I’m starting out small and want to figure out the best strategy for myself. I know no two situations are the sam but if you’ve done anything similar please share your story. Here’s mine...
I’m in the process of acquiring a paid off house, it’s not highly valued but paid off nonetheless. I considered renovating then renting, but I’m wondering about different options that may be available.
Is it possible/feasible to leverage the paid off property as a down payment on another property? If so, what’s the process like?
I’m trying to leverage as much as possible without draining my cash reserves if that makes sense... any input is greatly appreciated.
I am not an expert at this matter, but based off the basic knowledge I attained from being on Biggerpockets, here is the situation:
I don't think you can use the house as a down payment to pay for another property, you will still need to have actual cash to use as a down payment, especially with the stringent policies on investment properties set up by Fannie Mae and Freddie Mac. You can use it as collateral if you default on the property, but that's about it.
If I were you, I would use some of my on hand cash to do rehabs that would increase the value of the house: increase curb appeal, add bathroom, make it open concept, whatever that is affordable but adds great value. Then, put on it on the market.
Instead of pocketing whatever profit I make from the sale, I do a 1031 exchange
(Remember if you don't do a 1031 exchange, you will be paying capital gains tax on the profit you make on the sale). So I will buy another house within 2 months of closing on the sale of the previous house. The new house I acquire, has to be of greater value or purchase price than that of the previous (Only way a 1031 will work).
I now have capital to house hack with an FHA loan. Meaning I buy a Multi-family which has a greater purchase price, I live in one unit and I rent out the other.
So you pretty much just invested in a property without using too much capital.
I hope others chime to say if this method works or have better ideas.
You can refinance it after the rehab if it’s paid off. They’ll probably give you 75% or so of the appraised value.
How are you acquiring it? Is it in move in condition? If so, are you planning to live there? If so, could you do a live-in flip?
You could also house hack/take on roommates to help pay expenses and start your income flow.
If not, can it become your first rental property?
If it needs work, do you have funds to make it ready for occupancy?
Are you prepared to sell it to fund your Investment pot?
If not, do you have ability to carry it as there are expenses (electric, heat, taxes, insurance, r&m)?
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