Best use of equity for primary residence

3 Replies

My wife and I are looking to secure our finances in addition to our employer match 401k investments. REI seems to be a great way to diversify and start seeing returns on a shorter timeline than 30 years. We're considering taking extreme measures to drastically cut our monthly COL to build up enough capital to get into our first buy and hold SFH.

To the crux of the matter.

Based on purchase price of $275K, in a stable neighborhood, our current mortgage principal is $259K. So we do see some equity from that perspective. Additionally, we have made significant improvements to the home which should increase it's value by some additional margins above the assumed $16k we have now. However, in doing so, we have racked up a good bit of renovation debt--$60K--that is at a very high interest rate, 12%-17%. My mortgage note is 3.5% fixed. When we started, it was assumed we'd be in the house many more years, but family issues have come up and we need to exit sooner than later, which skewed the numbers. FWIW, our credit scores are right below 800 and our revolving utilization is under 30%, so getting a loan shouldn't be too hard.

Here's the options we're considering...

  • -Sell the house and hope that we have increased the value of our home high enough to recoup our expenses. Assuming the sale price would wipe out our debts, we would move in with our in-laws and use the monthly debt service/COL savings to get the down payment for a SFH within 4-6 months.
  • -Leverage the equity to purchase a cash flow SFH. However, this seems like it may only add to our monthly bills, which could wipe out all gains and cause us to be overextended.
  • -Or is there another strategy that would help?

I would knock out the 12-17% debt before looking to invest in a rental.  

@Greg Lawrence I agree with @Mark S. - pay off the high interest debt. You would be happy with a rental returning 12-17% COC.

You could leverage the equity to pay off the debt and use whatever remaining to purchase a rental?

Just be wary of getting back into debt and managing the cashflow of your SFR. I see some SFR investors with personal finance issues that bleed over into their SFR business.

Best of luck!

Thanks for weighing in, guys. I figured wiping out the renovation debt for our primary, prior to purchasing our first SFR was the most advantageous course... but you never know when someone with a little more savvy has a better way of getting to the same end.