Starting Out: Sell first and househack or just buy 2nd property?

Question

Hi,I am in Hartford County, Connecticut.  My wife and I have solid jobs are 50 years old and have three kids in college.  We own our house outright which is valued @ $375,000.  Other than that, no real cash on hand.  We would like to get started with investing and are thinking the easiest route would be to identify a property either SFH, Multifamily or a property with an in-law suite or other rentable unit within a unit.  We'd like to find a top notch realtor who is an investor and has lots of experience identifying/buying/selling properties that meet the 70% ARV model with higher than 1% Rent/Purchase price criteria.  We would then take out a Home equity loan, rehab, rent and hold, refinancing when we want to do another deal.I am wondering if banks will allow us use home equity loans for properties that meet the above criteria because they will likely be somewhat distressed.  Thoughts?  I am wondering if anyone has any recommendations for a great realtor who meets the above criteria and who has an eye for what specific repairs are needed vs. unnecessary to minimize costs and maximize resale and rent.  Another thought if banks won't allow us to buy distressed properties that meet the criteria above would be to list our house for sale, if we get the price we want, we sell and then we have cash on hand to make an aggressive cash offer for a property that meets the criteria.  Under this scenario, we would need a place to stay after the sale of our house and until the purchased property (probably a multifamily so we could house hack) can be rehabbed enough for us to move into at least one of the units, finish rehabbing all units, rent, refinance repeat.  We do have family willing to let us stay with them or we could buy an RV or rent something short term while the units are being rehabbed.  We have family that in the building business that could help steer us towards good contractors.Thoughts on the two methods?  Other methods we could use that aren't listed? What would you do if you were us?

Samuel Eddinger · Answer

@Steve Bugnacki - I highly recommend @Brandon Rush and @Joseph Salzillo.  Both are realtors for investors and own real estate themselves.  Either will take great care of you.

Nathan K. · Answer

Hey, Sir, first of all, that's friggin' awesome y'all are doing this with 3 kids in college! Great to hear. Few thoughts, in order of your scenarios:

1) For expectation management, the 1% rent rule is going to be difficult no matter what market you're in. If it's a $300k home that means you'll be making $3k in rent which seems really steep. More likely these days is .5-.7% rule. But I could be wrong if your market is that hot!

2) Yes, you can take up to 80% of your $375k equity (so $300k) and put that towards an investment property. I don't believe the distressed nature of the property will make a difference as a HELOC is really a revolving line of credit for you to use. Few thoughts on that though - HELOCS are adjustable rate mortgages so if the feds keep raising rates, your rates will also go up which might skew your numbers a bit. There are annual fees associated with the bank to maintain your line of credit. Ensure there are no early payoff fees.

3) Rather than outright sell your home and re-deploy the cash, consider a section 1031 exchange into a bigger, nicer place that has an extra unit/garage/basement that you can rent out to offset the rent - or something similar that you can rehab while living in your own quarters. If you sell your home, I'm assuming you'll be hammered pretty good with taxes (depends on your state and how long you've been living there). This is also not the ideal option because you'll be spending so much on rent in the interim while waiting for your rehabilitations to be done.

Few thoughts to leave you with:

1) Will your kids ever need money for schooling/life expenses?

2) Recommend you look at using a HELOC to buy a decent-enough multi-family home to remodel. That's typically your best return on investment for both equity and rent.

3) Other option here entirely... what about taking that $300k in equity (80% of the equity you have in your primary home) and using as it a 25% down on 3 homes of $400k apiece. Does that make sense? If you do $100k down on a $400k home, that's 25%. If you have $300k in equity, that's 3 homes. BUT - an important note for your underwriting process is that you'll now have 2 loans on each home - your HELOC and whatever conventional loan you used to pay the remaining 75%. So that could be stretching you super thin and potentially result in negative cashflow for the next few years.

Hopefully some of this is at least remotely useful and if nothing else, hopefully it spurs some more thoughts. Sounds like your original plan of HELOC, buy fixer-upper in cash, fix it, refinance out, and take your money and go do it again elsewhere is the best bet for your situation and timeline. It's what I would do in your shoes.

Regarding a realtor, I know there are some floating around on this website but if you need, I can absolutely set you up with 2-3 awesome professionals and let you choose which you want to work with!

Great work and please keep us posted!

John Warren · Answer

@Steve Bugnacki I used a HELOC when I got started, and I am pretty sure this will be your best route. I am in Chicago, so I can't help with the realtor end of things, but I definitely think you can look at a lot of alternatives to house hacking. I have kids in school, and I cannot imagine going back to house hacking now that I have had a family in a home for so long. You can leverage your equity in a more intelligent manner and not be forced to lower your standard of living in my opinion.

Steve Bugnacki · Answer

That is good advice and my wife will probably want to thank you for suggesting it.

Brandon Rush · Answer

Thanks for the shout out sir!

Steve Bugnacki · Answer

Thank you both for your replies.  Thinking of keeping our house and finding out if the home equity loan of hopefully up to $300,000 would enable us to buy a property.  Looking at one today with my brother who is a builder for potential rehab and rent or resale.  This property is a foreclosure and is on MLS so I amnthinking it went for auction, didn't sell and is now listed on MLS.  Need to do title searches to uncover any liens and check out the property for viability.  Hoping town would allow a rental unit above the detached garage as the main property is a SFH.

Brad Taylor · Answer

Hello,

You all are in a great position right now owning your home free and clear. No way would I sell that right now with declining home values.  You'll just end up having to buy something at a higher interest rate environment!  Use that equity via a HELOC to purchase and/or purchase & rehab good property candidates (BRRRR method), and learn about hard money and private money loans to buy distressed properties.  You're right though...banks do not like those kinds of properties.

Two HUGE things you can do before doing anything like this though is just to read a LOT of books and do a lot of self-educating. Have a friend who got himself into big trouble because he didn't read anything and thought he had it all figured out already. Ended up being in the hole $40k and ran out of money to finish a Multi-family project. OUCH!

Go slowly when you're starting out. Buy something small first to get familiar. Then scale up as your confidence grows. Don't put yourself in a super risky position with your own home!

Starting Out: Sell first and househack or just buy 2nd property?

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