First time RE investor. Please poke holes in my strategy!

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First time RE investor. Please poke holes in my strategy!

Account Closed
Member since 2022 · 2 posts · 0 votes

I've (29M) about $250k saved up. Don't own a home yet, but I've been planning to buy one for a while now. Instead of buying a single family home, I'm thinking of buying a condo outright in cash, rent it out so I can start generating cash flow/passive income and then do cash out refinance or HELOC to pull equity out of the condo and use that as a downpayment for a single family home about half an hour away. From what I've read online, I can pull up to 80% from the value of the condo so about $200k. I'll use that to buy a SFH in the ~$400k - $500k range. I understand that I can probably better use my cash but I'm very risk averse. Basic math is as follows:

Cost of condo = $250k, Rent estimate = $2k, HOA + taxes = ~$800. Net profit = ~$1200.

Cost of SFH = $500k, Mortgage + taxes = ~$2500 (assuming I use $200k from cash out refinance as downpayment)

Hence, net payment on the mortgage out of my pocket would be ~$1300, which I’m very comfortable with.

Location = NJ, Income = $100k, Debt = $5K in student loans. Credit score = 720+

PS - The Condo is recently renovated. 

My questions are:

  1. How soon can I pull equity out the condo once I buy it? Is there a "waiting period" before I can do a cash out refinance? I understand I've to wait 6 months to do a traditional cash out refinance. But can I go the Delayed Financing route to immediately pull out my money? I read Fannie Mae's guide about this, but I'm confused about on of the criteria in order to quality. The website says "The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs, prepaid fees, and points on the new mortgage loan (subject to the maximum LTV, CLTV, and HCLTV ratios for the cash-out transaction based on the current appraised value)." I'm not sure what this implies? Does this mean that the new loan on my primary residence/SFH cannot be more than the price of the condo, so essentially cant be more than $250k? Am I understanding this right?
  2. On what grounds can a bank/lender not approve a cash out refinance, if any?
  3. What are potential risks with this strategy that I may not be aware of? I understand being a landlord is not easy, but I’m okay with all the headache that comes with managing tenants/property. 
  4. Any other suggestions to stretch my cash in order to generate passive/rental income? 

Please poke holes so I’m aware of any unwanted risks that I’m potentially taking with this entire strategy. My entire point is to somehow generate rental income that can offset my mortgage payments on my primary residence.Thank you!

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
4y

Lawyers are always going to do a cost / benefit analysis for their efforts. The lowest hanging fruit for them is the liability insurance coverage.  The insurance carriers are most likely to pay out quickly without much effort.  If they feel they can get more, they might try to convince a judge or jury to take the property.  That is a lot of effort.  If you only have 25% equity in the property, it isn't usually worth their time to go after it.  If you have 100% equity in the property, you are a nice juicy target.

Putting all your eggs in one basket is also riskier.  I'd much rather have 4 properties with 25% equity than one with 100% equity.  If something goes horribly wrong with one, I have three others to help defray costs.  

Also, if you use up all your cash to buy the property, you have no reserves for unexpected problems.  In the scenario you provided, putting all your cash into acquiring one property is a VERY risky strategy.  If you are just horribly afraid of debt, consider getting 50% leverage instead of 75%.  Cash is king and can solve a lot of problems.  Having no cash, eliminates most of your options.

In single family, a simple ROI is as follows: ROI = Cash Flow / Cash Invested. Generally ROI improves with leverage. Do the math and see.

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    4y

    There are two parts of the strategy that I don't like.

    1) Condos.  With a condo you take away a lot of control of your investment.  There are plenty of posts in this forum on why Condo's suck.

    2) Paying Cash. Paying cash for an investment property gives you a horrible ROI on your investment and makes you a target for lawsuits. This may seem a risk-averse approach but it is actually riskier than putting 25% down and keeping cash in the bank.

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  • Account Closed
    OP
    Member since 2022 · 2 posts · 0 votes
    4y

    @Greg Scott Hi Greg, thanks for the response. Can you please elaborate on your second point? Why do you think paying cash would make me a target of lawsuits? Also, what is a good metric for ROI on investment property? Thanks!

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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    4y

    Lawyers are always going to do a cost / benefit analysis for their efforts. The lowest hanging fruit for them is the liability insurance coverage.  The insurance carriers are most likely to pay out quickly without much effort.  If they feel they can get more, they might try to convince a judge or jury to take the property.  That is a lot of effort.  If you only have 25% equity in the property, it isn't usually worth their time to go after it.  If you have 100% equity in the property, you are a nice juicy target.

    Putting all your eggs in one basket is also riskier.  I'd much rather have 4 properties with 25% equity than one with 100% equity.  If something goes horribly wrong with one, I have three others to help defray costs.  

    Also, if you use up all your cash to buy the property, you have no reserves for unexpected problems.  In the scenario you provided, putting all your cash into acquiring one property is a VERY risky strategy.  If you are just horribly afraid of debt, consider getting 50% leverage instead of 75%.  Cash is king and can solve a lot of problems.  Having no cash, eliminates most of your options.

    In single family, a simple ROI is as follows: ROI = Cash Flow / Cash Invested. Generally ROI improves with leverage. Do the math and see.

    1Reply
  • Nick Schlabach
    Realtor · Sarasota, FL · Member since 2015 · 51 posts · 11 votes
    4y

    The problem I see is with your math. Your calculation is missing the HELOC repayment costs. HELOCs are fine for short term money but I personally don't know anyone that uses them for long term financing. I would suggest obtaining a fixed, long term mortgage when purchasing your investment property and it will make underwriting properties for cash flow a lot easier if you know what your debt service will be up front. Many people see debt as the main risk they're faced with when in fact, as Greg has mentioned, there are other risks such as lawsuits and depleted cash reserves when purchasing a property with cash.

    Your idea of offsetting your personal mortgage with rental income is a good one. One of the best ways to accomplish this is to house hack. There are a ton of ways to do this with the primary one being to purchase a multifamily property as a primary residence. 

    Good luck!

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  • John Walter
    New to Real Estate · NJ · Member since 2020 · 124 posts · 63 votes
    4y


    @Account Closed Are you planning on living in either of these residences? If so, why not house hack one (saving on the massive down payment, having to pay refinance costs [or] HELOC fees, etc.), put 25% down on the other property and keep the rest in the bank for reserves?

    Don't forget about maintenance, capex, associated fees (again HELOC or refi), and of course vacancy. If your condo goes vacant, you're having to pay out an extra $2k a month. If you're risk averse, seems like your strategy leans toward the more risky option. Whatever you decide, insert all the variables to accurately quantify cash flow. Good luck.

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