Which bucket(s) do we fill and how much?

Question

Forgive the lengthy post!

I am a new member to BP and literally can't absorb all this information fast enough! I have a long history in real estate first being licensed in 2005, then went into financing, back to real estate all while owning my own hospitality business for over 12 years as a single mom of two, building it from the ground up. Even though I have had several years in real estate, it's never been for our own investing. Long story short, sold my home on 40 acres and business, made a nice profit, met an amazing man who is a contractor, got married, sold his property too and we moved to the high desert of Central Oregon near a very popular year round resort town. He is continuing his contracting business and I reactivated my brokers license here. We bought a house and paid cash for it, forced some value into by adding over 1800 square feet onto it with very little cost due to an addition that was already started prior, and updated the house built in the 80's. From the time we met, we did all the previous mentioned in just two years time, so we are definitely goal focused and not afraid to put our heads down and work! We are looking at what's next and want to absorb all the information we can to make the most educated decision on our moves. Although we both agree we need to start prepping and are excited to make our decisions, my husband is very religious about not leveraging our primary home for other investments. Taking profit out and reinvesting yes, but not leveraging.

My question as a new BP member is what you do with the following scenario? We are curious to hear what creative ways more seasoned investors than us would do as a first move looking back on some of your first deals?

Primary house purchased cash $965000

Spent $75,000 updating/remodeling

Other holding expenses to date: $12,600 (annual taxes and utilities for two years)

Home now appraised at $1,325,000.00

We are considering selling our primary house, finding another primary that we can live and flip again over two years. Anything under $1mil but trying to keep it around $700-$800K

Leaving approximately $300-600k to reinvest.

Investments we are considering or at first glance are appealing to us:

fix and flip

STR *we live in a year round resort town (this is appealing to me with my hospitality background)

Owner Contracts vs. renting? We carry a partial contract on my husbands property and it's worked nicely without the headache of renting. What is everyone's take on this? Seems like a no brainer, but I don't hear it talked about very often. We forced some equity into his house, sold it, carried a partial contract on it at 7% for 10 years. No headaches of property management and if they default we get the property back (after a foreclosure of course), but it's gone perfect so far.

How would a more seasoned investor divi up the allocated funds that we have to reinvest? Our ultimate end goal is to create passive income for retirement within 10 years. Do we pay cash for everything we can or take advantage of smaller down payments to be able to fill more buckets? Sooooo many paths to consider!

Jason Wray · Answer

Just 2 cents from an investor/Banker but I would never put $965K all cash into a home. Unless you did that to win out against several bidders. Even still that much cash tied up in one property is losing you opportunities on multiple other real estate investment deals. A good realtor can generally help you win a bidding war with a higher earnest money and a fast close with no inspection if that was the case.

Under the current circumstance you could pull out just enough cash that will allow the home to cash flow based on a LTR. Take that cash and use it for a new primary and for more investment rentals. A little goes a long way you only need 5-10% down for a New primary, 10% for a Second/Vacation home, and 15% down for an investment home even up to 4 units.

The home you are planning on selling if you rent it out you can use the 12 month lease/rental agreement to offset (Wash) the mortgage payment if you take cash out so that you do not get hit on the new purchase against your DTI. This must be communicated up front because there are some lenders who have overlays.

You can also buy the new primary after you take the cash out and use a DSCR loan program to buy another investment if you are worried about DTI as well. Just do not sink so much of your liquid reserves into a property use the banks money! Mortgage rates are dropping fairly fast so check out the numbers and have a good conversation up front with a Banker first.

This can make or break your real estate portfolio just by having a game plan up front. If you have any questions feel free to reach out I enjoy helping and offering loopholes to help bigger pockets members save more money and time.

Chris Watkins · Answer

Hi Temple! Welcome to the forums.

I agree with Jason about how leaving too much in your primary will hamstring your investment goals. But if your husband is adamant about not leveraging your primary, you have to play the hand you are dealt.

If you want to owner-finance your current primary, you'll gain cash flow (acting as the bank), but sacrifice the cash you want to use for another primary or investment property. If you get someone to put 25% down on the $1.3M, that's only $330k in your pocket to buy your next primary, so you'll be carrying a loan there that will offset some of the income from your owner-carry note. Owner-financing can be a great strategy for passive income, but since you are now the bank, you need to do due diligence on the borrower to make sure they can make those payments.

If you sell your current primary conventionally, you can take that 1.3M to buy a new primary with cash, then have the leftover to invest, but you won't have the income from the owner-carry note and your cash won't go as far on an investment property (>15% down) as it would on a primary (5% down). Too many variables to say which is the better move without knowing more.

The STR strategy can be great for cash flow, but it certainly isn't passive if you are managing the property. I have a PM for my STR and it is still quite a bit more work than my LTR's. I'm assuming that you're somewhere around Bend/Sisters based on your post. Both of those towns have stringent rules about STR's that can make it more difficult to find the right property that will fit your strategy. Not impossible, but more difficult. Outside the city limits of both towns there is more flexibility, but you want to be sure about what you can do with a property before you get under contract.

I'm happy to help strategize more!

Chris

Which bucket(s) do we fill and how much?

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