Newbie question. Bought in Daybreak...150k equity...now what?

[Stephanie Clark]

Hello! I am just starting the process of learning everything I can about investing so please excuse my inexperience. I would love some advise on what to do next.  My husband and I just bought our primary residence in Daybreak, South Jordan, UT. It's 4400 sq. ft 2007, 6 bedroom 4 bath home for 275K (we got a deal from a family member. He only wants 120K back when we sell with no time limit to sell) It was appraised for 480. We are putting 50K in to it (flooring, kitchen, granite, etc). We expect it to be appraised for around 600K based on the market, when all is said and done. I would love to use this as a jumping off point for future investments. Because I don't know all my options I'm not even sure what is possible but here are some options I'm thinking of. 

1. Long term rental. We should be able to get 3000-3200 per month. Mortgage is 2000. 

2. Short term rental. I'm not exact about rates or occupancy percentage but based on what I can gather we can get about 500-1200 per night depending on time of year. 

3. sell in 2 years and get equity

4. lease to own. I just feel uneasy about this because I'd hate to lock in a sale price especially when South Jordan has continued to climb

 I know there are other options I just don't know what they are. I'd like to try everything from flipping, vacation rentals, long term and everything in between to discover what I really like and what is the most profitable. 

Any advise, mentorship, knowledge would be greatly appreciated. Thanks

P.S. Im not sure why it states above that I am from Manila...weird

[Chris Jensen]

@Stephanie Clark welcome to BP. I came across your post that didn't get much traction, so I thought I'd offer a few perspectives. I live in Iowa but am originally from Orem and have lots of family spread throughout Utah County. Your home sounds very nice, a fantastic deal for you and your husband with potential to be an excellent jumping off point for an REI path. Regarding the options you listed:

1) LT rental: I wouldn't recommend this.  Even with it being a newer home with lots of recent improvement, you will have expenses.  You generally should shoot for 1% of market price as monthly rent.  In this case, 600k should generate 6k per month in rent.  You're probably saying no way, and I would agree.  Market rents just would't support this.  So using half that... 3k like you stated... starts you off at a disadvantage.  As for expenses, you generally budget about 50% of rent as expenses and set-asides... so $1,500 in this case.  If you want to be a property manager and deal with calls about leaking faucets and broken towel rods, etc, then you can reduce that 50%.  Believe me, it's not as easy as it might seem.  But you certainly can learn from others and take it on.  As for set asides, you will eventually encounter big repairs or need to replace big ticket items like roof, HVAC, etc, so setting aside money for those things now, a little each month, is important.  Not sure what your property taxes and homeowner's insurance is, but all this kind of stuff is included in that 50% number.  So if your rent is $3000, and expenses and set-asides are $1500, that leaves you $1500 to cover debt service (principle and interest on your mortgage).  You said it was $2k, so you're theoretically $500 in the red each month now.  Sure, you'd get the tax advantage of depreciation expense write-off, but these kind of numbers would never make sense in the long-term.

2) Short-term rental: I don't have an opinion here, since I've not been involved with this kind of activity before.  You'll want to check local laws and regs.  To me, some of the same concepts as mentioned in option one also apply here.

3) sell in 2 yrs: to me this is the most favorable of the 4 options.  Take full advantage of the great deal you have with this house.

4) lease to own: too much risk on you as a homeowner. If property values go up more than anticipated, you leave a lot of value on the table.  If the market declines, and your buyer defaults, you are left holding the bag.

Here's an option not mentioned that I would actually recommend the most to help you get started in real estate investing. It requires a good bank, a good realtor, and a good contractor. Once all your improvements are done, obtain a HELOC from a local bank or credit union. Local, because they are the easiest to work with and have favorable terms compared with national banks. You can get a HELOC for 80% to 95% of the market value of your home, which would be quite a sizable amount given the numbers you describe. With that HELOC, work with a good realtor to find a property that requires some rehab but which, after being rehabbed, can then be refinanced for at least 30% more than the purchase and rehab costs. You'll need a good contractor for the rehab. That 30% margin will allow you to pay for refi costs and then to allow 25% equity to remain in the home after you do what's called a cash-out refinance. This will allow you to get all your investment back out of the home, rent it out, and continue your REI on more properties. BP calls this the BRRRR approach. Do some quick research, and the concept will become clear. But here's a quick example for illustration.

Say you buy a home for 50k and put 20k in rehab into it, and your realtor says the value is now 100k (supported by good comps). Your total investment is 70k, but you can now refinance it for 100k. Your bank requires you to leave 25% as a downpayment. 100k less 25k = 75k proceeds from the refi. Deduct misc refi costs and say you now have 70k in proceeds. Use that 70k to repay your HELOC for the 50k purchase and 20k rehab costs. Now you have recouped all your costs, you have a nice property that's rented, and you can repeat the process with another property. In this fashion, you leverage the equity in your primary residence to acquire a nice little rental portfolio.

This is all just my perspective.  Hopefully there are a few nuggets that can help.  Best of luck as you begin this exciting journey.