How to start building a portfolio

Question

Good morning.  I'm trying to start real estate investment off right and I wanted to get some advice from you all.  I'm 43 years old and living in NE Florida. I currently have a regular 9-5 in the IT field. I have been studying property investment online and watching a ton of videos for (embarrassed to say) approx 2 years now and have never pulled the trigger.  I'd say that's "analysis paralysis" for sure!  Here's my situation, I own two properties, one property is a post war bungalow in avg condition (needs a little work) which I own outright.  This property appraises for around $92,000.00.  My two "adult" children currently live there but they will be exiting the property in January.  The second property is a river front condo in very good condition which appraises for around $171,000.00 in which I owe approx. $155,000.00.  I currently reside in this property.  I have no other bills other than my condo.  Everything else was just paid off including all outstanding loans, credit cards and car note. I am interested in understanding how best to leverage the equity in my first house to obtain capitol to purchase rental properties.  My ultimate goal is to build a strong portfolio that will produce enough positive cash flow to supplement my current income in the short term and eventually enable me to quit my 9-5 and focus on investment full time.  I have heard about the BRRRR method for a few years.  What are your thoughts on this method and what should my first steps be to implement.  Also, if there are any other schools of thought as to how I should go about investing other than BRRRR, please let me know.  Thanks!

Michael Mullininx · Answer

@Michael Vann going with 20% down and carrying the mortgage keeps money in the bank you wouldn't have otherwise.

For example, say you're looking at a $100k property. If you purchase outright with cash you've got $100k tied up in this house for 6 months until you pull out $80k that you can reuse plus rent.

If you leverage 80% then you still have $80k on hand to invest elsewhere if the opportunity presents and rent should be enough to cover monthly expenses plus a few bucks extra.

Personally I would leverage up front. The $1k/mo profit from rent checks if you buy with cash would be nice but I would prefer to have the $80k in the bank with the tenant paying the mortgage on the house. Ideally you would hold the property for 10-20+ years and sell for well over $100k (depends on your area) once the mortgage is payed off.

Michael Vann · Answer

Thanks Account Closed.  This totally makes sense.  Another method that I was considering was to extract the equity using an 80% LTV out of my first home, buy a property outright with that money in order to create the most equity possible in the new rental property.  Place a renter into that property and obtain another 80% LTV from that property, then repeat for additional rental properties.  Is there an advantage to purchasing two or three properties with just 20% down and carrying a mortgage vs. buying a single property outright and extracting equity 6 months later?

Taylor Chiu · Answer

@Michael Vann Glad to hear you are getting in the REI game! Like Account Closed mentioned, you could do a cash-out refi to access a lot of capital from your first property. Or if you prefer, you could also get a heloc on that property, possibly for the same 70k. The advantage of a heloc is you don't pay anything if you aren't utilizing the funds. Plus closing costs are often much cheaper. Downside is the rate will be higher. So which should you do? It depends on how quickly you can get your money back out of deals.

If you do BRRRR, then a heloc could make good sense, because you will only have your money in those properties for 3-6 mo or so.

If the money is going to be sunk into new investment properties for the long-term, a cash-out refi is probably best.

Valery's advice about getting another primary residence on a low-down loan is also great. This, combined with financing your first property, could easily let you pick up a few more rentals in the next year.