I'm totally new to REI and need some guidance to my specific situation.
My wife and I own a 2 bedroom house in Adrian, MO we bought 4 years ago as a HUD house for $30K in cash. I'm getting close to finalizing the rehab with a new roof and gutters and I expect based on comps it will appraise for $100K. Ideally, we want to find a larger 3 bedroom home for our growing family.
I work for a remodeling company as a lead carpenter and did all the work myself (except roof/gutters). This is my value I can bring to my REI. That is, being able to do most work myself, although later I may transition to contracting more out after we have built up our investment home inventory.
1) Save until we can afford a 20% down payment on our next home to live in, move there and then attempt to BRRRR our first home. In other words, refinance to recapture our equity we have built assuming a refinance loan (75% of $100K) of $75K. Rent it for $900/month to cover refi loan and earn a small cash return. Take $75K and BRRRR again.
2) Stay in first home, unable to access built equity, all the while saving for a BRRRR. This option seems less risky but less lucrative too. However, I'm just not yet aware of all the options available to obtain a loan to even be able to BRRRR. Maybe I wouldn't have to fully save cash to start a BRRRR, but could borrow somewhere. HELOC? REFI? I just don't know yet what even makes since.
3) Save until we can afford a 20% down payment on our next home to live in, move there and then sell first home. This option gives us $100K and avoids capital gains tax since we have lived in it for more than 2 years. Take $100K and find a home to BRRRR. As I'm writing this, my gut tells me this would be the way to go, but I've gone back and forth on so many scenarios I just can't seem to get the clearest path in my head.
4) BP decides!! But seriously, I'm just needing more experienced minds to share your thoughts and ideas. I love this community and figured there was no better place to go to get the guidance I am seeking!
Thanks for anything you can offer!!
I always choose cash flow. There are plenty of people who will highlight the limiting to my wealth in choosing cashflow, but I don't need to die with 28.6 million dollars. I only need to live how I want today, and to die with enough to give my children a financial legacy. That's my goal.
Because of my goal, I see your options and gravitate toward your second scenario. HELOCs are the best debt you can access. Even though the "percent" looks higher, it's so much better than the reality of amortized debt. The reason that matters is that you can capture a ton more equity in properties way faster by financing them with a HELOC.
You could find a bank in your locale that would give you a first-position HELOC with 90% LTV right now on the home you live in. You can then use that loan to purchase another live-in-BRRRR. Use 5%-down on your new primary because you can and there's no reason to trap equity in a loan.
Once you have the HELOC, you have a place to park savings as you build capital toward your next purchase. That's the exact method I've used and I've been able to purchase two rentals in 4 months, each that cashflows $1000 a month.
Best of luck however you move forward!
Thanks for the reply @Jody Sperling !
Let me understand a little better because this sounds like a great option!
1) HELOC current home to access 90% of assessed value.
2) Take assumed $90K, pay cash for a BRRRR with enough money to perform rehab, rent it, refinance.
3) At this point, I still have original home with HELOC loan. And here you say use 5% down for our new primary home? So I'd have a HELOC on original house I could now be renting for cash flow or breaking even. And have a 5% down amortized loan I'd be paying on for new primary. Maybe I lost track in this 3rd step but just wanting clarification here.
You've got it. The HELOC replaces the original mortgage. But I failed to account for the fact that you owned the first house free-and-clear, so ignore the part about 5% down. You can buy your next property in cash with the HELOC, rehab it, and if you get similar numbers, then refinance, leaving the least possible cash in the new house.
Some banks will allow you to increase your HELOC with a new property as additional collateral, but many banks will push back saying you have to have some amortized debt with them. (It's a lesson in how banks make money when you learn that they prefer not to give HELOCs to people who use them wisely.
I would not tie up my personal home as collateral to a bank . I know that is often raved about on here but if you have a family you don’t want to risk losing your home over making some early mistakes in this game , things can get ugly fast in this business , it’s not worth it .
I would save up money and find off market deals and use creative means to build a portfolio. You don’t have to do what everybody else by calling up a realtor buying what’s Available and picked through at full retail pricing ! Despite what they tell you on here you don’t even need a realtor !