To sell or not to sell

[Hillary Buckingham]

Hello! My husband and I are hungry to start investing in real estate. We have the capital for a downpayment and closing costs to go ahead invest in one, but we're wanting to invest in more than one property this year. 

To do so, we're going to need more capital (and of course the thumbs up from the bank to get a loan). We've come up with two possibilities on how to get this capital, but don't know what one makes the most sense or if there's something we're missing.

Option 1: Cash out refinance - get capital out of our home, hopefully lower our interest rate in the process, keep our home to use as a possible rental property in the future, and maybe the house gets seen as an asset with the bank so it's easier to get an additional loan (?). We would get about $18k with a cash out refi. 

Option 2: Sell our house and rent for the time being - acquires capital through the sale of the home and lowers our debt to income ratio, but rent will likely be $800 or more each month than what we're currently paying on our mortgage. We would get about $56k with the sale. 

We've talked with multiple banks in the area and they haven't been helpful. Any insight or tips would be greatly appreciated. We're located in Duluth, MN.

[Michael Schraepfer]

Hey Hillary!  

Here is my two cents from another Duluth Investor!  

I think this is a fun question, and I've seen an aspect of it echo as investors get going. So - first, I'll be annoying and answer your question with a question: Ok, so if you take either of the 18k or 56k routes as detailed above, what will you then do to grow after that?  Unless you can create an engine that funds future investments without having to wait years for returns to build up - you'll be back in the same spot. Every investor is faced with this dilemma in some way or another - you'll eventually run out of cash to put down on new investments. Its hard, and slow for an impatient investor (I'm impatient anyway) to perfectly roll a chunk of cash from deal to deal and get it all back time after time to reinvest again and again. Most of the time you loose some of the cash (in a good way) to illiquid equity in properties.  Thats just the nature of buy and hold investing - especially in a market like we're in these days!  So you either stop investing (or in many peoples case never start) or you need to wait and build up cash again.

The real answer to this dilemma is OPM.  I've always loved the saying "You're not an investor until you run out of money."  It's really kinda true. If you have down payment cash, then you're just buying stuff and anyone can do that till the cash runs out. Real investors get creative.

So, If I were you - I'd stay put and get that 18k liquid (having some cash is always good). Then I'd start looking for ways/deals to invest using Other Peoples Money. You'll need to sooner or later, or your investing streak will flame out.  How? Awesome question! There are a ton of ways to add some creativity into a deal. This is ultimately the stuff of legend and I keep learning new ways as the game unfolds. A few basic OPM ideas to start with are owner financed deals, friends and family loans, hard money lenders, house hacking and construction remodel loans.  

One thing I think that helps a lot in the beginning is to realize when investing is that you're buying 2 things: You buy the property, and you buy the terms.  I'll take an OK property with great terms any day.  Terms are often more valuable in the deal than the property itself. You need to find (or create) deals with some great terms!

Best of luck!