Is my personal residence holding us back?

Question

Help! I think our personal residence may be holding us back. We are on the hunt for our first brrrr property and we will be using private money loans for the down payment. We are hoping to acquire upwards of 20 properties in the next 5 years. Based out of Philadelphia suburbs (Delaware county specifically).

We bought our personal house in 2016 with the plan to either do a live-in flip, or a fixer upper that we live in long term.

The house was purchased for $154k, well below market value (comps in our neighborhood sell for minimum $250k).

We have done almost all of the work ourselves thus far including:

New kitchen and opening of floor plan on first floor (not completed- still needs trim and some custom cabinetry)

New deck and sliding doors

Rework of 2nd floor to add bigger closets, 2nd floor laundry and new larger bathroom (bathroom not completed)

Total cost of renovations so far: $25k

The reason we only paid $154 is because the stairs to the 3rd floor are in the 2nd floor bathroom! My husband is an architect and we have the plans to turn the staircase to make the layout much more efficient.

When all of the work is completed, it will be a 4 bedroom, 2 bath (it was a 3 bedroom, 1 bath at purchase).  The problem is, we need about $30k to finish this project.  We do not currently have this cash available.

Do we borrow cash to finish the job so we can either refinance or sell and pay back the borrowed money with the estimated $41k equity gained.  This feels risky to me because I’m a not 100% confident about the numbers.

Alternatively we will just continue to slowly DIY the renovations ourselves, but I feel like it is tying up our cash and time!     THIS IS MY BIGGEST ISSUE.  We would rather be focusing on our rental portfolio assets instead of this liability property. (We also both work full time w2 jobs and have two small children).

We did not have any real estate knowledge when we bought this house, and now we are looking for creative ideas to get us out of this mess. We do like the house and could live here for the next 30 years, but are looking for input from all of you creative real estate professionals because maybe you’ll have some ideas we haven’t thought about.

Thank you!

Rich O'Neill · Answer

@Liz Spina is the $41k equity you say you will gain after all of the repairs are paid for? Including the ones you have already done? Meaning will you be all in for $210k and it’s worth $251k after that?

If so, I would say go to the bank and try to get a construction loan or a home equity line of credit. You probably have a decent amount of equity in the house as is after all the work you have already done. Finish up the punch list and get it appraised. If that HELOC does not get you all of the renovation budget then figure out what you can do yourself and what you need to bring someone in for and budget that way. If it does get you all the cash you need, get the project done and find a new place. $41k is a great down payment on any small multi family you would want in Delco, or you could hang onto that property as a rental. From the sounds of it though a $250k property in Delco is more of a flip than a rental.

The other thing is, if you are thinking of moving on from that house, I don’t see the need for custom cabinets. You would be surprised at how much you can do with standard cabinets. They may be special order but they don’t have to be custom made and you will save thousands of dollars.

Victor S. · Answer

you better zero in on that ARV. 250 with 210 all in seems pretty thin, after you factor in your selling costs. HELOC could be your least expensive option (shop smaller/local banks and credit unions). Most banks do a drive-by appraisal. They will ask you if you have performed any upgrades, and that's where you tell them everything and more that you've listed in the OP. You can also contest the appraisal if it comes in low (done that myself before), so be prepared to present some comp data, just in case.

Also, you mention that you need $30k more, so technically your all-in would be your loan balance + $30k. You can use a 85-90% HELOC, so you should be well covered for needed expenses. Alternatively, you can use this HELOC to get deals, while continuing to expand your portfolio and finishing up your main residence. Obviously, it's a more risky strategy.

Liz Spina · Answer

Thanks @Rich O'Neill !

Rich O'Neill · Answer

@Liz Spina I do know some but I think the HELOC is the way to go here. That way you can work with whoever will give you the best price and you may even get better terms on it than a renovation loan or something. The HELOC is strictly access to cash. You could buy a boat with it if you wanted. There are no requirements on what you can use the money for. You could also continue to deal with the house as is and use the HELOC as a down payment on a strictly investment property.

Liz Spina · Answer

@Rich O'Neill  Yes, we would be all in for about $210k and I estimate that $250k would be the minimum ARV.  Do you have any recommendations for contractors that work with construction loans?

As for the custom cabinets, my husband that is building them, so the overall cost is not too high, but when you factor in his time, it definitely feels like too much.  We are building this custom pantry into a wall that used to be wasted space and I don't think we'd be able to purchase anything like it.  Definitely not the wisest design choice on our part in hindsight, especially if we end up selling, but I think we are too far into it now.  We bought this house as DIYers with plans to live here forever, but after a lot of education on investing, we are really starting to look at this house in a different light.

Liz Spina · Answer

@Brian Ellis Thank you!  I appreciate that advice.  We are living very frugally.  We are aggressively paying down student loans, but I am starting to reconsider saving the extra money every month to invest into this business instead, at least for a little while.  I am weighing the opportunity cost there.  We are willing to make the sacrifice, I just have to figure out the smartest approach.  That is why we started looking inward at our own house and realized how much time and money it is costing us!

Brian Ellis · Answer

Welcome to BP!

How much could the both of you save from the w2? How much rent could your primary bring?

You can always save up for another down payment and buy another place (house hack) and rent out your current house. Or you could borrow against it, maybe even sell it as is.

But the bottom line is you both need to sit down and weigh out the options. Any scenario is going to bring some level of sacrifice. What I have found to be the best investment, is living frugal and saving money. It has played a huge role in how ive been able to achieve what ive achieved so far.

I hope I helped at least a little bit! Good luck

Is my personal residence holding us back?

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