What would you do in this situation? Sell, keep, something else?

Question

Hey everyone,

My name is Michael, I am currently a new Real Estate Agent in Alpharetta, GA.  I became an agent with the eventual goal of buying rental properties and getting into flipping houses.  I've been listening/watching BiggerPockets podcasts for quite awhile now but this is my first post.  My wife and I are trying to come up with a plan and were hoping to get feedback from the community.  We want to get into rentals and potentially flipping as well as a way to replace my income but just aren't sure when the right time to pull the trigger is.  We have come up with a couple strategies for what we could try and do, but honestly we're unsure the best way to move forward.  Any feedback would be greatly appreciated!

We live in Alpharetta, GA in a house we purchased for 267k in 2013 and have paid the loan down a bit and now owe 170k.  Our home is now worth conservatively 360k, maybe up to 385k based on comps, so we have a bit of equity available.  We also have 20k set aside as an emergency fund which we aren't too keen on touching.

So here are the options we were considering:

Option 1: Sell the house.  Cash out on the equity (~160k).  Find a smaller home and only put 20% down.  Use the remaining ~100k to either buy a first rental or start flipping houses.  I think this is the option we want to go with if we're sure we could either start the flipping business or at least buy a rental property outright.

Concerns with option 1:
- Is 100k enough to really consider being able to flip a house? I don't think it is likely we can get qualified for a 2nd loan to be able to purchase a house to flip? Is finding an investor partner who can afford the home outright our only way forward here, or do you have any financing suggestions?
- side question - Our current bank said they wouldn't give us a loan if they knew the property was for a flip, but they would give us a loan if it were for a rental. If I'm buying the property with the intent of either renting OR flipping depending on the outcome of the project and what numbers make more sense... could I get myself into trouble here?
- If we use the money to buy an investment property, what type of property would you be looking for? We are very nervous to carry a 2nd mortgage (if we could even qualify for one), so we would want to purchase a rental property fully... what type of property do you think we could afford or should aim for here?

Option 2: Refinance the house.  Refinancing the house would cut our mortgage down to 700/mo from 1300/mo.  We would then start saving the extra until we had enough to either flip or buy our first rental.

Concerns with option 2: Time.  With this strategy, its going to be awhile before we can really get started with either flipping or rentals. We'll pay more for the house in the long run by refinancing back out to 30 years, but with the lower monthly payments we'll be able to invest the difference in either a flipping business or rentals.

Option 3: YOUR SUGGESTION! If you have an idea about a better strategy, or something you would personally do, please let me know!

What would you do? Do you think even if we sold, we would have enough capital to begin flipping?

Mya Toohey · Answer

@Michael Perry

Hi Michael,

Where to start...I am a real estate agent in Tampa, Florida.  I have been investing for about 7 years.  Investing is like ripping a band-aid off. You just have to do it.  You can a millions reasons not to, you may never start.  So, If I were in your position and don't mind moving homes.  I would honestly sell your home and take the equity.  Find an older cheaper home that needs renovations and do them yourself.  Learn the hard way.  You build a network of good people and start to trust the people you work with, so, when you do your own flip, you won't get taken advantage of.  Your mortgage will be less and you now can save while working at the same time.  You now have your equity to use for buying new home and renovations.  You keep cost down by managing your renovation yourself.  Then after 1 year you refi that house and cash out the equity and turn it into a rental and move on to the next...If you don't want to house hack...I would move into the smaller home and go that route.  Save the money and start by purchasing a turn key rental.  Flipping is very hard and you can easily be taken advantage of if you don't know what you are doing.  Get one turnkey rental then move on to a BRRRR.  Get your feet wet learning without all of the risk of a flip.  Those are my thoughts, either way, best of luck to you!!!!!

OH and last but not least!!!!  NO MATTER WHAT!!!!  Find a good mentor in your area!!!

Dennis Cosgrave · Answer

I would suggest that you refinance and pull out the equity. Based on the numbers you provided, that would be about $65K after costs. That should be enough for the down payment on a rental property. Another option would be to sell the house and purchase an income property with less than 5 units. Live in one and rent out the rest. The tenants will be paying your mortgage which would save you $1300 per month AND you will be building equity.

Tuval Barnea · Answer

Hi @Michael Perry,

Welcome to the BiggerPockets!

I'm a real estate agent and an investor who's doing exactly what you plan on doing.

I assume from your description that you are flexible on your housing and have no issues moving out of your current house and buying another one.

My advice to you is the following:

1. Sell your house. That should leave you with roughly $200K after all expenses are paid (considering also the $20K you have kept aside).

2. Find a duplex/triplex/quadplex in your area or in an area you'd like to live in and buy it as your main residence, that will require 5% downpayment and not 20% as required for investment property.

Since I live and work in your area, I know for a fact that finding a nice duplex for ~$330K is possible.

3. Live in one unit of the small multi family you just bought and rent the other unit/s to pay for your mortgage and you're practically living for free...

4. Now you should have roughly $180K in your pocket that you can use for either a full rehab flip or a moderate flip and a rental property with 20% down.

Hope that helps!

Louis Jeffries · Answer

@Michael Perry Hi Michael, my suggestion is to not sell unless you just want to down size. If you refinance and get $60k or more that is more than enough to get started. I would do the BRRRR method. Buy, Rehab, Rent, Refinance and Repeat.

This based on the fact that you want to build a rental portfolio. Step1 I would consider 3 to 4 unit properties for the greatest cash flow. Step 2 remember the 70% rule. The BRRRR method does not really work if you are spending too much for the property.

Step 3, 4, 5 Rent and then Refinance at 75% cashout to get your money back to do it again. If you pay attention to the numbers and focus on 3 to 4 unit properties you can add 9 to 12 units or more to your portfolio per year.

So to answer your questions directly. $100k is more than enough to get started.

I would not do option#2

and refinance versus sell.

Trampas Tanklage · Answer

@Michael Perry if you were to go with Option 1, $100K is more than enough to flip a house. Private financing/JV would be an option, but in my opinion hard money is a great way to go. People complain about the high interest, but start off with a quicker project that you can get in and out of in 3 months or less. In my market (San Antonio) you could actually flip 2 houses simultaneously (depending on your ARV range, I'm thinking less than $350K) with $100K if you're utilizing hard money.

Some other great options in this thread as well, I'm a big fan of the multifamily house hack strategy to build equity for (basically) free. Best of luck whichever way you choose!

Theresa Harris · Answer

If you want to down size, then do option 1.  If you don't want to move and love the house you are in, refinance.  Use the money to buy a rental.  You are a realtor and know your market and what you can buy with that money.

Jonathan Oh · Answer

#2. Another concern you should add to #1 is the fact that this is your first flip and one mistake can set back all your hard work of paying down current mortgage. With #2, your rent is almost reduced in half. With equity you pull out, you can buy up couple rentals that provide even more income. If you're looking to flip, why not do a BRRRR?

Ruth Lyons · Answer

I would suggest you consider taking out a home equity line of credit to access the equity in your current home as cash for a secondary rental investment property purchase.

Darius Ogloza · Answer

3 answers, 3 opinions!

I would go with option 2.  You sound like you are not ready to make the leap.  Save and invest the moneyy you save on the mortgage payment in a dedicated account.  A bigger cash cushion will likely give you the courage to make the leap in the future.   Having enough cash to lose some of it helped me.  Good luck!

What would you do in this situation? Sell, keep, something else?

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