Help with financing strategy

[Lyle Quillin]

 Our goal is to develop a financial strategy for moving forward on purchasing investments this upcoming year. I think I have a decent plan of attack despite a recent setback, but would love to hear what advice the BP community might have.

We currently own 3 homes:

Home 1: Cash flows about zero, but has about $150k in equity. For the time being this home is off the table as we may move back here after my Air Force contract is up.

Home 2: We own this home outright and the details can be found on my profile. Purchased April 2018 for 76k, rehabbed for about $22k, current value $160k. 

Home 3: Current residence, Purchased for $180,000 in April 2018 and current principle is at $170,000 on a VA loan.

We orig. planned to do a HELOC on home 2. Wells Fargo assured us we would have no problems getting a HELOC in the amount of $100,000 after being completely transparent everything including how long we have owned it's purchase price. This was going to be our vehicle to purchase other properties when we find a good deal, and provide great cash flow while we are in between deals.

After applying, their reason for denying the line of credit was because they wanted to value the property at the last purchase price and there not being enough time of ownership. Despite pushing back and asking them to do our double check everything, they still came back with a hard no. 

Moving Forward:

I think we ought to refi home 2 @ $128k, take the cash and invest primarily in flips. This would reduce home 2' cash flow to about $160/mo. Once we have enough in cash to pay off our primary residence, do that and open a HELOC - which we would be able to get around $150k. We would essentially be cash flowing an extra $1100/mo (thats what home 3's mortgage currently is) and also have the cash to invest further.

I would prefer to do a few flips for now rather than more buy and holds since we currently are carrying over a loss from the last 2 years tax returns that we would like to take advantage of. After that, we would like to pursue more cash flow to put my wife out of a job. 

Any feedback/comments would be awesome. Thanks!

[Don Konipol]

If the prior years losses you want to use to shelter flipping profits are from a like activity you can use them to offset future profits.  If they are capital losses, they can only be used to offset ordinary losses up to $5000 per year, while they can be used up to 100% to offset capital losses.  Flipping activity will likely be challenged as ordinary income by the IRS under the theory that flipping is a real estate business rather than a passive investment.

As per your question about extracting capital from your properties via mortgages or credit lines, it’s merely a question of cost, i.e., interest rate, points, and other fees, as well as terms.  Don’t get bogged down on which property the loan is against, it’s the overall financial picture that counts.