Starting My Real Estate Journey: How Can I Leverage a Paid-Off Townhome?

Question

Hi BiggerPockets community,

I’m just starting out on my real estate journey and could use some advice!

I currently own a single-family townhome in a great area. The property is fully paid off, as it was essentially gifted to me. While the townhome is in good shape overall, it does need some mild cosmetic updates to bring it up to rental standards.

My goal is to leverage this property to start building a real estate portfolio, but I’m not sure what the best first step is. Should I focus on fixing it up and renting it out? Should I explore options like a HELOC or cash-out refinance to free up capital for other investments?

Any insights, advice, or strategies from those who’ve been in a similar position would be greatly appreciated. Thanks in advance for helping a newbie get started!

Looking forward to hearing from you all!

Drew Sygit · Answer

@Hank Bank where are you located?

Probably better to DM me so we can better connect...

Hank Bank · Answer

Do you have any resources on this strategy that you would recommend? I think this is the method I would like to go as it fits in line with what I envisioned.

Hank Bank · Answer

Thanks. I’m trying to research now

Ericka Parrott · Answer

Don't be so quick to indebt your paid off townhome until your learn creative financing and review all your options.

Hank Bank · Answer

This sounds like what I had my mind on. I need to do some research on what credit score I need to actually begin this process

Greg Kasmer · Answer

There are hundreds if not thousands out there, but there are many by Bigger Pockets that are excellent for newer investors. I would recommend the three below and then go from there!

The Book on Managing Rental Properties | Book for Landlords – BiggerPockets Bookstore

David Greene Best-Sellers Bundle – BiggerPockets Bookstore

Rental Property Investing | Best-Selling Business Book – BiggerPockets Bookstore

Drew Sygit · Answer

@Hank Bank BRRRR is probably want you want to do.

Buy, Renovate, Rent, Refi, Repeat.

Before you go all in and either find out you don't like being a landlord or you make costly mistakes, start with just the next one.

You'll have some challenges with tapping the equity in the townhouse:

1) What loan amount can you qualify with your credit & income?2) If you do owner-occupied cashout refi for best rate, you technically have to live in the home for 12 months before renting it out. * Some responders here may suggest not worrying about that and renting it out anyways. Nothing illegal about doing that, but if caught, the lender may call the loan due and if you don't correct the situation or pay the loan off, they willstart mortgage foreclosure.3) You could also go the HELOC route to tap the equity in the home, but the 12-month owner-occupancy will also apply AND the interest rate on the HELOC will fluctuate with the Fed Fund Rate.4) You could do a cashout refi as an investment property, but that will be at an interest rate 0.5-1% higher than owner-occupied rate.

Suggest you meet with 2-3 lenders to explore your options about the above.

Once you have access to funds, recommend you buy a 2-4 unit with 20-25% down. - You can buy owner-occupied, live in one unit, and fix up and rent the other unit(s).- If you're handy, recommend buying a property in the worst condition you can tolerate. There will be less buyers to compete with => better price for you!- You can buy using FHA 203(k) loan which allows you to finance repairs into the purchase mortgage.

If you find you like being a landlord, you can BRRRR a property every year.

You can also start BRRRing rentals w/o planning to live in them.

Hank Bank · Answer

Thanks for replying! I do want to rent it out I’m just trying to decide how to use this to maybe get another property while also renting this one out. Rent in this area is pretty good so I believe renting is the best option. I just need to see how to turn rental property into a second property.

Hank Bank · Answer

Thank you for your reply. Do you have any book recommendations?

Julia Lyrberg · Answer

Hi Hank, congrats on having a fully paid-off property! I’d start by figuring out the cost of the cosmetic updates and seeing how much you could rent it out for. If the rental income looks solid, it could be a good idea to rent it out for some steady cash flow. A HELOC or cash-out refinance is definitely worth exploring if you want to free up capital for more investments, but make sure it fits your goals and comfort level. You’re in an great spot to get started—good luck!