Turning $55k into $1M+ [CONTINUED using BRRRR]

[Steven Baca]

Expert advice needed!!

I bought a townhouse in 2016 for $95k and have been renting it out since 2018 (creating ~$300+ monthly cash flow), as of today current mortgage due us $74k.  This townhouse has now appreciated to a value of ~$140k.

I bought a 3bd/1.5 bath home in 2019 for $113k, rehabbed it for 3 years and sold it for cash ($165,5k) and walked away with ~$55k in cash which I closed 9/2/22.

I just started reading the BRRRR book two days ago and need some solid advice on the direction I should take as this could narrow my road to that $1M+ goal sooner...

Which option should I take?

Option 1: HELOC/ Cash Back refinance my townhome and pull out enough equity to add to my $55k in purchasing a 2nd property? With rates being as high as they are this is a worrisome option

-OR-

Option 2:  Pull out $19k from my 401k, add that to my $55k and pay off the townhouse note. Invest a small amount of capital into it by adding some make up and then refinance it in order to purchase my second investment property?

My current situation: I just moved my family of 3 into my folks home while making this next investment transition and would like to have my next property by end of year.  My tenant moves out of townhome on 11/11/22 which I plan to move my family into the townhome for a 6-8month stint until a 3rd property is purchased which would be out slow-2-3yr-primary-residence-rehab-project.

Any straight forward advice would be GREATLY APPRECIATED. Or if there is a 3rd option I'm missing please indulge me!

Thank you in advance BP colleagues!

[Andrew Postell]

@Steven Baca thanks for posting.  Always great to hear from a fellow Texan.

Why are we examining just buying another primary home using 3%-5% down to purchase it?  That would have the least amount of money out of your pocket with the lowest interest rate you could find.  Why not just to that?

[Steven Baca]

Quote from @Andrew Postell:

@Steven Baca thanks for posting.  Always great to hear from a fellow Texan.

Why are we examining just buying another primary home using 3%-5% down to purchase it?  That would have the least amount of money out of your pocket with the lowest interest rate you could find.  Why not just to that?

Hey Andrew good to hear from you.  I think that route is more traditional, safer and road most traveled with getting into your second/third property.  But with these rates 5-6% percent the  passive income takes a hit. Especially with the Texas hike in listing value.  That is def an option though

[Patrick Rhodes]

Steven,

Great question and situation for discussion. I do have a few questions that may help in figuring out what is best for you as that is different then what is best for me or anyone else giving advise.

In your post you spoke about "Cashflow" and a "1Million" Goal. What is more important? From your answers to other comments on here I would believe that there is a fear of losing the cashflow. 

What do you feel that market is going to do in your area over the next 1,5,10 years?

How does scaling your debt make you feel? Are you okay with having all of your properties highly leveraged or does that stress you? Would you rather less properties paid for or with low balances?

Personally, I would do the HELOC and get into another property. If that next property has the means to cash out and pay off the HELOC with in 18mnths. If it is longer then that I would do a cash out refi on the first property and buy the next investment.

Hope this helps.

[Andrew Postell]

@Steven Baca ok, I understand where you are coming from.  I think purchasing a primary home might still warrant at least thinking about it a little. Here's 2 other items to think on as well:

1. HELOC - getting a line of credit in the 2nd lien position on an investment property is pretty impossible. I don't know of any lenders in Texas that do this. I think this option might be out entirely. In order to get your equity out we would either need to do a cash out loan (which means your rate and payment increases) or take a Line of Credit where it assumes our mortgage balance. This means you would be paying a higher rate AND now having an adjustable rate as well. Now could you move back into the property and then get a HELOC? Yes, but I'm not sure if any lender here in Texas would be ok with you having a HELOC and occupying your property for only 6-8 months. Most want 12 months...and then after you move out they will close the HELOC. We have some state specific rules to cash out loans here.

2. Paying off the loan - there's no need to pay off the loan and then refinance again.  It's just the same as refinancing above except now you have taken out 401K money at a penalty.  So this route just makes you pay more fees.  

I still feel that considering purchasing another home with 3%-5% down should be explored some.  If the goal is to purchase another primary home in 6-8 months....I feel like we should analyze doing it now.  That's my feelings on it.

Hope all of that makes sense. 

[Steven Baca]

Quote from @Patrick Rhodes:

Steven,

Great question and situation for discussion. I do have a few questions that may help in figuring out what is best for you as that is different then what is best for me or anyone else giving advise.

In your post you spoke about "Cashflow" and a "1Million" Goal. What is more important? From your answers to other comments on here I would believe that there is a fear of losing the cashflow. 

What do you feel that market is going to do in your area over the next 1,5,10 years?

How does scaling your debt make you feel? Are you okay with having all of your properties highly leveraged or does that stress you? Would you rather less properties paid for or with low balances?

Personally, I would do the HELOC and get into another property. If that next property has the means to cash out and pay off the HELOC with in 18mnths. If it is longer then that I would do a cash out refi on the first property and buy the next investment.

Hope this helps.

 I appreciate the response, great points to think about.  Let me get my thoughts in order and get back to you with some answer to further this conversation!

[Steven Baca]

Quote from @Andrew Postell:

@Steven Baca ok, I understand where you are coming from.  I think purchasing a primary home might still warrant at least thinking about it a little. Here's 2 other items to think on as well:

1. HELOC - getting a line of credit in the 2nd lien position on an investment property is pretty impossible. I don't know of any lenders in Texas that do this. I think this option might be out entirely. In order to get your equity out we would either need to do a cash out loan (which means your rate and payment increases) or take a Line of Credit where it assumes our mortgage balance. This means you would be paying a higher rate AND now having an adjustable rate as well. Now could you move back into the property and then get a HELOC? Yes, but I'm not sure if any lender here in Texas would be ok with you having a HELOC and occupying your property for only 6-8 months. Most want 12 months...and then after you move out they will close the HELOC. We have some state specific rules to cash out loans here.

2. Paying off the loan - there's no need to pay off the loan and then refinance again.  It's just the same as refinancing above except now you have taken out 401K money at a penalty.  So this route just makes you pay more fees.  

I still feel that considering purchasing another home with 3%-5% down should be explored some.  If the goal is to purchase another primary home in 6-8 months....I feel like we should analyze doing it now.  That's my feelings on it.

Hope all of that makes sense. 

 Very detailed responses and educational!  I've definitely determined that is not be pulling out of my 401k and paying off any note.  I feel you are correct I the traditional method as all the other examples lean towards higher rates and increased monthly payments! 

I appreciate you taking the time to break things down for me!