New Investor Financing suggestions

3 Replies

I have recently come into some good fortune. I inherited a house that I will live in long term with my wife and children. The current house I bought, FHA, about 4 years ago. I believe it's current price is about market cap. FMV ~150k. I owe about 100k. Rental value approximately $1200-1300 but I probably would need to update the kitchen and bathroom.

I am doing some deep research and deciding if/when to start purchasing rental properties. My main decision is: do I sell my current house and use that money to start investing? Or do I refinance and rent? Side question— should I consider taking a loan on my new house to fund purchasing or is that too risky? What do y’all think?

If your current house cashflows off the $1200-$1300 a month rent then I’d be tempted to keep it. If you refinance it out of your owner occupied fha loan then the interest rate will probably be higher so make sure the property would still cash flow if you refinanced it. 

I personally buy all my rentals with bank financing. If it cashflows with the financing plus conservative assumptions for costs then I’m comfortable with the risk. Buying properties outright obviously reduces the risk quite a bit but it’s capital intensive. You can buy 1 $100,000 property outright or 5 $100,000 properties with 20% down. Which is better? It’s an age old dispute that is personal based on your risk tolerance. 

$200 a month = $2400 a year /$50,000 cash invested = 4.8% cash on cash return which doesn’t sound that great but that $1200 a month will also be paying down the equity in the house a couple hundred dollars a month and will open up some cool tax stuff for you. 

At $100 a month that’s only a 2.4% cash on cash return which to me is very small even when accounting for equity repayment.

One thing to keep in mind is if the house is worth $150k and you owe $100k you won’t get the full $50k when you sell since you’ll need to pay commission and closing costs of 6-8% of sale price. 

Now the big question is what could you do with the $50k if you sold the house? If you can buy a rental that produces much better returns even accounting for sales costs then it makes sense to sell and buy something better.