What's my next move... any suggestions?

14 Replies

Here's my situation:

My 2/1 house is worth $340k (I live there and it's my only property), and has a conventional loan.  I still owe $150k on it, so I have $190k in equity.  I've lived here for 5 years.

I also have $70k in savings I can draw from.  I have no credit card debts, no auto payment, and good credit above 700.

I was thinking of purchasing a second property and live there for two years, while renting out my current house.  On my house, my mortgage/taxes/insurance are just $1,240/mo and I can rent the house for $1,900/mo, so it's worth holding onto and just renting it out.  It's in a good location near the beach and it would also work as a vacation rental.  So there's no reason to sell it.

I was thinking I'd purchase a new property to live in it for 2 years, get it with a conventional loan, and only buy a house that would have potentially good cash flow.

Remember, I have $70k in liquid cash right now to play with.

So would I do a "cash out refinance" of my current home and pull out some of the equity to get more cash?  And how would I qualify for a conventional loan on the next property, if I've decided to keep my current home and rent it out?

What would my next move be?  any suggestions here?

Hi @Matt Miller , welcome to the BiggerPockets forums! 

The answer to this depends entirely on your personal goals.  You could go a dozen different directions with it and the applications could be mega different, but those could be 'right as rain' or horribly wrong.

  • You could buy a 2nd home, move into it, and rent out your current home
  • You could sell your current home, combine it with your $70k savings, and buy an apartment building
  • You could stay in your current home, refinance, use that equity + your $70k to invest in a REIT or Syndication
  • You could buy a Ferrari and send out Wholesaling videos on Tiktok and Instagram until you get a massive massive following of people that pay $5,000 per seat for a half-day long virtual "hustler mastermind meetup bootcamp"

That is just the tip of the iceberg of what you could do from here in your investment journey, and it really comes down to this:  what do you want to do and why?

Go up there and do some "cloud work" to answer these questions and get a deep sense of your compelling vision for life (as far as you can see it) and then come down and do the "dirt work".

okay thanks for the suggestions.  My goal is to build up a portfolio of real estate properties.  For starters, live in a property for 2 years (and fix it up a bit with sweat equity), then move into a new property for 2 years, and continue repeating that process.

@Matt Miller   I completely agree with @Will Fraser . First, define your goals. Second, take action towards accomplishing them. Try to be specific about the goals (# of properties, # of doors, cash-on-cash return, monthly cashflow, "X" # of employees, etc.) 

If your goal is to buy another property to live in for 2 years while fixing it up, you need to determine how much will it cost in your market? Will the $70k + future income be enough to cover a 20% down payment and future repairs? If not, I'd consider refinancing your current property for additional funds. If $70k is enough for 20% down and future repairs you may want to refinance anyway and use those funds to purchase your 3rd property.

You'll qualify for a conventional loan on property #2 because it will be your primary residence. Property #1 becomes an investment property 

Thanks Jon.  Yeah, I would probably do that then.  Take the $70k I have to make a down payment on the second property.  I'd qualify for a conventional loan on property #2 because it will be my primary residence, while property #1 becomes a rental/investment property.  I could do a cash-out refinance on property #1 if I need more cash for repairs, or for the downpayment on a third property.

@Matt Miller ultimately that is up to the rent you can collect on your house. If you can swing the higher monthly payment and still cashflow, then yeah do a cash out refi and swing that money into a new rental.

If your monthly payment after refi would be more than the rent you could collect, I'd say leave it as is, use your 70k to buy a property that needs some rehab- you could go with an FHA Loan and find a property well into seven figures that needs work, take out a HELOC on your current house to pay for the rehab, and then refinance that property and enjoy your successful BRRRR

@Matt Miller What you are planning on doing, in theory, is a good strategy. Keep in mind though, you need to reposition that first property in 5 years to utilize the tax exemption to keep that equity tax free. Also, I'll name it outright, even if you rent for $1900, your equity in property #1 underperforming (.55% RTV). You have options... if you have lived in the property for 2 years, honestly, I'd think about capturing the high asset prices right now and reposition that equity into better performing properties. Also, this opens back up your FHA spot, and now you could get a 4-plex as your next investment and house-hack it (if you wanted). Start scaling...

@Whitney Hutten I understand that after 3 years I'll lose my tax-exempt status on my home when I rent it, but what do you mean by "reposition" it after 3 years.  Do you mean to defer paying taxes by completing a 1031 exchange into another investment property ?  Or... ?

Originally posted by @Whitney Hutten :

@Matt Miller What you are planning on doing, in theory, is a good strategy.  Keep in mind though, you need to reposition that first property in 5 years to utilize the tax exemption to keep that equity tax free. 

@Whitney Hutten I understand that after 3 years I'll lose my tax-exempt status on my home when I rent it, but what do you mean by "reposition" it after 3 years. Do you mean to defer paying taxes by completing a 1031 exchange into another investment property ? Or... ?

Also you say:

Also, I'll name it outright, even if you rent for $1900, your equity in property #1 underperforming (.55% RTV). You have options... if you have lived in the property for 2 years, honestly, I'd think about capturing the high asset prices right now and reposition that equity into better performing properties. 


My home will have positive cash flow if I rent it.  However, if I do a cash-out refinance on my home, I will no longer have positive cash flow with my new, higher mortgage payments.  So is it still a good idea to pull the equity out of my house, and reposition it into a new property, like a duplex.  I guess it all depends on the numbers right... if the duplex has enough positive cash flow to cover the higher mortgage on my home, then it should all work out fine, right.
 

@Matt Miller , if we take your numbers at face value, your ROE is 4.2%, which is not great, but you will still have positive $7,920 in cash flow per year,although that doesn't account for repairs and maintenance, or vacancy, so your actual cash in hand will likely be even less.

If your goal is to build up a portfolio of real estate, you have to decide what that looks like.  If it's 100% free and clear, then keep your house and rent it out, and go buy another with your $70k in cash.  If the goal is to build with leverage, then sell your current house and walk away with the gain in equity that you have accumulated tax free, and buy a MF using the strategy you outlined above.  As I see many times in this forum, you're trying to get other people to make your investing decision for you, which can't be done.

Good luck, and always happy to chat further.

@Matt Miller whatever you decide to do (Heloc or cash-out refi) do it while you live there as you will get the best terms. And dude, put that puppy on STR once you move out if there is demand for that. You won't be cash neutral any longer. You must be able to respond when issues happen and be willing to go through the learning curve of self management but you can jack up your gross revenue and profit (in exchange for more effort of course) if that fits with your priorities/goals. Not sure where your market is but if you decide to go that route and want to chat hit me up. Happy to help. Nothing to sell. Good luck.

Originally posted by @Brian Gerlach :

@Matt Miller whatever you decide to do (Heloc or cash-out refi) do it while you live there as you will get the best terms. And dude, put that puppy on STR once you move out if there is demand for that. You won't be cash neutral any longer. You must be able to respond when issues happen and be willing to go through the learning curve of self management but you can jack up your gross revenue and profit (in exchange for more effort of course) if that fits with your priorities/goals. Not sure where your market is but if you decide to go that route and want to chat hit me up. Happy to help. Nothing to sell. Good luck.

Brian, I didn't realize a HELOC would be easier to get if I lived in the home. Thanks for the advice. And I've managed a STR before, so I'm a bit familiar with it!

 

Originally posted by @Scott Wolf :

@Matt Miller, if we take your numbers at face value, your ROE is 4.2%, which is not great, but you will still have positive $7,920 in cash flow per year,although that doesn't account for repairs and maintenance, or vacancy, so your actual cash in hand will likely be even less.

If your goal is to build up a portfolio of real estate, you have to decide what that looks like.  If it's 100% free and clear, then keep your house and rent it out, and go buy another with your $70k in cash.  If the goal is to build with leverage, then sell your current house and walk away with the gain in equity that you have accumulated tax free, and buy a MF using the strategy you outlined above.  As I see many times in this forum, you're trying to get other people to make your investing decision for you, which can't be done.

Good luck, and always happy to chat further.

thanks for advice Scott, the options you're presenting make sense.  

By the way, I'm just looking for other angles that I may have missed due to my newbie inexperience- I've been presented several points from others that I had never thought of, that I had missed completely.  I wouldn't call that the same as asking other people to make the decision for me.  If there's experts with more experience around, it doesn't hurt to ask how they'd handle a situation.

@Matt Miller not only easier but a higher LTV. Pen Fed does 90%LTV Helocs on a primary at very reasonable rates. If you are looking to recycle your cash (ie BRRRR or Flip) that's a useful tool. If you are looking to plow your capital into LTRs and you are not a value add investor, cash-out refi might make more sense. You can't borrow money any cheaper than on a primary whether Heloc or cash-out refi. Good luck on your investing journey!