Buy new build or BRRRR?

Question

Good morning. I hope everyone is doing OK this Sunday morning when I am writing this message.

My wife and I are finally getting our feet wet and we are jumping into real estate investing. We have acquired a lot of equity in our primary home. This has been a slow and steady process and we did not know that we were doing a BRRRR over the past seven years because we bought the cheapest and worst house in a good neighborhood. After seven years we have a 2.87% interest rate and over $230,000 of equity in our primary home.

We are considering buying properties in our area and rent out our primary home. After using the calculators from the BiggerPockets website, we can cash flow between $600-1200 from our single family home if we rent it out. Now we are trying to figure out where we can move. We are considering of buying a new property vs. buying a property in our neighborhood and doing a BRRRR.

Option 1: We can buy a property (or properties) in our neighborhood that needs some work, but we could live in it and basically have no mortgage and have two properties in a really good school district. We were thinking of slowly building up our portfolio by buying houses in our area because our area has been booming. There is also so much development around us that it almost feels like a safe bet…

Option 2: We buy a new home in our neighborhood. There is a builder that is offering us less than 6% interest rate. It is brand new and everything looks amazing. It is basically our dream home. I was worried about over leveraging ourselves because it is a lot more expensive. After doing some rough math, it looks like we can afford to buy a new property and not worry fixing more stuff. It’s gonna be a little tight and I am going to need to work more at my second job, but the numbers will work. On a positive note, we would be acquiring an asset that would hopefully appreciate significantly overtime, and as the community is finished, it will be worth a lot of money. Unfortunately, we would not have any cash flow from our single family home.

We are fortunate enough to have the ability to just acquire this assets, and slowly build our real estate portfolio, but again worry about being over leveraged.
My question is which way should we go? We can have more cash flow if we buy a cheaper property and renovate it while renting out our single-family home, but we have the opportunity to get a very good interest rate on a brand new property and have a shining you thing while building wealth overtime. I am not sure if it is wise to buy a new property in this market where it could have the potential to depreciate. I would like to get some opinions and some guidance from you smart people. Thank you so much and I love this community

-Eric and Katie.

Kerry Baird · Answer

While the new house will be your dream house, just hearing that you would be tight makes me squirm. If you were to do the other first, you’d be set up in a better position. Buying the new house will prevent you from buying another rental for a few years. Whereas you owner occupy a fixer in the same neighborhood with great school district, you definitely defer gratification for a little while. Buy OO with lowest interest rates and fix up over time. Stay one year to gather more houses. Stay 2 years to maximize capital gains tax, if you have a thought to sell within 5 years. Your journey could look like this:Y1 Turn first house into rental. Buy second house now, with low OO rates. Harden the house (finishes that won’t be easily damaged by tenants, i.e. less carpet, more LVP). Stay one year. Y2 Buy 3rd house, turning the 2nd into a rental. Fix up 3rd house over the year. Raise rents.Y3 Buy 4th house, turning the 3rd into a rental. Fix up 4th house over the year. Raise rents.Y4 Buy dream house, turning 4th house into a rental. Raise rents. Consider House 1 for sale, with capital gains exclusion or keep renting that cash cow. Buy 2 houses with the gains. Consider using rents to debt snowball the first house instead. Use extra from all rents and apply to lowest mortgage. So many choices! Vs. you buy the nice house now and are tight for those same 5 years where you might be able to save up for your next rental.For insight into my thoughts, DH and I have bought and improved 39 houses now. We did the difficult thing when we were younger and are in our dream house now…and it is a $1M+ fixer in an amazing beachside location. Along the way, we discovered pre-foreclosures and probates that we didn’t live in, but fixed and sold or rented. My houses are in my profile.

Zach Gring · Answer

@Eric Magat With that amount of equity you could look at what a HELOC could do for you. It should give you the ability to purchase a property and rehab it with a cash out on the backside. However right now I stopped doing these due to where Loan to value positions is at and interest rates are at with cash outs right now, It will be next to impossible to get a single family to cash flow after the cash out. There are other options I have been selling to my investors right now that are putting out nominal cash on cash returns but are putting out high teens for a IRR (internal rate of return). Matter of fact with a HELOC you should be able to access 175-190k of those funds at around 6% with doing that the singles I have been selling are getting 16-19% total returns.