How much down?

Question

Hi gang, would appreciate your thoughts on this one.

I'm buying a second duplex, using financing from my first duplex. I bought the first 6 months ago at $82K, the bank values it at $140K. ($90K is likely resale value.)

Second duplex is selling for $80, needs $10K worth of work. I'm considering taking $90K against my first property at 5% to buy this one outright plus reno costs, and keep my (currently +6.5%) liquid investments liquid. (Likely resale value on this second duplex is $110)

Downside: more financing = more exposure to risk (the loan is 20 yr, first 5 years fixed, then floating.) downside is less cash flow because more goes to debt service. Upside: I keep the liquid for other things if needed, including paying the loan off if the interest rate suddenly goes ballistic in 5 years.

OR: should I drop $30K into the house, and finance $60? It makes a smaller monthly note, but ties up more capital. Better to keep the liquid capital accessible, right?

Any ideas on that would be mucho appreciated, thanks!

R

Randall Williams · Answer

@Darren Budahn   Makes sense to me, too - I'm just trying to see what I might be missing. For example, when I bought the first duplex, I paid cash, and bought outright. Had I mortgaged it, I would have had a bunch of extra cash then for several other properties. But in effect, I'm doing the same thing now by mortgaging it to buy another outright.

Thanks for the perspective - appreciated!

Darren Budahn · Answer

Yeah, personally I would as long as it cash flows. I still can't wrap my head around how a bank could value the property 40-50k higher than its fair market value.

If you're looking to add value you can always do the BRRR method so you can ideally use the same money over and over again