Old Town Scottsdale - worth it to renovate and use Heloc for downpayment of 2nd home?

[Chris DeSoto]

Hello BP community,

I am trying to start my real estate investing journey and have a question if it is worth it for me to fix up my current property or instead invest the cash I have on hand to buy another house right away. I will outline the scenario below.

I currently live in my primary residence in Scottsdale, AZ (4 bed 2 bath with a pool ~1990sq/ft) just a few minutes from Old Town. I bought my home in 2021 and have a great interest rate 2.99% and a low mortgage ~$2500 (including tax and insurance). I can conservatively rent my house out for $3700+/month as is (without renovations) so it will cash flow. My home is in good condition but has not had any substantial renovations/upgrades done to it however other homes with my exact floor plan in the neighborhood have opened up the floor plan and invested substantial money to renovate their properties (100-200K). I am interested in purchasing a new home and moving there with my girlfriend so that I can rent out my current property to start cash flowing. My question is if it is worth it for me to invest money into my current home (open up floor plan, curb appeal, upgrade bathrooms and kitchen) or rent it as is (maybe making a few minor improvements)? Ultimately I would like to pull that money out of the 1st home so that I don't have so much tied up but want to fix it up as I plan on having this property for a very long time and feel it will need improvement eventually.

If I renovate property #1, I can easily spend over 100K of which I have in cash. I had a thought to put this cash into the home for renovations and when I find another property I can move into, I can use a Heloc towards the down payment of the next property. Eventually I'd want to refinance the 2nd home and pull out cash to pay off the Heloc to get rid of the higher interest loan once I have some equity (80% loan to value).

Financial Situation for first home:

First House Purchase Price: $665,000
Down Payment for First House: $133,000 (20%)
Remaining Mortgage on First House: $510,000
Example Renovation Cost for First House: $100,000
Example Value of First House After Renovation: $900,000-1,00,000
Current Value of house without renovations: $760,000-800,000

Current rental income without renovations $3700+/month

Monthly Rental Income for First House after reno: $4,000+

Second Property Purchase:

Example Second House Purchase Price: $600,000
Down Payment for Second House: $100,000 from a HELOC $20,000 in cash
Mortgage Amount for Second House (After Down Payment): $480,000

HELOC and Mortgage Interest Rates:

HELOC Interest Rate: 9.5%
Second House Mortgage Interest Rate: 7.5%

HELOC and Mortgage Payments:

HELOC Monthly Payment: $801.61
Second House Mortgage Monthly Payment: $3,357.30

After Refinancing once second property appreciates:

Home value after appreciation 725K, pull out 100K cash to pay off Heloc
Mortgage Debt on Second House (After Refinancing): $580,000
Monthly Mortgage Payment for First House: Approximately ~$2,500
Monthly Mortgage Payment for Second House (After Refinancing): Approximately ~$4420 (including tax and insurance) assuming 7.5% rate (hopefully rates go down by this time)

Outcome:

After refinancing the second house to pay off the HELOC, mortgage debt of $580,000 on the second property

First property fixed up, 900K+ valuation, can rent for more as a long term, give me the option to short term rental, fixed up house for the same mortgage payment

I'm open to any feedback about my strategy. It may make more sense to invest more or less into the home for the renovations or buy a cheaper 2nd home, could buy a distressed second home add value and sell to force equity quickly to refi sooner. Ideally I would buy a home under value so that I have natural equity built into the second home to get the 80% loan to value appraisal so I can refinance and pay the Heloc.

Thank you!