How to leverage my person residence

Question

My wife and I want to get into real estate and wondering how we should go about it. Our current residents we still owe about $104,000, we have about $280,000 in equity. The value of the house is around $384,000. My initial thought is to do a HELOC loan and pull out enough to do a flip and then rinse and repeat with the profit from that. If that is the direction we go where should I start? Should I start with moving our house into my LLC or just keep it under our names? Our goal is to flip one house this year I just need to know where to start.

Drew Sygit · Answer

@John Mason as a PMC we seem to get sued by tenants for slip & fall "accidents" every year:(

What's frustrating, is that it seems to all be a big racket. The plaintiff's and insurance company's attorneys seem to know the drill - which is that the case will be settled for under $20k.

Have been told this amount is cheaper for the insurance companies than challenging the plaintiff's claim and going to a jury trial.

In our opinion, this just encourages desperate tenants AND personal injury attorneys to file frivolous claims!

Jeff Roth · Answer

Hi Landon-

Great question! You have about $280,000 in equity in your home and you want to put it to work doing a fix and flip this year and continue that model. You also asked if you should put your own house into an LLC.

Yes, I think getting a Home Equity Line of Credit is a great way to get access to that equity and only use and pay for what you need.

Putting your own house into an LLC may affect your ability to claim homestead taxes so you may not want to do that and may also affect your home insurance.

However, putting your fix and flip into an LLC can reduce your liability exposure but make sure you also have the right insurance on the property while it is being worked on. An umbrella insurance policy for you while you are actively investing wouldn't hurt either.

Look for Facebook groups that discuss wholesale deals locally to source fix and flip opportunities and get on the list for the local wholesalers near you.

To Your Success!

John Mason · Answer

@Drew Sygit Thanks so much, that was one point I was scared of . As to how much I would lose

Chris Seveney · Answer

I would never in 1M years move my primary residence into a LLC. There is so much BAD information online about LLC's and real estate investments its disgusting.

I would be asking the question, what experience do you have flipping houses? Its similar to say I am taking $150k in equity to go start a marketing business or a restaurant? Flipping is a business that you need to know what you are doing - otherwise the chances of success are low.

John Mason · Answer

@Drew Sygit  you have seen lawsuits for rental  properties?

Drew Sygit · Answer

@Landon Lehmann many investors borrow against their primary residence equity to invest.

Getting a HELOC can also be the path of least resistance and cheapest.

There is risk though, that if you investment results in a loss or lawsuit that you could lose some or all of that money and more (lawsuit).

Getting more insurance is typically easier than setting up an LLC and meeting all the requirements to separate your business from your personal assets.

What are you doing to source potential flip properties?

Nathan Gesner · Answer

If you cash out equity in a property, you are "borrowing" that money from the lender. Upfront expenses and monthly payments must be considered when calculating the return on your investment.EXAMPLEI will provide details below, but here's the short version for those who hate to read or do math. The new investment earns $24,000 a year, but the mortgage + the equity loan cost will be $22,332—and that’s before you account for taxes, insurance, maintenance, capital expenditures, vacancies, etc. Borrowing from the equity must be done wisely, or you will end up with negative cash flow and be at high risk due to over-leveraging.NOTE: I use interest rates much lower than they currently are in 2024!Borrowing Against Equity: Costs and Expenses

• Cost of Cash-Out Refinance or Home Equity Loan:Interest Rate: Assume a 4% interest rate over 30 years.Monthly Payment: Approximately $716 per month.Total Interest Paid Over 30 Years: Approximately $108,000.
• Interest Rate: Assume a 4% interest rate over 30 years.
• Monthly Payment: Approximately $716 per month.
• Total Interest Paid Over 30 Years: Approximately $108,000.
• Closing Costs:Typically, 2% to 5% of the loan amount. For $150,000, this could be $3,000 to $7,500.
• Typically, 2% to 5% of the loan amount. For $150,000, this could be $3,000 to $7,500.

• Interest Rate: Assume a 4% interest rate over 30 years.
• Monthly Payment: Approximately $716 per month.
• Total Interest Paid Over 30 Years: Approximately $108,000.

• Typically, 2% to 5% of the loan amount. For $150,000, this could be $3,000 to $7,500.

Investing in a Rental Property: Costs and Expenses

• Down Payment and Closing Costs:Down Payment: Assuming you buy a $300,000 rental property, you need a 20% down payment ($60,000).Closing Costs: Typically 2% to 5% of the purchase price. For a $300,000 property, this could be $6,000 to $15,000.
• Down Payment: Assuming you buy a $300,000 rental property, you need a 20% down payment ($60,000).
• Closing Costs: Typically 2% to 5% of the purchase price. For a $300,000 property, this could be $6,000 to $15,000.
• Mortgage on Rental Property:Loan Amount: $240,000 (assuming 80% financed at 4% interest over 30 years).Monthly Payment: Approximately $1,145.
• Loan Amount: $240,000 (assuming 80% financed at 4% interest over 30 years).
• Monthly Payment: Approximately $1,145.
• Other Expenses:Property Taxes: Estimated at 1.5% of property value annually ($4,500).Insurance: Estimated at $1,500 annually.Maintenance: Estimated at 1% of property value annually ($3,000).Property Management Fees: Assuming 10% of monthly rental income ($2,400 annually if rent is $2,000 per month).Vacancy and Turnover Costs: 5% of annual rental income ($1,200).
• Property Taxes: Estimated at 1.5% of property value annually ($4,500).
• Insurance: Estimated at $1,500 annually.
• Maintenance: Estimated at 1% of property value annually ($3,000).
• Property Management Fees: Assuming 10% of monthly rental income ($2,400 annually if rent is $2,000 per month).
• Vacancy and Turnover Costs: 5% of annual rental income ($1,200).

• Down Payment: Assuming you buy a $300,000 rental property, you need a 20% down payment ($60,000).
• Closing Costs: Typically 2% to 5% of the purchase price. For a $300,000 property, this could be $6,000 to $15,000.

• Loan Amount: $240,000 (assuming 80% financed at 4% interest over 30 years).
• Monthly Payment: Approximately $1,145.

• Property Taxes: Estimated at 1.5% of property value annually ($4,500).
• Insurance: Estimated at $1,500 annually.
• Maintenance: Estimated at 1% of property value annually ($3,000).
• Property Management Fees: Assuming 10% of monthly rental income ($2,400 annually if rent is $2,000 per month).
• Vacancy and Turnover Costs: 5% of annual rental income ($1,200).

Total Initial Investment and Annual Operating Expenses

• Initial Investment:Total Borrowed from Equity: $150,000Down Payment for Rental Property: $60,000Closing Costs for Rental Property: $10,500 (average)Total Initial Cash Outlay: $70,500 (initial investment from equity) + $10,500 (closing costs)
• Total Borrowed from Equity: $150,000
• Down Payment for Rental Property: $60,000
• Closing Costs for Rental Property: $10,500 (average)
• Total Initial Cash Outlay: $70,500 (initial investment from equity) + $10,500 (closing costs)
• Annual Operating Expenses:Property Taxes: $4,500Insurance: $1,500Maintenance: $3,000Property Management Fees: $2,400Vacancy and Turnover Costs: $1,200Total Operating Expenses: $12,600 annually
• Property Taxes: $4,500
• Insurance: $1,500
• Maintenance: $3,000
• Property Management Fees: $2,400
• Vacancy and Turnover Costs: $1,200
• Total Operating Expenses: $12,600 annually

• Total Borrowed from Equity: $150,000
• Down Payment for Rental Property: $60,000
• Closing Costs for Rental Property: $10,500 (average)
• Total Initial Cash Outlay: $70,500 (initial investment from equity) + $10,500 (closing costs)

• Property Taxes: $4,500
• Insurance: $1,500
• Maintenance: $3,000
• Property Management Fees: $2,400
• Vacancy and Turnover Costs: $1,200
• Total Operating Expenses: $12,600 annually

Expected Return

• Rental Income:Assuming $2,000 per month, annual rental income = $24,000.
• Assuming $2,000 per month, annual rental income = $24,000.
• Net Operating Income (NOI):Annual Rental Income: $24,000Minus Annual Operating Expenses: $12,600NOI: $11,400
• Annual Rental Income: $24,000
• Minus Annual Operating Expenses: $12,600
• NOI: $11,400
• Debt Service:Mortgage Payment on Rental Property: $1,145 monthly, $13,740 annually.Total Debt Service: $13,740 (rental property) + $8,592 (equity loan) = $22,332 annually.
• Mortgage Payment on Rental Property: $1,145 monthly, $13,740 annually.
• Total Debt Service: $13,740 (rental property) + $8,592 (equity loan) = $22,332 annually.
• Net Cash Flow:NOI: $11,400Minus Debt Service: $22,332Net Cash Flow: -$10,932 annually (negative cash flow initially due to high debt service).
• NOI: $11,400
• Minus Debt Service: $22,332
• Net Cash Flow: -$10,932 annually (negative cash flow initially due to high debt service).

• Assuming $2,000 per month, annual rental income = $24,000.

• Annual Rental Income: $24,000
• Minus Annual Operating Expenses: $12,600
• NOI: $11,400

• Mortgage Payment on Rental Property: $1,145 monthly, $13,740 annually.
• Total Debt Service: $13,740 (rental property) + $8,592 (equity loan) = $22,332 annually.

• NOI: $11,400
• Minus Debt Service: $22,332
• Net Cash Flow: -$10,932 annually (negative cash flow initially due to high debt service).

Cash-on-Cash Return

• Initial Cash Investment: $70,500
• Net Cash Flow (first year): -$10,932
• Cash-on-Cash Return: Not applicable initially due to negative cash flow.

Long-Term Appreciation and Adjustments

• Property Appreciation:Assuming a 3% annual appreciation, the property value could increase by $9,000 annually.
• Assuming a 3% annual appreciation, the property value could increase by $9,000 annually.
• Rent Increases:Assuming a 2% annual rent increase, rental income will rise, improving cash flow.
• Assuming a 2% annual rent increase, rental income will rise, improving cash flow.

• Assuming a 3% annual appreciation, the property value could increase by $9,000 annually.

• Assuming a 2% annual rent increase, rental income will rise, improving cash flow.

How to leverage my person residence

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