Use of retirement savings and placing home on equity

[Alfredo Franco]

I have a plan to take out 20 k from my retirement fund to take care of Debt and fix credit. The rest of the money I want to put towards raising the value on my paid for home and then use that for equity to have more money available to start investing in flipping and rentals.

Is this a good plan?

[Trent Chance]

It can work well:

Is it a good idea?  I'm not sure - I'll let the pros answer but I will give you my experience.

In February 2016 my wife and acquired our first home.  It was outside of Nashville and very livable but we had plans to raise it's value using my 401K:

• -$137,500 Purchase Price
• -$5,000 Down Payment (3.5% FHA)
• -$15,000 Remodel (HVAC, Kitchen, Flooring, Trim & Paint)
• -$1,000 Monthly Payment (Mortgage, Escrow & HOA)
• -$20k All-In

In Fall 2017 we took out a HELOC based on the new appraisal. Our $15K injection + sweat equity boosted our equity by $12,500. We converted this property into a SFR and it does well for our first attempt.

• -$165,000 New Value (The appraised value due to both forced & market appreciation)
• -$12,500 HELOC Approved
• -$1,550 Monthly Rent & no vacancy so far

We then used the $12,500 and a little cash to move into a newly constructed home approximately 10 miles from downtown center:

• -$300,000 Purchase Price
• -$15,000 Down Payment (5% Conventional)
• -$1,970 Monthly Payment (Mortgage, Escrow, HOA)

It's now been two years since we moved into this home and the market has been kind in Nashville:

• -$165,000 Home is now valued @ $200,000 (originally $137,500)
• -$300,000 Home is now valued @ $330,000 (approximately)
• -$43K is what I stand to clear on the original home after selling using a 1031 Exchange to avoid capital gains taxes.
• -$13,200 isn't true cash flow but it is what we captured beyond monthly payment over 2 years, we can assume 35% for expenses since this property is remodeled and the HOA cares for the roof and external structure.

Total gain over 3.5 years:

• -$62,500 in Equity on Home #1
• -$30,000 in Equity on Home #2
• -$6,600 in Cash Flow on Home #1
• -$20,000 in Debt Pay-down for both homes combined
• -Plus tax savings that I don't know off-hand

When you look at each wealth generator I imagine REI far outperformed my 401K had I left my original $15,000 slow-cooking.

• Total Gain: $120,000
• Total Cash Invested: $35,000
• Net Gain: $85,000
  

Next, I'm most likely selling the original home and acquiring a deal that net almost 5x the cash flow of that SFR. I'm working with @Dave Foster on the best steps to shield the capital gains taxes through a 1031 exchange.  At some point we'll turn our current home into a SFR hoping we don't lose a bet on appreciation in Nashville.

I literally had NO IDEA what I was doing and managed to get this far before I had even decided to work towards full-time investing in the near future.  The one advantage I had was the Nashville market is insane.