Buying & Selling Real Estate Discussion

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Danielle Coleman
  • Denver, CO
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Take a mortgage out on our home ?

Danielle Coleman
  • Denver, CO
Posted Jan 26 2022, 09:32

We paid cash for the home we currently live in.  Wondering if it makes sense to get a mortgage on it and pull cash out to buy another home to live in or buy an investment property so we can take advantage of the low interest rates and not have to qualify for a loan on a new property.

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Alex Roter
  • Lender
  • Los Angeles, CA
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Alex Roter
  • Lender
  • Los Angeles, CA
Replied Jan 26 2022, 10:37

Hey @Danielle Coleman I highly recommend this strategy as long as you do your due diligence in finding a strong cash flowing investment property. Many experts believe that utilizing equity in your property to invest in additional real estate will put you on the fast-track to getting out of the proverbial "rat race." 

Essentially, you are leveraging the bank's money to increase your monthly cashflow. Ideally, the rental income will pay for the mortgage on your primary residence. 

The real estate market in Denver County is strong-- experts are predicting about a 25% cumulative appreciation forecast. The average cost of homes in Denver County is about $523,000. In 5 years, it should appreciate to about $656,000. Worst case scenario, if you are unhappy with the investment you can sell the property and make a profit.

Hope this helps

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Danielle Coleman
  • Denver, CO
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Danielle Coleman
  • Denver, CO
Replied Jan 26 2022, 11:17

Thank you !  

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David M.
  • Morris County, NJ
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David M.
  • Morris County, NJ
Replied Jan 26 2022, 12:07

@Danielle Coleman

Just depends on your strategy and your risk tolerance.  Just make sure you can afford everything.  You don't want to do this for investing and find you can't make the payments on your own house and lose the roof over your head.

That being said, real estate is pretty much the only investment/business where leverage, i.e. debt, is generally good.  There are many reasons how the power of leverage helps increase your wealth.

Aside from the competitiveness of this market, consider using the funds that you cashed out as the money down for multiple rentals.  Again, leverage is generally considered a good thing.

That being said, it depends on what you are looking for.  If retirement is looming near and you don't consider yourself to have the time for the investment to grow, then maybe you need to take a slightly different direction.  Cash flow is nice, but building wealth through equity is the time tested strategy that works well especially if you have the time to realize the power of leverage.

Hope that helps.  Be happy to chat.  Good luck.

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Danielle Coleman
  • Denver, CO
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Danielle Coleman
  • Denver, CO
Replied Jan 26 2022, 15:07

Great, thanks for responding.  I appreciate this quick feedback from both comments. This a great platform!  We have a complicated situation I guess.  We are not close to retirement.  We are mid life and are hoping to crack the code on exiting the rat race. My husband has a full time income and I stay home with our young children. We would like to buy an acreage, farm, or land to build on and convert our current home into an investment property and grow from there. We had plans on investing while we lived in Denver 10 years ago and didn't make it happen. Hoping we aren't too late. We know there is a way, but looking for wise counsel on how best to use our money.  Our house is worth about 150-175K and we have other money we could add onto that.  I guess we are trying to have our cake and eat it too. We are contemplating if there is a market for brrr method on acreages. Anyone had experience in this niche?  We live in rural Nebraska and are willing to relocate.  

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David M.
  • Morris County, NJ
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David M.
  • Morris County, NJ
Replied Jan 26 2022, 16:26

@Danielle Coleman

I am assuming by "acreage" you are referring to raw land.  you really can't exactly brrr the land itself.  You basically need to buy it in cash.  I spoke with a couple commercial lenders who confirmed you really just buy it in cash, and at best they could to a 50/50 ltv for me.  If you mean to be a developer or builder, that is possible but much more involved.  Is that what you mean?

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Danielle Coleman
  • Denver, CO
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Danielle Coleman
  • Denver, CO
Replied Jan 26 2022, 17:07

I meant acreage with a home. 5-20 acres with home and sometimes additional buildings. Old farmhouses with acres that were split off or small farms.

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David M.
  • Morris County, NJ
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David M.
  • Morris County, NJ
Replied Jan 26 2022, 19:03

@Danielle Coleman

I'd have to think about that and understand your market better...

To me that goes into developing when you take a large plot and subdivide.  General improvements is development. e.g zoning, subdividing, getting some approvals, maybe getting utilities brought to the street/access point.  Actual construction is building / GC work.  

Land speculation is how many of the ealry "greats" make their wealth in the colonial days.  

Is that what you were thinking of??

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Juan Campos
  • Dallas Tx
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Juan Campos
  • Dallas Tx
Replied Jan 27 2022, 08:49

@Alex Roter how does that work exactly taking out a loan on your current home , to buy another home now you have two loans ?

Your main property is being rented out so tenant pays for it

And now you have a second mortgage that you're paying for ?

But the cashflow only covers the first home, what about the second one? Assuming you do your due diligence and the house appreciates in value and gives you good returns, there's still

capital expenditures in the long run ect

How does one exactly benefit here ? Still learning and one of thr things I'm struggling to understand is this particular step along with a cash out refinance

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David M.
  • Morris County, NJ
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David M.
  • Morris County, NJ
Replied Jan 27 2022, 11:07

@Juan Campos

I am kinda confused at your confusion...  Let me see...

I think maybe in your thought process  you are missing that you have your own income to service the loan on the 2nd property??

The point of cash out refi'ing on your own home is to tap into the equity so that you have the cash to put down on another property.  Overall, your own income and the rental income needs to cover the rental expenses and your own living expenses.  Otherwise, you'll need to be tapping into some sort of cash reserve of your own.

Does that help?

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Stacy Fernandez
  • Real Estate Agent
  • Lincoln, NE
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Stacy Fernandez
  • Real Estate Agent
  • Lincoln, NE
Replied Feb 2 2022, 06:53

@Danielle Coleman Regarding BRRRing acreages. It's definitely an option - my dad and his partner did that around Lincoln, NE. They bought raw land them parceled them out as mini-acreages. It did take cash to purchase the land, develop the roads, get utilities to the properties (electric), wells & lagoons - responsibility of the buyers. This was right around Lincoln so I wouldn't call it Western Nebraska Rural but it was technically rural property. If you already have a house on the property you are probably in a better position because you have some sort of utilities - just be aware of how much frontage you need to be able to parcel off lots properly (try to avoid easement driveways and what not). 

I would get in contact with a commercial lender (I have a great one in Lincoln if you need a referral), let them know your plans and what they would require. 

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Replied Feb 2 2022, 15:20

@Danielle Coleman - We work with many financial advisors, and the vast majority agree with the math of leveraging.  If you can take out a loan at 3%-4% on your primary home and you use that for some investing purpose that will generate you more than 4% in annual gains (stocks, real estate, etc), than you are absolutely making the right call.

Having a home free and clear is great, but only if you have plenty of free cash for investing.  Otherwise, you are holding yourself back.  What to invest in?  That is up to you, rental properties in growing markets, stocks, etc???

If you want the best rates possible, you can refinance your home as a primary home (rather than a rental), but that means you will sign loan disclosures stating its your intent to occupy the home for the next 12 months.  Otherwise, call it a rental property, but that comes with a higher interest rate.

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David M.
  • Morris County, NJ
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David M.
  • Morris County, NJ
Replied Feb 3 2022, 09:32

@Zach Wain

Honestly, I don't think in my opinion that your financial advisors are any good or you aren't getting the full story.  If you are paying 4% on your loan and getting 4% annual gains in stocks either way you are losing because of taxes.  You have to compare apples to apples.  Playing a net interest margin game is risky and something banks and other investment firms do.  I don't know your advisors, but it sounds like they are trying to sell you something in my opinion.

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Replied Feb 3 2022, 09:42

I think you misread or misunderstood my post.  I said more than 4% in returns.  Borrow at a lower rate with the goal of generating returns at a higher rate.  If you are doing this with Crypto, that would be extremely risky and a bad move IMO.  If you are investing wisely in real estate or equities, I think its a good idea.  The math works out.

If you are buying real estate and generating annual revenue, while getting a possible tax deduction on your schedule E after write offs, and based on historical trends your real estate is appreciating at 3%-5% per year.  You are winning.  Leverage is a powerful tool.

Also, your mortgage interest might be tax deductible as well.  Depends if you itemize your deductions.  For example, I did a cash out refi for myself at 2.625%.  I itemize my schedule A, so my net interest rate is closer to 2% after tax savings.  

Avg returns for the S&P 500 for the past 50 years are 9.4%.  Is leveraging a good idea?  The math does not lie.  Good years and bad years happen, but I will take my chances at 2% vs 9.4% annual averages