Hi All, 

I'm looking for some advise or opinions on the matter below. 

Up until August, we (my wife, my son and myself) owned 2 houses, a rental and our primary residence. In August we closed on a SFH with a seperate entrance to the basement. The plan was to fix up the basement and rent it out. Rent would be around $1200 according to other rentals in the neighborhood. In order to fix it up, I would have to tap into an LOC. Note that I have a 5 year fixed term with a bank that does not do HELOCs.

After some thought, I had another idea. Instead of fixing up the basement to rent it out, I can buy another property instead and do the BRRRR. In this case, I would also have to borrow part of the money for the down payment from family/friends, and use the LOC for the rehab.

House prices in Ottawa, Canada range between 350 to 450k, at least that is the range that I'm looking for. When fully renovated, they would get appraised around 600k conservatively.  

Which option do you think is better? I can provide more info if needed so let me know.

Thanks for your time,

Ramzi 

Let's do the math, figuratively. If you fix up the basement and rent out the house what will your gross profit be per month? Times that by how long it will take to make *estimated* 150k profit from turning a 450k house into a 600k house. Which one weighs more?

Update- arv value to last post.

Personally I do not think barrowing from friends and family is very safe. It can turn south real quick. There are a couple of nationwide lenders that work specifically with investors. If you would like references I've got a good one.

Can you still rent it out without fixing up the basement and have that closed off for now? If you can, I would BRRRR another property, and use the cash flow from that to save up on the renovating costs for the basement. Of course I do not know if you can even rent it out while cash flowing without renovating the basement.

Thanks guys for the quick response. To answer some of your questions, the basement is unfinished, so I cannot rent it out at all at this time. 

Shaughn, based on your response, I am understanding that you believe buying another property is the better option solely on the fact that there is more money to be made, correct?

Wil, what was your experience with borrowing from friends and family? How did it go south if you don't mind me asking?

Not sure of that math, but I'm guessing that a house would likely be a significantly more than fixing your basement yet the rents wouldn't scale up as nicely? 

Plus if you do another house do you have the cash-flow (doesn't sound like it) or reserves if something went wrong? 

Hi Matt, I don't think I understand your first question, can you elaborate more on it.  2 bedroom basement units usually rents for 1200 no matter how much money we spend on them based on the research I've done. I could be wrong but for my math I'd rather be conservative. 

If I buy another house, the property would cashflow $200 to $400 a month once completed. Until then, obviously 0 cashflow. My reserves come in the form of LOCs, my wife's and my full time job. 

It's a risky maneuver, which is why I posted the question on BP. Not expecting a definitive answer from anybody, but talking about it is opening my eyes so I really appreciate everybody's time.

Ramzi, yes I think that BRRRR strategy would get you more gains rather than putting money into a basement and renting out the property.

But it also opens my eye to Matt's comment. I personally wouldn't like to do business with my friends or families money. Have you calculated your costs to acquire the property with whomever you use for financing? Have you calculated the holding costs while you repair it? Factored in realtor fees? Closing costs? Repair costs? Staging costs? Do you have an exit strategy if things go south? 

Not having the right capital and right fix and flip can put you in a really hurt position especially if you're gambling your families money and wind up in a stuck in the middle position. 

Not saying that you don't, but you must do all the math right first. Because if you don't, it can cost you your pockets. 

I had a friend who was investing in his third property and used family to barrow money. Deal fell through, no one bought his flip and they were not able to recoup the money for several months after they expected. It pulled on the relationships and caused stress when it wasn't needed. He started thinking from his emotions rather than his brain.

@Ramzi Marjaba

A couple things:

1) Is your mortgage broker also an investor? How was this missed in the process if you planned to do a reno?

2) Have you considered paying for the reno upfront, whether cash or regular LOC & refinancing the property after?

Originally posted by @Ramzi Marjaba :

Hi Matt, I don't think I understand your first question, can you elaborate more on it.  2 bedroom basement units usually rents for 1200 no matter how much money we spend on them based on the research I've done. I could be wrong but for my math I'd rather be conservative. 

If I buy another house, the property would cashflow $200 to $400 a month once completed. Until then, obviously 0 cashflow. My reserves come in the form of LOCs, my wife's and my full time job. 

It's a risky maneuver, which is why I posted the question on BP. Not expecting a definitive answer from anybody, but talking about it is opening my eyes so I really appreciate everybody's time.

 My numbers could be way off.... but let's just pretend they are close for easy math.

Fix basement, 60k investment, rent's 1200, let's say adds another 80k to the value of your house. You could then wait 6-12 mo and refi your house to get the money back out if you wanted, or keep the debt which should be minimal costs. 

Or your second option is to get a house for what like 400k, pump in some money, it's "worth" 600 and you get lets say 3600 mo in rent. You're increasing your net work but your also increasing your risk. It'd take you lot longer to be able to finish the basement, vs doing the basement first and then getting another house. 

I guess what I am trying to say is if you did the basement it'd come with similar results for your cash-flow for significantly less money/risk. You'd lose some networth but if things went bad you'd be in a much safer position.....

@Jacob Perez My mortgage broker is an investor, the oversite was mine. We were not planning to do any work on the main floor before we got the mortgage. it was only after we got the house we found we are actually able to increase from 1 bathroom to 2.5 which would add the value to the property. If we were not to do any work on the main floor, the value would increase but not enough to be able to pull money or money out after renos in the basement. The plan was to use the loc to do the Reno and then pay it off from the rental and or salary. I just started thinking from a strategy perspective if it would be better to just buy another property. @Matt K. thanks for the feedback. I did feel that it is risky, just need to hear it from somebody else to set my head straight.