Dacula, GA · Member since 2013 · 16 posts · 0 votes
As the title implies, I'm considering selling the first SFH I bought back in Aug'12. The reason being that I want to try my luck in the market, I want to buy/fix/hold and fix/flip properties. I've wanted to do it for a while now and seeing as my first purchasing experience was a success, I think Its the right move. Well, 80% of me does.
I currently have 30yr. fixed at 3.75% which I owe 67k on. I've had several real estate agents come out and place the house in the 120-135k price range(I did cosmetic rehab for the most part). I also have about 15k cash, ready to invest.
[b] My question is, should I sell this property and use the cash to buy 2 SFH to buy/fix/hold?
I would move in to one and rent the other. Or should I keep this one and try to "get in the game" a little later when I have saved more money than the 15k I currently have.
I'm afraid that if I don't act soon the deals will pas me by, and I feel that this is the best way to start investing soon! (and with proper funds in the bank)
For those suggesting a 1031 exchange - please stop suggesting that for somebody's primary residence. That is a scenario not eligible for 1031 exchange. Please read the next link:
Arnoby Torres,
Some thoughts from a long term buy and hold guy.
Your interest rate may be the lowest rate you will see in your lifetime. Have you thoughts about pulling cash out to pursue your fix/flip venture? Quick math looks like you have 37K in equity plus your 15K for 52K to purchase, fix, and flip all the while living in or renting our your first home.
What is your stance on:
Managing properties?
Taking on a partner?
Using Hard Money lender?
Doing the fixing yourself?
Great question. More details about your situation will help the members provide better advice.
to answer some of your questions, I say I'm only 80% sure because I realize that this is a very low interest rate and I don't want to lose it. so I'm on the fence.
The issue that I have with pulling cash out of my current home is that it would be as a low interest loan(unless there's another way) and I don't want to take on any loans. So that also leaves hard money out of the question. I just don't feel safe with taking on more debt, that's how many people I know got into financial trouble a few years back. I rather play with my own cash and live or die by it.
I will be doing the fixing myself, I have family in construction and the best handymen around so those costs will be minimal. Haven't really thought about a partner. Would investors go for a buy/fix/hold deal? Lets say I buy a foreclosure as a owner/occupant and live in it for the year while I fix it...could I find a partner for that?
What about just buying another personal property. You dont need as much downpayment, can move as fast or as slow as needed on repairs. Plus your interest rate and downpayment is lower. Plus you wouldnt have the real estate costs.
A fixed sub 4% loan is great, and this is your house. Take it from a guy playing games with his personal residence right now it takes a lot out of you and isn't fun.
Maybe partner with someone, borrow money, use hard money. If the deal works, you can find funding. Do a few that way until you have that cash you'd get from this place.
Plus, you haven't been there two years yet. Have fun with the tax bill!
What about just buying another personal property. You dont need as much downpayment, can move as fast or as slow as needed on repairs. Plus your interest rate and downpayment is lower. Plus you wouldnt have the real estate costs.
How could I get another personal property without it being considered an investment? I don't think I make enough income to be approved for a second home...maybe I'm not sure what you mean, could you explain a bit more?
It might take getting creative to get that first deal going.
You know there are a lot of people with 20-50k collecting dust in their savings. Maybe bring on a partner that way, I would just avoid selling at all costs personally.
If I was going to, I would wait for the two year mark for tax benefits.
Arnoby Torres, you are asking a great question and only you can answer that. Why? It all depends on your goals & needs.
Based on what you said so far, it seems like your goal is to generate passive income. You like renovating houses and creating equity (profit). Your fear is that these good deals will pass you by BUT at the same time you do NOT want to borrow more money or go into more debt.
If the above is accurate assessment of your goals and needs, here's an idea for you:
1. Sell your personal residence and get $60K in profit
2. Use that as downpayment + rehab money + reserves money to get a FORECLOSED 4-plex instead of a house
3. You can live in one of the units while renovating the other units to generate massive cashflow and equity
Why 4-plex? You can still get owner occupant financing for a 4-plex, you can live in one of the units (live rent free or no house payment) and it will generate enough cashflow or passive income.
Of course, this assumes there is good demand for 4-plexes (rent-wise) in your area and you're OK living in those rental areas. Makes sense?
I am in a similiar position. My second house I bought at 82K, owe 77k @ 4% and it should appraise out around 130-140k right now. I have thought about selling for the cash. Market rents on this property as it sits, are $1100-1200 all day long, maybe more.
I thought about selling, but I love this property, have a large amount of equity, and it has an attic and basement I could finish to make it a 3/2 or 4/3 , at a 4/3 fully renovated, it should put me in the 170-180k range. Instead of selling, in August I will have 1 year seasoning on my mortgage. This means I can get a full appraisal (not just a driveby) and show the value I have added. Also, I should have a few great comps hitting the MLS that will help this whole scenario. I will be attempting to obtain a HELOC at 80-85% LTV, and hope to achieve at least a 25k line. Along with cash on hand, and profits from the sell of my first house I bought 4 years ago (long story, wasnt selling, lady left a card in my mailbox, I named a price and she accepted) I hope to use all of this to buy a fix and flip with a partner. Also hope to 203k loan another property as well if I can get all my ducks in a row with them.
It is all based on your risk tolerance. If its not that high, sell and use the cash. If it is higher, use someone else's money.
Unless you can find another property to buy immediately, and 1031 exchange your profit, you are giving ALOT to Uncle Sam.
Here is another scenario that COULD be possible -
House appraises at 135k , and you are able to secure 80% LTV (some banks go 85 or 90% , may have to dig hard to find) HELOC:
$135,000 - 20% = $108,000 - $67,000 mortgage = $41,000 Home equity Line of Credit.
Even at $125k appraisal, you yield $33k Line - which is close to your cash yield on the sale... and you still own the property.
Rent it out for market rents (i would hope is close to 1000-1200 a month) which should be close to covering your original mortgage and your line payment, depending on terms. Use the line of credit to buy flip/rehab a house. pay it off. Rinse and repeat.
Shane Johnson, thanks for pointing out about not owning it for more than 2 years and the tax implication. I have thought also about getting a HELOC but Arnoby does not want to go into more debt.
In this case, then...Arnoby Torres, you might need to do a 1031 exchange and trade up to a 4-plex without paying taxes on the gain.
You get more cashflow with minimal debt and you get to live rent free.
My suggestion would be to stop worrying about the "free" money that are interest rates.
According to the BP mortgage calculator:
67k @ 3.75 @ 30 yrs is $310/mo
67k @ 6.5 @ 30 yrs is $423/mo
Can you rent a new house bought at those rates and still be realizing significant cash flow? Probably! I'd sell to cash out the equity and buy 2 properties one as a buy and hold and one as a fix and flip! Do that once or twice a year and in 5 years you could be looking @ 5-10k/mo in passive income!
Which is better? Paying 15% capital gains tax on the property today, and starting down the path, or waiting too long and never getting started?
The more I think about it, the less I want to sell this house. 3.75% IS really low and like some of you said, I might never come across it again.
Another thing I'm starting to realize is that a home equity loan might be better than I thought. I'm pretty new to all of this, but I believe you are saying that a home equity loan will have a term length (like 30yrs)...right?
I thought about it as a traditional loan that would have to be paid back in 5-7 years(sorry for my newbness)
In that case I wouldn't mind taking out the loan since this house can rent for $1000-1200 which would cover the mortgage and 2nd loan. I think that's the way I'm going to proceed.
For those suggesting a 1031 exchange - please stop suggesting that for somebody's primary residence. That is a scenario not eligible for 1031 exchange. Please read the next link: