How to Leverage Your First House into Multiple Properties (Even With Limited Capital!)

by | BiggerPockets.com

Whether you’re already living in a house you own or you want to buy your first house and springboard it into a bigger portfolio, I’m hoping to provide some useful information to make this easier.

There are plenty of ways to do this—plenty of exit strategies and lots of different names used for it on BiggerPockets. You may have heard it called house hacking, live-in flipping, live-in BRRRR investing, etc. Basically, we will be discussing how take a personal residence and inject some creative element or added value to produce a profit when you exit. There are countless strategies to do this, and a lot depends on what type of starting resources you have access to. Even if you don’t have a lot of starting capital (like how I started), this is still very possible! You just need to find a deal that allows for a reasonable profit margin and be willing to get a bit creative.  

Know Your Leverage Options

Everyone starts out in different places. If you have never bought a house, then buying your first with a value-add is an effective way to get started. You learn the buying process, and you get to make your first purchase with an investor mindset: big advantage! If you already own a house, then you may have equity in it, or you may be able to refinance some of the cash out at a low interest rate. If you have a house that has equity but can’t grab the equity, now might be the best time to sell. Many markets are currently inflated, and if you’ve been living in it for two years, you get to take the gains tax free. There are lots of options available—make sure you take time to consider them all.

If you already own a home, you may have equity that you can borrow against. A home equity line of credit (HELOC) is like a credit card against your house. It’s set up using the existing equity you have in your house, which allows you to use the funds at your discretion. The best part is that, just like a credit card, you don’t pay anything until you actually deploy the capital. HELOCs are a great strategy that I highly recommend.

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To see where you may qualify:

  1. Use Zillow as a guide to see your home’s worth.
  2. Take that number and multiply it against 75% and 90%. This is the low and high of common HELOC loan-to-value (LTV).
  3. Take that new number and subtract your current debt service. This is how much you could be able to borrow in a HELOC.

For example:

You own a house worth $200,000.

You owe $100,000.

200,000 x .85 = $170,000 – $100,000 = $70,000 potential HELOC credit!

Other benefits include the option to pay interest only or very low origination costs.

Sometimes it’s better to do a full refinance than a HELOC—for instance, if you need to finance a property that will be difficult to get its own loan or if you have access to reliable income and the increased house payment is less of a concern than access to liquid cash. It’s also good to know that you can take out a HELOC and spend it on a house and then later convert that outstanding balance to a closed-end loan like any other. This is a fantastic option in situations where it can be applied usefully.

Related: The Real Estate Investing Strategy I’d Recommend to Newbies (As a Seasoned Investor)

Viewing a House as a Financial Transaction

Lots of people are emotionally afraid of debt. We live in a society where the word “debt” has a highly negative connotation, and people rarely get explained all the benefits. Now, I’m not saying that debt doesn’t come with risk—it does, but risk is something that should be managed, never feared. The point is, don’t fear using leverage to move forward where you can. Use your resources effectively so they turn a profit. You don’t want to over-leverage or mortgage everything possible in order to get ahead, but realize that leverage can increase your growing power significantly when used wisely. Emotions make terrible debt decisions.

In addition to emotional fear of debt, we also suffer from emotional attachment to our homes. People feel compelled to “love” their house, but house hacking requires sacrifice by definition. It means you’re willing to buy and live in a non-retail house, that you’re comfortable with rehab going on day-to-day, and that you want the house to make money primarily—it’s not your dream home. I always try to remember this great quote: “Never buy a home, only a house.”

I lived in my house hack for about three years. It wasn’t terrible by any means. For people looking to buy “starter homes,” this is probably not the path for you. But making a little sacrifice can be profitable, and it’s good for the soul!

Knowing your home is a financial transaction from the start also helps restrain you from doing unnecessary improvements. Maybe you want a glass enclosure shower, but you know it’s not going to increase the rent, and you’ll never get your money back if you sell it. If that’s the case, then restrain yourself! If the point is to leverage profitable properties into a larger portfolio, then keep your eyes on the long game. There will be plenty of time for luxuries and amenities; don’t get caught up tricking out your rental property.

How I Did It

My first house was a lousy retail purchase that I made no money on. (Still own it and still don’t make money on it!) That deal taught me that buying homes at retail price doesn’t make money. I needed to buy something underpriced or distressed. So we started looking, and before long, I found a foreclosure that I was able to move into while still using an FHA loan. After 18 months and a little rehab, I had a house that was worth quite a bit more than I paid, and many homebuyers had dismissed it because it was a foreclosure. In reality, the house was not in bad shape at all—it was a perfect house.

The original home price was $54.5k. I put $3,500 down and another $3,000 into it over my first year. My wife and I made a little sacrifice to move in this house—it certainly wasn’t brag-worthy, but when it later appraised for $115K, we knew to refinance it immediately. We pulled out some of the created equity and got a HELOC to tap into the rest. So, my $6,000 investment had made $60,500 in under two years. Not bad for a first deal, especially when I was mostly winging it. This means if you’re diligent and focused, you can do a lot better.

Some of the details here are important to cover to better show the most important factors:

  1. I moved into a foreclosure with an FHA. This didn’t seem like a big deal at the time, but being able to find a foreclosure where the FHA will allow immediate move-in can be rare, so if you can find this type of deal you might want to look closely at it. Being able to use FHA means two things: 1) the bank will finance with a low down payment and 2) the bank won’t allow you to move into a foreclosure if it’s in really bad shape. Combine these two things, and you get a discounted house, which is move-in ready, at low cost to entry. EASY!
  2. My initial strategy was to remove the PMI on the original loan, and I was able to lower the interest rate a small bit, so I could pull out $20,000 while keeping my payment the same. Looking back, I should have pulled out as much as they would let me.
  3. Not all markets are equal. People who live in large cities probably look at my numbers and think it’s impossible to replicate, and others might look at these numbers and decide it may be worth moving to capitalize. Sacrifice was definitely a factor in my progress, but to be fair, sacrifice is most likely going to be a big factor anyway if you are starting without a lot of resources and intend to make progress. Something will have to give.


Related: 4 Steps Newbies Can Take to Get Ready to Invest (Even if You’re Still Saving Up!)

Experience Creates Momentum

Using the first home as financial leverage to buy the next is a great strategy, but the momentum it creates should not be undervalued.

That first house hack I did, where I created $60k out of thin air, was much more valuable in experience than in cash. This is because cash isn’t usually the choke point for beginners. Cash might seem like the problem, but the real problem is usually talent, resources, or strategy. Even if you have no shortage of cash, if you don’t know how to deploy it correctly, it’ll go to waste for sure. So the first deal or two, when you’re cash strapped and struggling, trying to grind out maximum returns from your deal is when you create the most momentum. It increases not only your return, but your self confidence. I wasn’t a smart guy who figured this stuff out when I started making money, just a knucklehead who thought he could do it and wound up making a lot. That’s when the momentum hit me. I thought, “Oh, this is not only profitable, it’s very POSSIBLE.”

Now that I knew it could be done, I was unstoppable. This has been the true springboard in my business, not so much because of the capital, but the confidence! Once that first deal or two is in the past, the future starts looking quite easy.

Do you have that first deal under your belt yet? What’s your plan for scaling your investing?

Weigh in below!

About Author

Alexander Felice

Alex is a long distance single-family real estate investor and a full-time underwriter at a commercial bank. After a few years of success in real estate, he felt compelled to teach people real estate is more profitable than they might think and far less risky than they assume. Alex is the author of brokeisachoice.com

13 Comments

  1. Moises Guzman

    Thanks for your input great article as I’m looking now for my first investment property it could be very overwhelming the truth people like you sharing with us your story makes it much more worthy to get our hands dirty life is even more risky not doing nothing wish you the very best

  2. stephen rowe

    Thanks for the post Alexander. I have seeking out my first property and all the options for getting started can be overwhelming at times. I appreciate your distillation of some of the info regarding FHA loans and foreclosures.

  3. brock w.

    Mr. Felice, this post was serendipitous for me, especially your words about being debt averse no matter what. I am in somewhat similar circumstances. I’d love to see your opinion on leveraging a house owned free and clear to greatest effect.

  4. Nicole Richards

    I am in the process of doing a cash out refi for the purpose of securing more deals. I consider this decision a deal in it self. It is a finance package that will allow for some great wealth building opportunities….while the money is doing nothing sitting in mortgage.

  5. Mike McDevitt

    “A home equity line of credit (HELOC) is like a credit card against your house.”
    (an investor in 2006)

    What could possibly go wrong?

    There are plenty of leverage and funding options around (including using your own cash) without betting the farm. I’d dare say that if you’re looking at your primary to bankroll investment properties, you probably need to shore up your investment capital or collateralize other (existing) investments. ESPECIALLY if your working deal #1.

    If you can keep your fingers out of the primary residence cookie jar, you’ll at least have a dry place to stay if it all goes south.

  6. Shawn Landon

    We/re about to sell our first for a sweet little profit. We bought an under priced house about 3 years ago for a very low $150k. Financed FHA and got all in for around $7,500 out of pocket. Did a few minor things like painting and landscaping and now we’re about to sell for $250k. Not bad for 3 short years and just a little bit of work. Now, onto the next one.

    • Rebecca Jackson

      That’s awesome! We are about to do the same thing 🙂
      Except we use VA loan, bought a smelly old house and now will reap over 100%+ return on investment! It didn’t make sense to keep as a rental since we can only use one VA loan at a time- which is hands down the best financing ever! So, while we do it again in the next house (with more experience), we can take our tax free capital and re invest elsewhere.

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