Getting 100% equity out of my future home

10 Replies

We are moving to Colorado Springs this summer and plan to retire from the military in the area. Our plan is to buy a house for cash to live in for free, until we have enough savings accumulated to buy land and build a house. I am anticipating to start construction at the end of 2018. I do not want to carry debt on my final home.

The only way to be able to do this is to take 100% of the money we invest in the first home and borrow it back just prior to construction. Otherwise we would have to rely on a 20% appreciation in home values to get our money back with a regular HEL that gives 80% max.

Our max. budget for the first home is $100,000 (total cost including closing costs, improvements etc.), with as little renovations/improvements as possible since we need to move in immediately once we arrive and it would not be feasible to find somebody to fix the place without supervision.

So the question is: how do I find the best way to finance 100% of my home's value? I came up with two scenarios:

1. Get a VA home equity loan for 100% of the home value. Possible issue is the length of term (max 15 years) and higher interest rates (over 6%). But it looks like Quicken Loans does offer loans that are cheap and 30 year term.

2. Sell the house to my sister (on paper only) with no money exchanged and buy it back with a VA mortgage with 0% down. She would transfer me the money upon receipt so we have the funds for the new house. This offers 30 year term and lowest interest rates.

An issue with involving the VA is that we are required to live in the home for a certain period - I'm not sure how long. In reality, we want to rent out the house as soon as the new one is finished and continue on as a long term rental.

Has anybody been in this situation before? Are there any other solutions to get my initial investment back without selling the house? Thanks.

Sorry for the long post.

Why don't you just rent for a year or two, then build your new home? A lot less complex.

You could buy up to 4 units with your VA; move in and rent out the other units so that you live for free. Stay a year. Bank your BHA for that time. Use your cash to build your forever home. Buy another rental with the baked BHA. Retire. Use rents from the two properties to supplement your retirement.

There a some credit unions in Colorado that will do 90% ltv HELOC as long as you have good credit and it is a home/townhome. They will only do 80% if it is a condo. The one I pulled has no closing costs if you pull 15k out on day 1. If the home you're putting the HELOC on is worth around 100k then the 10k difference between 90% and 100% shouldn't be too hard to make up in other ways.

I'm not sure if I understand the question correctly, but I think what your saying is that you:

1. Want to buy a home for cash, $100k

2. Live in that home 2-3 years while you save additional for property and a new build.

3. Build your new home with a value based on the $100k home you paid cash for plus what you have saved.

4. Keep your original home for a rental.

5. Rental would cover the payments, so essentially no monthly payments out of your pocket.

IMHO, I would use the historic low rates of a 100% VA loan now, buy your temporary house, keep the 100k cash and add to it with savings. When it comes time to build, you have the cash, don't need a loan, don't need to pull equity, and you have a much better chance of having a cash-flowing property because of the low interest rates you locked up. I believe the occupancy time requirements are different for each lender, but typically about 12 months.

On a side note, have you looked at the Colorado Springs market. $100k doesn't get much at all if you don't want to put a lot of work into it. Mobile homes, modular, condo's are your most likely bet, maybe a townhome if you find the right deal. SFR will be tough to find at that price point without needing a lot of work.

Going to agree with Brad there. Not sure what size home you are used to, but $100k won't get you very far in the springs. Most 3 bed, 2 bath homes will run you at least 220, depending on the neighborhood.  

I agree to explore leveraging a va loan on a multi family to help save money for your build home. Or rent for a couple years

Hey Gabriella, welcome to Colorado (soon)!

I lean towards Brad's way of thinking. There are a decent number of SFRs under $100K in the Colorado Springs area (I just pulled a quick list and it showed 60 properties currently Active and U/C), but they are in areas that will appreciate poorly and will be pretty rough around the edges.  Additionally, a refi in 2018 will almost certainly be at a higher rate, diluting your profit on the rental.

If your goal is to minimize cost of living in order to maximize savings towards your end goal of buying property and building a home, then keeping the property for cash flow...I would probably recommend using your 100% VA financing on the front end to purchase a multi-unit property, live in one unit, and rent the rest. It won't be glamorous, but it is a means to achieve your goal. It would look something like this (these are real numbers in the Colorado Springs Market, but all rounded for generalization):

Living-

1. Purchase 4-plex @ $200K with 100% VA financing, payment around $1200/month, units rent for around $600/month each.

2.  Live in unit #1, rent the other three for a total of $1800/month.  Assuming a 10% vacancy plus maintenance expenses, a $200+/month net profit is doable.

Saving-

1. $2,400/year from your rental income + living for free =  $7,200 + $? in 2018

2. You invested your original $100K at 10% = $133K in 2018

-There are several experienced local RE Investors that take investors to fund their rehabs with a guaranteed return.  I can point you towards them if you would like.

Your picture in 2018-

1.  $140K plus your other savings to put towards land and building your new home.

2.  Cashflow positive rental

That's just a theoretical example, but you could do a similar scenario with another type of multi-family or a house with a cottage(s)...you get the idea.

Thanks for all the ideas, guys! I really like the 4-plex idea but it looks like the units are not big enough for our family and dogs. I will keep looking if something pops up.

I did the numbers for different scenarios and I come up short on the money if I rent or get a loan up front (unless it is a multi-unit rental property that covers my mortgage payments). I need to save every penny every month to build up the savings and it will take 3 years just to have enough. That includes getting my money back on the original amount spent.

I think in my situation the first priority is financing the construction without going into debt on the new house itself. (That's just for my peace of mind. And because getting a construction loan is harder and comes with problems.) Earning cash flow on the first property is secondary, as long as I break even. I can always sell it later for a profit, there is no hurry.

I guess I could always just buy it cash (below market value) and sell it when I need the money. If the market does not look good at that time I wait and put the construction on hold. I will have the land already paid for and a home to live in. Once I sell, I could rent until the house is ready to move in (maybe even rent it from the new owner). It is cheaper than renting for 3 years.

I am very new to all of this, so here is what I see many of you suggest might work against me if I buy cash and take a loan out later: interest rates are going up or will very soon. The question is - will monthly rent prices follow along? How about property values? One way or another I should be able to recover my money. Am I being unreasonable? Yes, I know what happened in the recent past with the bubble and all, but I don't think that will happen in the next 3 years.

If interest rates go up 1% (which is highly likely in the timeframe you are talking) then you're going to see an approximate $60 increase in your payment. $120 for a 2% increase, which isn't out of the question. Will rent prices follow - probably, but they will lag behind. And based on the home that you will be purchasing at the $100k pricemark, they will probably not go up that much. 

Another thing to think about, and this is pure price speculation on my part, is the amount of apartments that are being put in now in Colorado Springs. Eventually the market will become flooded, and prices will stagnate and possibly drop slightly (although history shows rental prices don't tend to drop too drastically). 

thanks Brad. I ran my numbers and also got pre-approved for a VA loan so I have options. My monthly payment would be below $600 PITI. I think that as long as I find a property that rents out for $1000 or more I'm more than likely to break even and even have cash flow. I will be a bit short on my cash available for the new house but it will be easier to finance a smaller amount then or even sell the house to get the equity out.

I think it's time to start looking at rental prices as that is a main factor here. Do you know any good resources besides just MLS?

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