Suggestions for capital allocation?

Question

I was hoping to get some opinions on where to put some capital I have. A quick summary of my circumstance. I own my own home which Is in a very nice neighborhood on long island in N.Y. I say this because over-renovating for the area is not a concern. I essentially purchased a house that needs some TLC but paid mostly for the area. I have aprox 150K to start investing in RE. In addition I also have a home equity line of 100K for renovations to my home. To get my house to the point that I would like, it will cost about 150K( as per a few quotes). I've also spoke with some real estate agents from my area and explained the work I have planned and all have said that the renovations will more than pay for themselves in terms of equity once re- appraised after the work is completed. Most say the renovations will increase the homes value beyond the money spent to renovate. I am however about 50 K short for the project. This brings me to my question.
Would it make more sense to take the 150k I have and spend it wholly on long term rentals ( my investing goals) or take 50 K out of that amount to add to the home equity line and go forward with the renovations which would be an investment in itself. That would leave me with aprox 100K toward my investing goals of long term rentals. I have been torn between the two and it would be great to get some opinions of experienced investors. Thank you in advance for any opinions/ suggestions.

John S. · Answer

From your posts it sounds like you are thinking more like a homeowner than an investor. Homeowners don't know the value of money they just want stuff their way. In your case you want the best.

Investors think about what's required and their budget and the bottom line and their exit, amongst other things. Getting things done cheaply and spending less money aren't necessarily the same. I would advise against starting your REI career on home projects and blowing your whole bankroll on your first project. I think some experience doing value-add rehabilitation and studying the economics of grip it flip it ops (if that’s your plan) is in your best interest. Why not use 25% (example) of your bankroll in a pilot rehab to see how everything works and test your nerves and skills? What’s the rush to fully commit your funds? You should never feel rushed while investing, rushing causes mistakes. No one runs before they walk.

You should be looking at getting below market value deals and marking that property to market, not over-improving you primary residence and hoping the 'right' buy comes along in 15 years. Still how many Sq Ft is your home?

Jumping into a $250k rehab project and fully committing your capital stack doesn't sound too good me without more discussion. Have you factored in the carrying costs? What about acquisition/disposition fees and broker commissions? Without wrapping your head around an entire project and understanding its risks and yellow flags that $250k 75% complete renovation might become an albatross rather than the liberator your expect it to be.

Many folks 'dream' about real estate because it seems so easy looking in on. But there is a lot to consider, and to the novice, a lot of that is easily glossed over. You wouldn't expect a fresh grad to come into your office and be handed the highest $$ value project available to run off the bat. What insinuates you can do just that in the real estate office? You don't win the REI game by spending and borrowing the most money. You win it by spending the least to get your projects done correctly and maximizing profit.

I would recommend writing your objectives down and sharing them with the group. We are happy to critique and refine your ideas.

Btw, retail contractors will sack your bottom line. For example, out of curiosity on a rehab I recently got two contractor quotes, they came in at 34,000 and 37,000. My crew did the same exact job for 17,500. I would recommend backing out any contractor estimate or ask them to itemize and then think through what % of their bill is cost and what % is profit for their families. Everybody and their mom is trying to make a nickel off your deal. Control the situation and the costs or you'll be under quick.

James G. · Answer

Thank you Jeff. Points taken. On a side note, I think I managed a way to attend the conference and I am very excited. Hope to learn a lot as well as network with some BP members.

Jeff S. · Answer

The big question is can you easily pay your credit lines long-term for your renovation? Consider also that interest rates may take a hike so a long-term loc may be hurtful in the future, so be careful there.

With the 100k left over you should be able to do some decent investing on your long term rentals. You want to take a look at what you will get in cash flow etc as that won't be much of a means of income. I take it you have other income.

If you decide to redistribute the equity in your new renovation either through a sale or by financing you will have an asset to tap if you so choose. Again, selling or borrowing has everything to do with your other income.

Using the money entirely for rentals will be the best if the rentals turn out well. There is no guarantee there though.

Good luck, hope to here more.

James G. · Answer

John, I probably sound more like a homeowner than an investor in this particular instance because this Is my primary residence. I DO know the value of my money and also know from experience how a poorly done renovation could hurt a future sale (in some areas). The area I live in, the median home price is around 1.6 million with many houses well beyond that in price. People expect to see higher end finishes when looking for a house here and surely take notice when they are missing. I know this from experience since this is my third home in this immediate area. Now, as I had stated earlier, I plan on staying put in this residence for some time so return on investment for the renovations will not be immediate as mentioned earlier. I am aware of this, as well as the depreciation the renovation will have as it ages. I am not considering renovating my home as my "start in real estate investing". However, it does have a direct effect on my startup capital. That was the purpose for the post in the first place. To get the opinions of experienced investors as to where to allocate the capital. Maybe you misread my original post but the renovation cost was $150K not $250K. I also did not state that the full amount was going into one project nor do I plan on "blowing my whole bankroll" on one project. Actually, my plan is to purchase Long term rentals in the 40-50K range that cash flow. The question was how to allocate the money, both the renovation and a startup in REI will happen with this money. Just how much for each? As far as contractors and renovations I do have experience from a "homeowners" perspective. I have gut renovated my last two homes and did so as to make a nice return when I sold my homes. I believe the quality of the renovations is what made me a nice profit in a tough market. I know some contractors over charge. But I am pretty confident that I know how to weed through most of the guys that try and take you for a ride. I am also realistic that this is their livelihood and they do have to make some profit to feed their families. As you stated, I am one of those folks that "dream" about getting into real estate but I am certainly not one who thinks it is "so easy" My family has been involved with investing in multi family apartment buildings in NYC all my life and I have seen first hand the ups and downs. I am looking to go at it on my own and build my own portfolio, that is what brings me to Bigger Pockets. I do not rush into anything without making educated decisions. I can also recognize the importance of asking for help from people who are actively doing what I strive to do and are willing to share their knowledge. Again, this was my intention of the thread. I am sorry if it strayed off.

James G. · Answer

Thank you all for you input. I will take everyone's opinion and use that to make an educated decision. Since getting into successful REI has always been a dream of mine I think I am leaning in the Direction of using all the capital to get started .

Lynn McGeein · Answer

James, Family seems to be a very important component in your decision. If both you and your wife are ready to sacrifice some quality of life while your children grow up to expand into real estate assets now to potentially have a better future for all down the road, then the answer is simple -- start investing it all and hold off on your own home renovation until you pay for it with your real estate investments, maybe 5 years down the road or sooner with some decent flips.

However, deciding it's more important to have that lifestyle right now, raise your children in a renovated home in a nicer neighborhood -- think childrens' birthdays & sleepovers, cookouts, hosting garden clubs or civic league meetings, etc., is wonderful, too. They grow up fast, and you don't want to miss it. Just realize that it probably means taking it much slower for investing. Maybe consider a partial -- like do the kitchen rehab you really want, but wait on the master suite upgrade till you sell a house or two or can pay for it with rental income.

Either choice will be right (and easy) once you decide together what is more important.

Rich Weese · Answer

James,
I'd use the funds for acquisition of new properties. If there is some SMALL fix-up that is NEEDED, go ahead. You mentioned that the area is very nice, so value will increase whether you fix up or not. That future value increase is locked in for free. Now, go add other properties , where your value will increase. In my eyes, you get multiple opportunites for added value, where plowing fix up money into personal residence eliminates other revenue options. Rich

p.s. You sound young, so you might even consider the heloc funds for more investments, rather than fix up.

Sharon Rolel · Answer

Personally, having no family of my own, I would not do any renovations which are not necessary. If it works, I won't fix it or replace it. This comes from the realization that 1000$ today have the potential to be a cool mil in a couple decades. Putting money into renovating your home which you are not planning to sell anytime soon is not REI.

In your position I would put in the bare minimum into renovations, perhaps sacrificing a bit of quality and luxuries .

James G. · Answer

100-150k is really not over the top in my opinion. I have renovated homes before and always get multiple quotes from contractors I have used in the past or that come highly recommended. Just to do the kitchen eats up most of that number . Appliances alone are 25-30K ( wolf, sub-zero etc ). Now put In a quality set of cabinets, countertops, radiant heat etc. the numbers go up quick. Not insinuating that you are suggesting this but if I was to cheapen the quality of the renovation it would hurt me in the long run more than help me. I do appreciate your feedback however.

John S. · Answer

Don’t risk youfor deals that fit into the $150k of cash on hand, before you bet the house.

Also, how many sq ft is your home? $100,000 for upgrades sounds over the top unless it’s a mansion. Do you have an experience rehab crew at yor depot and get familiar with prices. I run a 3 man gc crew for about 2250/wk in labor. Dn’ny sq ft is your home? $100,000 for upgrades sounds over the top unless it’s a mansion. Do you have an experience rehab crew at your disposal or are you getting retail quotes? I would take a walk around at your local home depot and get familiar with prices. I run a 3 man gc crew for about 2250/wk in labor. For $100k I could run the guys for almost a year.

Suggestions for capital allocation?

Suggestions for capital allocation?

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