds like you've seen good appreciation on your primary home. If you do decide to rent it out (no way I'd rent out a $350k home, btw) be sure to sell within 3 yrs of renting it out to take advantage of that tax free gain on sale.
I'd be inclined to sell after IDing your new multi. Houses for the most part sell faster and easier than it will be finding a new plex @Patrick Isaac .
Sounds like a good tip, Steve. Thx!