$100K Cash. Should We Buy a Home and Invest w/HELOC, or Rent and Invest Cash?

13 Replies

I'm humbly requesting the help and brilliant expertise which is never in short supply around here. 

We're about to be in possession of $100,000 to $138,000 cash from the sale of our home (primary residence). This figure will depend on the final sale price of course and all closing costs, realty fees, doc stamps, prorated taxes etc have been taken into account. 

We are planning on leaving Florida and moving to the (much more affordable) Pittsburgh area, where we can just about purchase a new home all cash, or have very little mortgage. We're looking at homes between $120,000 and $170,000. This would be our primary residence. 

We also want to begin a fix-and-flip business. I've got a little experience doing this and would like to get back into it. Our original plan was to put all of our cash into our primary residence, have little to no mortgage, and then open a HELOC which we'd use to purchase and rehab distressed properties. My uncle does it this way a few times per year via channels such as HomePath and the good ol' Gold Room at the downtown courthouse.

Now we're wondering if we should consider renting a primary residence in order to more freely invest our cash in distressed properties. My concern with that is that we're looking at a minimum of $1,100 per month in rent for a home with a yard for our husky. If we were to purchase our home with our cash, we'd be paying only taxes and insurance and maybe an inconsequential amount to a mortgage. We'd have plenty of equity in order to open a home equity line.

Or we could finance all but 20% of our home and use the leftover cash to buy distressed properties. 

As you can see we have a lot of options and with a lump of cash this size, I felt it was only right to consult with the experts and gather some wisdom. 

Wisdom? Anyone? 

@Dayna Jung

Love this question because it rides the line between the critical discussions of real estate investment and personal finance. 

Full disclosure: I am not a full-time investor. I have a great W2 job that I enjoy immensely. My targets with investment are passive income and wealth building over a longer term. Therefore, my personal finance and investment psychology is closely linked. If you are in the real estate business full-time, perspectives definitely shift.

Because prices for a primary residence in Pittsburgh are reasonable, I say go with buying the house. You will always need a place to live. John Schaub has a great podcast (in-part) about paying cash for a primary residence. Removing that monthly cost does something nice for your psychology, it frees up a monthly in-flow to be regularly used for new investment. There is no landlord in town profiting off of you and your family.

The mistake I often see people make in this primary residence plan is that they buy the primary, and then do all the additions/glitter/and debt-funded improvements that push their costs way out of proportion. Renters rarely do that, and thus tend to free up more money for investment.

If you can stay disciplined and take the remainder for investment, you will remove a huge weight from your shoulders. A weight that most Americans carry for life.

Great question and a great position to be in.  

I would list pros and cons and put a loose business plan together where each scenario plays out.  Off the top of my head - a paid off house sounds awfully nice to not have to worry about.  Even if you pay off a majority of your primary residence and finance a small portion, that may be advantageous.  The thought of having fewer monthly bills in my mind means you have to worry less about working to pay them off.  i.e. you can do what you want to do vs having to get work to pay the debt off.  

I hope that helps.

@Dayna J.

If I were in your shoes I would buy a house with because you typically can get a better deal in cash than for a financed property. You can then choose to refi or not. The only caveat is that buying with financing requires you to have certain things like an appraisal, the proper documentation etc.  In short the lender does not of your diligence for you. If you do not have experience make sure you hire the right people as a cash buyer is 100% on their own in terms of doing diligence.  Make sure you find good help. Also, if you are not comfortable negotiating being a cash buyer can be an issue because you can't blame the lender (i.e. if the inspection does not come back a certain way or the appraisal is low). 

Once you buy the property you can refi into a conventional mortgage or a HELOC. The good part about a HELOC is that if you don't end up finding a property you like or it takes longer you can just sit and wait since the money is stashed in your house. The con is that I think HELOCs have less favorable terms.

Assuming it is cheaper to buy, the only reason I can see to rent is if you can't find a good property, are not yet comfortable you know what you are doing or are not staying long. In that case the transaction cost would be a big problem unless you buy a good enough amount below market to eat the transaction costs. 

Pittsburgh is PERFECT for what you want to do. Many colleagues feel Pitt is the absolute best market in the nation, I tend to agree.

There are SO many options.

Personally, moving to a new place (which I have done) - I would set money aside and rent for a limited time (deadline).

Using cash to acquire a property. Also staying liquid and not attached to a home right away that you are living in. 

This is all said believing that the 100-138 will be ALL your funds for your flip.investing.

All of these replies have been so helpful. I can't thank you all enough for taking the time to give your input and contribute your thoughts. I have some additional points and questions for you all and anyone else who might have some thoughts or ideas. 

@Trevor Ewen

 Thanks so much for the link to the John Schaub podcast. I've bookmarked it on my phone and it will be playing in my car ob the way home from work. And I also have a W2 job (which is great but not fulfilling if that makes sense). The goal for myself and my husband is to lower our monthly expenses and build a business flipping distressed properties, having the income from that and being able to pay ourselves a salary such that we don't need the W2 income.  

First step is to sell our enormous FL house and shed all the costs associated with it, trade it for a simpler way of living. If our monthly expenses are lower, it's easier to meet them with income we create. 

You touched on a really good point. We like the idea of being free and unencumbered and totally liquid which is why we considered renting. But when I think about the fact that we will pay more on a monthly fixed basis for the privilege, I wonder if it's worth the trade. 

Also, I'm not sure I can swallow the idea of paying for a landlord to profit, as you said. I love landlords, my uncle is one, but I'd rather be on the income end of that deal ;) . You're right in that we have to be careful not to buy such a fixer with our cash that we're beholden to blowing everything available to us via a HELOC on making it livable.

@Michael R 

Yes this is our primary goal, to get our monthly bills as low as possible and thus have the freedom to do what we want, that is to say, achieving financial independence and building a business of our own. At worst we'd be financing maybe $30,000 of our primary residence. Best case we pay all cash. 

@Charles Worth

 I never even thought of this point - that buying all cash, while an easier transaction, can be dangerous because no one is requiring these things we all take for granted like inspections and appraisals. This is why I knew that coming here and asking you all was mandatory before we made a decision. I can't thank you enough. 

I have a further query though. When you say you can get a better deal with cash, does this also stand when purchasing a straight MLS, from an owner, through an agent kind of property? Or is this only when dealing with distressed properties? For our primary, we're looking for something in fairly move in ready shape so that we're not sinking more cash into extensive renovations. We want to save that cash back for investing. So would we, as cash buyers instead of financed buyers, look any different to say, Jack and Jill Smith selling their little cape on Main Street through an agent?

@Dennis Pressey Jr  

It's great to hear this about Pittsburgh. I've suspected that it was kind of a perfect market for what we want to do given the market stability I've seen but I wondered if I was just making things up. I should have mentioned in my original post that I'm actually from Pittsburgh. I was born there and while my parents left with me when I was a kid, my mom is there now and I've visited and been present in the culture enough to know where we want to live and what our criteria are. So my hesitation to buy isn't for the same reason as it might be if we were moving to a new city where we knew no one and nothing. For us it's more about whether we'd be financially better off spending a little more monthly to rent but having that $100,000 + liquid and free to buy distressed properties for rehabbing and flipping

or

Putting that $100,000+ into the purchase of a nice, modest, relatively move in ready house for us to live in, having no mortgage (only taxes and insurance) and then opening a HELOC, which we'd use, combined with our dual W2 income that we're now not spending on mortgage payments, to buy distressed properties for rehabbing and flipping.

@Dayna J.

Yes even on the MLS sometimes (not always) cash can drive a better deal. Think about it from the owners point of view. If you have someone who has a financing contingency there is uncertainty and extra time (the bank can back away because of any number of issues or the person can end up not getting financing). With a cash offer that includes proof of funds there is a lot more certainty.

@Charles Worth

 Very true, because now that I think about it, we put our house here in FL on the market 6 days ago, and have had two "very interested" parties who wanted to write an offer but it would have had to have been contingent on the sale of their home. We told our agent we are "very *not* interested" in agreeing to a contract with that kind of contingency attached. Of course someone whose financing may fall through is also a nervous prospect. When I sold my Boston condo we had an offer two days after listing, but they couldn't get financing so we had to start over. A cash buyer actually sounds really great right now. Thanks for the clarification! 

Why not finance the house on a loan term mortgage, at historically low rates, and use the rest of the cash for your investing? I don't understand why paying cash for the home and putting a HELOC on it makes more sense?

@Hal Thompson

 That was our third option, to finance all of our primary residence (less the downpayment) since rates are so good  and use our cash for investing. 

The reason we considered the other two options as well is because we may only do one property in our first year up there (or we may do ten, we just don't know), so if we were to hold a flip for a total of say 4 months, we'd be able to pay back what we used via our HELOC and only have to make the HELOC payments while we held the property. The idea is that we'd put it back as soon as we sold our first property. Plus the interest is tax deductible.

If we have a mortgage, we're making that (mostly interest) payment every month whether we flip one house our first year or 30 houses or no houses. 

We don't know which makes the most sense, which is where the BP forums come in. You all have a lot of experience and know how so the reasoning was, why not ask for opinions. 

From this statement here:  "we may only do one property in our first year up there (or we may do ten, we just don't know" It sounds like you are trying to make your financing dictate your strategy and it sounds like you have too many options.  If you had one financing option, your strategy would be dictated for you - again, you are in a great position.

Consider coming up with your strategy first -- it will make your decision making much easier -- and is the way you want your business process to be.  Your business strategy is a result of you determining what your investment objectives are.  Take your three options and make some pros / cons lists along with 1 / 3 / 5 year objectives and map a plan to achieve what you want.  If you haven't checked out The One Thing yet, you may benefit from it - I did. 

I hope that helps.

@Dayna J.

 I like to think of it in terms of option value. Assuming you will be living in your house for a while (and not selling it in 1 year), then I think locking in a 15 or 30 year mortgage at insanely low rates, in an affordable area, is a great financial decision. Then, you can take the rest of the cash you have and use that to invest.

HELOC's have a floating interest rate. Therefore, whether you take it out today or a year from now isn't that important. You can always pay off your home loan on your house and own it free and clear, and then pursue the HELOC strategy, but not vice-versa. You will not always be able to get a 15 or 30 year loan at present interest rates.

In addition, if you make a mistake in your investing, you may lost some cash, but it will not likely lead to a default on your home loan. On the other hand, if you borrow 80% of the cash value of your house and lose half of it, you may be forced to sell your primary residence to pay the HELOC.

If you have family there that makes the choice more simple, if it was me of course.

Keep the liquid cash while renting for a short period to validate the market and business to yourself.

i think financing your new home would be the way to go. You use some for your down, put the rest in the bank where it will earn interest until you find your flip。then you have the cash and not have to wait for the heloc, and not pay their higher interest, no credit checking or paperwork. Its ready to go! 

Find your flip, rehab rent refinance, or sell and do it again! You will have money liquid in the bank ready for yout next opportunity! 

I wish i had your problem! Lol! 

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