Would you put it all on the line?

Question

Hello BP, I have four rental properties and two of them are paid off and the other two I have a couple more years before being paid off. Im just starting investing so my resources are limited I don't have a private investor nor a hard money lender. However, I spoke with a local bank and for the homes that are paid off I can get a loan on them at 4.2 percent . I was wondering with the two homes that are paid off is it a good idea to get a loan and purchase a property that I can rehab and sell?

Ben Hughes · Answer

I would get a loan for as much as I could and either do a flip or a rental. If you are careful and do all you're research correctly you should be just fine. Like someone else said worse case scenerio you are out 20-30k but just be careful. I am curious to know though how you say you are just starting off in real estate but have 4 rentals with 2 of them paid off and the other 2 close to payoff.

Mike H. · Answer

I would probably take the less conservative approach and say go for it now. If you come across a good deal, take it down and flip it. Is there risk there? Sure? But with 2 of your rentals paid off and the other 2 so close to being paid off, you have the cash flow to carry the flip house without worrying if something happens and it takes 9 mos to sell instead of 1. Is there a chance you can lose some money? Of course there is. But the chance is every bit as good that you'll lose that money in 2 years as there is today. Why not start now? Keep in mind too that depending on what types of homes you're going to be flipping, its not like your risk is losing the entire purchase price. If you're in the 100 to 150k price range, your risk should be somewhat limited to maybe 10 or 20k if things really went bad. But if your upside is 30k and the likelihood is 90% that you make money on your flip, then go forward. I wouldn't tell someone not to buy a rental because the risk that something goes wrong is there. We know its there but the risk factor is so much in favor of you if you're doing your numbers right, that the reward you'll get by adding another rental - or in your case doing a flip - far outweighs the risk you're actually taking. If you think you're seeing some good flip deals passing you by right now, I would refi those rentals at 4.2% in a heartbeat and move on one. Who knows how long this price point for homes is going to stay where it is. And with such a huge lack of supply right now, if you can fix it up nice, your chances of a quick sale priced right are probably a lot greater now than they will be in the future.

Account Closed · Answer

Rodney, If you intend to flip properties, I suggest you get a HELOC on all of your rentals. It doesn't cost any money to get the HELOCs, and you only pay interest when you borrow the money. To keep the monthly payment low, go with interest only payments. You can always consolidate the debt later. This real estate down turn is a once in a lifetime opportunity in my opinion. Capitalize on it although I think you might be a little late to the game. However, there are still some opportunities out there. Good luck.

Ziv Magen · Answer

If you're dead-set on taking on more debt, based on your personal track record and particular situation calculations, I'd definitely go for a rental over a flip - sure, the profit's bigger, but a) it's a one-off and not regular income, couple with the fact that b) it's far more risky. If the rental situation around your roaming grounds isn't that attractive, there's nothing that prevents you from researching out of city (or state, or country, or continent) providers - the world's your oyster, with today's technology. (But if it was me, I'd go for the no debt option any day of the week - just my personal preference).

Rodney Hunter · Answer

Thanks you guys I have a lot to consider

Ali Boone · Answer

It also depends how much of a nest egg you have. If you pull the money and let's say you lose it all in the flip, how in the hole is that going to put you? Can you afford the extra payment with no return on it? If you can, then go for it. If not, reevaluate.

Brian Mathews · Answer

I'd take money cash flowing from paid off ones and pay off the other 2 first, then save up cash, use hard money or a bank loan. I wouldn't risk the paid off rentals on a flip. If something goes bad or you miss something, you could end up losing a rental or two.

Rodney Hunter · Answer

@Ali Boone I was leaving it open for more rental properties , however, I really would like to get my feet wet with a rehab and sell

Ali Boone · Answer

4.2...nice! I'd definitely use that to do something with at least. It is a good idea if you are well-versed in flipping and know what you are doing. If you don't, it's extremely risky. It also depends on your goals. Do you want cash or more rentals? You'd be safer to use the 4.2 money to just buy more rentals. Just depends on your experience level.