Should I own my home out right?

Question

Im about to start building my next personal residence for my family. It's going to cost around $330k. I all ready own the land, but was wandering if it's smart to put the majority of my savings into my personal residence. I don't have great income, around $3500 a month right now, but enough to get a laon for most of it. My goal is to transition from flipping homes to buy and hold rentals and I don't want  to get into a situation where my debt to income ratio is way to high. I'm 26 and looking for what to do next

Andrew Syrios · Answer

My recommendation would be to do both and try to buy a duplex, triplex or fourplex with an FHA loan. You get about 96.5% LTV financing at very good rates (although you do have to pay mortgage insurance). You have to live there, but you can have the other units at least help pay your mortgage. Furthermore, if I remember correctly (check on this) you can move out after a year. So it's a great way to get started in buy and hold since you're basically buying your own place and a rental at the same time.

Clancy Catelli · Answer

@Joshua D. I think your idea of a HELOC is the way to go. It would be free and clear, so essentially the HELOC replaces the last cash reserve when im finished building. ANd this house is no dream house, material prices are at an all time high around here. We just got done building a similiar spec house that we sold and it cost around $310k and we did all the work, Foundation, framed, sided, paint, trim, ect. took 8 months but i sold it for $525k. I was just in OKlahoma visting my brother and that was the first time i had vacationed to a spot where housing was so dirt cheap. You could literally buy the exact same house for $235k that we sould for over $500k. not sure how they can do it so cheap. I guess average labor for a carpenter/worker up here is like $35/hr and down there like $9/hr. Most building products are built in the midwest and the price to move them to say washington state or the east cost makes everything 2x more

Anthony Gayden · Answer

@Clancy Catelli

So you are 26 years old and make $3500 a month.

You have approximately $350,000 in cash saved.

You mention that you flip homes.

I don't understand why you think spending all your cash on a personal residence is a good idea. You have a very powerful cash position that could easily push your real estate investing to another level. Giving that up so you can build a dream house owned outright sounds absolutely ridiculous from the perspective of an investor like me.

My monthly income is more than triple yours but I choose to live in a more modest home than the one you describe so I can direct as much money as possible toward real estate investing.

Joshua D. · Answer

@Clancy Catelli

Sadly there is no right or wrong answer here.  I think you need to do what you are most comfortable with.

Are you saying you can build free and clear?

If so, What I would do is finish your house free and clear and then get a a $200k LOC on your place that you can draw from at a LOW rate, interest only.  This then can be your base to do BRRRR or flips.

Why are building such a fancy place? Can you delay the dream home for a few years to get you way further ahead in your wealth building?

Clancy Catelli · Answer

@Shahriar Khan Tell me more when you say get a 7-9 K credit. doesnt a cash out refinance usually cost the owner money not the mortgage company?

@Anthony Gayden The idea of reinvesting my profits into more spec houses/flips is what i have been doing for a few years now. I know this market could continue for many more years based on economic data, but im a firm believer in Market cycles. Im not trying to find a top in this market, im simply protecting what i have maid since finding the bottom. I am living at a guest house that my inlaws own right now and cant wait to have my own place. I have done 2 live in flips over the past 4 years along with flipping 2 other homes and 1 spec house. I feel like my timing with the market has been excellent and i would rather have my last "flip/spec" be my own house and own free and clear i guess. I would hate to start another $350k project and get caught with my pants down if somthing horrible where to happen to the economy. If i built a spec house and it crashed, i would be losing all my funds from the past few years, if i build my own home and the market crashes, i dont really care since i plan on living in my home for the next 5 years. I will take your advise and focus on duplex/triplex as my first rental though. Putting 20% on a triplex after i build my house should be attainable, and my Debt to income will be very low. As long as my first rental produces around $1000 cash flow i think i will be fine, since most banks only count 75% of rental income(I think this is possible with a triplex in my area). So my new debt to income ratio would be like 4500/1500(based on a $280k loan) or 33% witch still give me a little wiggle room for the next deal.

Shahriar Khan · Answer

@Clancy Catelli .. First of all congrats on your decision. Given you are 26 ( a lot younger compare to a lot of us) it is safe to safe to say you will go through ups and downs in your life as you move forward. Keeping that volatility in mind would like to share the following 2 points

1) Break even cost/month: What is you minimum take home MUST BE to maintain what you have now ... Your house payment (PITI) would be more or less around 50% of your salary ... that a lot to make at a minimum. But you dont have a house payment then you are a FREE MAN. Suggest that you pay off your house (you base is protected) and then go out and take risks.

2) Buying a house with CASH is SUB Optimal: Build your house with cash and then refinance it with HIGHEST/MOST lender credit that they can... (this will result you a much higher interest rate but hold on a sec... )... wait for a month and they pay off the whole amount. If you do it right, this payoff will produce around 7K-9K FREE money for you out of thin air.  Dont do HELOC for 2 reasons #1 (see above ) and #2 new tax changes ...

David Fernandez · Answer

Hi @Clancy Catelli, if I were you, I will build the home you mention and own it free and clear, BUT I will definitely leverage it after it is done with a HELOC. If your DTI allows it, you can find banks that offers HELOCs at 80-95% LTV. You will be able to use most of the equity you have in your home via HELOC to purchase investment properties, rent them out, re-finance, and repeat (the BRRRR strategy often-talk here at BP). If you go with a HELOC you only pay interest when you use the money as opposed to have a monthly payment if you have a regular mortgage loan on your primary residence.

As you acquire more properties, your income will also increase and it will be easier to borrow money, both because your income will be higher, but also because you will have experience. Look for a small bank/portfolio lender, they don’t have as restrictive lending guidelines as the big national banks.

Anthony Gayden · Answer

@Clancy Catelli

Why not invest that money into your business of building more spec homes or flipping houses? Why do you have to buy a home now?

You mentioned that the local job market is weak and that housing prices are high. It seems like locking yourself into that market by building a home might not be the best idea. Do you currently rent? Why not continue renting?

Clancy Catelli · Answer

@Anthony Gayden The house that i am building is not anywhere near a "dream" house. My town is mainly a retirement community and lacks significant housing. a 3 bed 2 bath 1800 sqft ranch style home that is new construction runs about $485k. I have the ability to BUILD a similiar house for around $320 or so. Regardless, the house is being built, I need to figure out my options as far as financing. Iv talked to many mortgage brokers and they all say that i need to keep my DEBT to income ratio down to a minimum. Income is much more powerful tool when scaling then a cash reserve. I literally was just in a brokers office last week, and if i get a loan for around $200k to build my house, its going to be around $1400 a month, or 40% DTI. At those levels i would be stuck in the tracks as far as getting another property financed.  My town doesnt having many job options as its mainly a service industry to take care of the old people. average age is 65. So increasing my income dramatically is not an option.  Flipping homes have helped my grow my reserves, along with selling a few businesses i grew. What do you think about a HELOC loan on my primary when i get done? I guess that would give me enough money to buy a rental, get it rented out, then use cashflow to refinance. I know banks will give you a higher LTV on a primary heloc if you own it outright

Should I own my home out right?

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