As an investor, how would you do this?

Question

I just sold the house I'm living in for a large profit. Because I lived there for 2 years, I avoided paying capital gains tax on it.

I found another house that needs updating that I want to live in for 2 years then sell like the last one.

I am paying $350k for it. It needs $100k in repairs/updates.

Which of these would you do?

A) Pay $350k cash, do repairs only for $50k cash, then get a mortgage (For around $400-$500k) and do remaining updates over the next 2 years?

B) Pay $350k cash, do all repairs and updates for $100k cash (which is all of your liquid funds), then get a mortgage on the full ARV ($500-$600k)?

C) Pay $350k cash, get a mortgage (for $350k),then do $100k in repairs/updates?

D) Pay $350k cash, get a home equity loan for repairs/updates for $100k?

I would like to use some of my cash for purchasing houses using the BRRRR method, and other investments in the meantime. My goals are to grow my wealth and portfolio as fast as possible. I want to do this full time.

Nathan Gesner · Answer

If you're buying a home for $350, putting $100 into it, and expecting an ARV of "$500 - 600" then I would argue you're in over your head.

You should be able to nail the ARV down but you've got a range of $100,000 which sounds like you're making a wild guess. It also sounds like you're basing your entire investment strategy on appreciation, which is risky. What happens if the market slows during those two years and suddenly your home is only worth $400 after spending $450 on purchase and renovations? You could be under water for years.

Flipping houses is a fast game. You've got to turn the property around and cash out before the market turns. Two years is too long for a flip and too short for general appreciation.

Maria Flowers · Answer

@Lauren Cooper I would see if a 203k loan would work for financing the property, since you plan to live in it. Then  your down payment would be minimal and you will have cash on hand to invest and handle the unexpected. Then when you sell it you will pay it off and hopefully pull out more cash to invest in your next property.

Bill Plymouth · Answer

Whenever I hear “there aren’t any other homes likes it” or “unique home” that’s a big red flag to me.  I agree with @Nathan G.that 2 years is a long flip.  But, if you’re hell bent on following this strategy, I would suggest buying something more “mainstream” in your market.  It will make it easier to sell when your finished living in it.

Nathan Gesner · Answer

@Lauren Cooper then I would argue you're in over your head.

I'm a REALTOR in a small community of 9,500. It's not uncommon to see a unique property with no real comparables. For example, someone wanted me to list a commercial property that included a restaurant, two additional stores, a residential rental, and two small houses that could be used as office space. There was nothing like it on the market but I am able to determine value using a variety of techniques like cap rates, price per sq.ft., income-based valuation, etc.

You should probably consider working with an agent that understands the market and can give you a better determination of value. I guarantee there are agents that could tell you market value within minutes and then back it up with factual data.

Lien Vuong · Answer

Are you working with an agent? That person should be able to get you a professional opinion, after a while the acreage on a piece of property is moot unless it is developable.

I agree with @Nathan G.that you should have a more solid number of what your ARV should be to be able to gauge your return on the investment.

I would personally choose B which allows you to leverage your cash position to the highest potential and then use OPM (other people's money) and pull out money to put into other income producing assets. That way, you get the owner occupied property you're looking for and increase your cash flow.

Lauren Cooper · Answer

The ones that are comparable sqft are around $550k.

Lauren Cooper · Answer

@Nathan G. The problem is that there's not any good comparables in the area. It's a 5248 sqft home on 20 acres. Right now there's no homes for sale or that have sold that are comparable. Some that are nicer on a lake for $800k-$1m and some that have comparable sqft on 3-5 acres.

Nathan Gesner · Answer

@Lauren Cooper it requires studying the market. You have to know how to evaluate homes to find something comparable to yours. You usually want to compare your home to 3-5 comparable homes recently sold and 3-5 comparable homes that are currently listed. If you're in a bigger, busier market then you may have more comparables; slower markets may have less.

I'm not saying you're doing it wrong but you've provided very little information and a very wide range of what the ARV could be so it sounds more like you're guessing.

Lauren Cooper · Answer

@Nathan G.

I need somewhere to live in the meantime. The $350k also includes a 2br 1ba home that I will be renting out. I'm not getting a mortgage on that one.

I'm having trouble getting anything more than an estimated ARV. How do you suggest getting an accurate ARV?

Greg Dickerson · Answer

@Lauren Cooper I would go with option B. Purchase and do the entire project and get that out of the way so you can focus on new projects and its always more cost effective to do everything at one time. Pull all the equity out to use for investing as interest rates are back down to record lows.

As an investor, how would you do this?

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