First Investment Strategy Advice

[Robert Palladino]

Hello All,
My name is Rob Palladino. I am an architect in Philadelphia, who’s client base is made up largely of real estate investors. It goes without saying that when you see that type of success on a daily basis, it gives you a drive to throw your hat into the ring. I am currently working on my first real jump into real estate investing. A little about my situation; I bought a fixer-upper, single family home in Philadelphia back in 2012 (when prices were low), and rented two of the bedrooms out to friends, using the rental income to slowly pay for the rehab. In 2018, my girlfriend and I had a baby, and decided to no longer rent those two bedrooms.

I took a local investor friend out for drinks to pick his brain as to what I should do next, and he suggested building an addition over the garage of my existing home to create a 1-bedroom apartment, with a parking space. (parking is very valuable in Philly). He has a similar sized apartment in my neighborhood, with a garage parking space that is renting for $1,600, and says they had no problem renting it. On his advice, I’ve since been going through the zoning variance process to get approval for a duplex. My final hearing is on January 29th, and I’m fairly confident that I will get approval. Once I get approval, I have a 3 year window to apply for building permits.

I estimate that I can get this project built for under $100k.

I plan to fund this construction with either my existing HELOC, or do a cash-out refinance, in which I could pull out as much as $175k.

The benefits of constructing on my own property are:

• Doing so will allow me to apply for a 10 year tax abatement, which means that not only will my current property taxes not go up for that time, but I will essentially own a rental which is property tax free for 10 years.
• Everything will be new, so my maintenance & cap ex fees will be reduced.
• Property insurance will be much cheaper. (spoke to insurance agent to make comparisons, and the added cost to my current insurance was on average $800 cheaper per year than insuring a single family alone).

Here is my question:

I have access to $175k in cash, so does it make more sense to:

- Build this addition as mentioned above, and hopefully have money left over to put down on a second rental.

-or-

- Spread the $175k out to use as down payments/renovation for multiple properties

-or-

- Use that $175k to BRRRR my first property.

Big Side Note:

As an added caveat, In the past few months it has been made public the very large parcel of land on the river, right next to my property has plans to construct 1,100 units, made up of 136 fee simple single family homes, and almost 1,000 rentals.

Should this scare from a rental standpoint in this neighborhood. For instance, should I assume this may drive rental prices way down?

If you made it this far, thanks for sticking with me.

[Robert Palladino]

@Ronan Donnelly & @Whitney Hutten, Thank you both very much for the very insightful replies. I think that the addition to my property is definitely something that I'm going to do, but was thinking of keeping it in my back pocket for a later investment, while BRRRRing a few other properties first as Whitney has suggested. I'm thinking that waiting on the addition may be a good idea to see how the new project across the road affects rents in the area. It may not turn out to be a bad thing in the next 10 years, as they are predicting a lot of development along the river in this area.

Regarding the amenities of the new construction, they are basically building a whole new catchment, with retail, residential, etc. Below a link to an article describing the project. 

https://whyy.org/articles/a-th...

Whitney, I've been quickly moving backwards through the bigger pockets podcasts, and as chance would have it, I just listened to your episode earlier this week. Very cool!!

Again, thank you both very much!