Hello BP Community!

My wife and I have been BP podcast listeners for the last year and are very thankful for this community of great people. Most recently, Scott Trench’s book Set for Life really hit home for us. We've been on the earn and consume treadmill for the last two years as we graduated, got married, and bought a house - we want off! Long term, my wife and I want to have a portfolio of rental properties to pay down debt, accelerate our wealth, and deliver financial security and eventually freedom. 

Almost 2 years ago, we bought our 5-bed, 2-bath dream home in Monument, CO (80132) on 5 acres. We now realize that a better strategy, in terms of long-term wealth and freedom, would have been to sacrifice for a couple years, buy a 4-plex downtown or jump from SFR to SFR, and start a little empire of rentals. We don't see a big benefit to moving out of our house right now. In its current state, I don't think we could totally cover the mortgage by renting it out – definitely not if including vacancy, capex, repairs, etc. The house still needs work and we are working on that (trim, doors, bathrooms, landscaping, etc). Nevertheless, it is a home that we can see ourselves in for a long time and where we'd want to raise a family.

After long debate and a slow shift in perspective, my wife and I decided to give house hacking a shot. Our tenant is another young professional, is on a month-to-month lease, and currently pays $650/month for one room. What a game changer! We don’t know why we were so scared to start with and don’t know how we could give up that income that can accelerate our wealth building for the convenience of being “normal” and not having others live in our home.

The reason I am posting this is to get feedback and advice from those who also like to think creatively. We currently have an unfinished, walkout basement that is approximately 1,100 sqft. We want to finish the basement and do one of the following: move down there and rent out the rest of our house (5-bed, 2bath), or simply rent out the walkout basement (planned to be a 2-bed, 1 bath) via long term leases, AirBnB, or even target travel nurses (my wife currently is one and has those types of connections).

One spot I'm looking for specific advice is in regards to financing the basement. As an engineer and a night-shift nurse, we make around $160k and have credit scores touching 800. Unfortunately, we only put 5% down on our home and currently have about 8% equity in the house – so I'd imagine that a HELOC or home loan is out of the question. Again, we aren't that fond of selling the house either and losing $25k to the agents. That leaves us focusing on getting a good rate on a Personal Loan (any advice on a specific company? I'm currently planning on giving LightStream a shot). Yes, the rates may end up being around 10%, but if our payment will be $850/month and we can rent the basement for $1400, it just makes sense right? I guess I'm thinking of it like hard money? This assumes the basement costs around $40k all in and we put it on a 5 year loan. In addition, assuming a renter was there forever (unlikely, but plausible), that's an infinite COC return! Worst-case scenario, we stop renting after a couple years because of unforeseen life changes (my wife becomes the next octomom or we move once my wife becomes an NP or something), and we are left with a basement that was half funded by other people, right?

Ultimately, we think finishing the basement is a great idea if we commit to renting it out for several years, which we do. I don’t know anywhere near us where we can buy a 2-bed, 1-bath unit for under $50k. I checked Craigslist for those in my area that rent out a room in their house too. Rooms range from $600-800/month with utilities included in our Monument / Northern Colorado Springs area – zip codes 80132, 80921, and 80920. Also, we think if we replaced our doors and trim throughout the whole house while we do the basement, our house would be updated enough to potentially rent out the whole thing for a much higher amount than we currently could and better cover the mortgage if we needed to in the future. We completely remodeled the kitchen last year and the yard this summer; the biggest thing holding it back from demanding $2500-3000/month would be the doors and trim to dress it all up.

One fear I have is that if we pull out a $40k unsecured, personal loan out to finish the basement, what does that do for our future rental property purchases? Let’s say that next summer, we decide to rent out our whole house and buy another house in downtown CS, live there for a year, then jump to another one or two before going back to our dream home with a family. Would we be able to purchase another house when we currently have a $2,000 mortgage and potentially a $40k unsecured personal loan? How can we prove that we have rental income for the first residence? Does it get even trickier if we did AirBnB or short term rentals with no long-term lease (like 6 month or 1 year)?

Thanks in advance for your time and patience! One more shout out to Scott Trench – incredible book. We appreciate all of your guys’ wisdom and advice.

Cheers,

Michael & Kim