What would you do in my situation?

Question

have a few questions for all of you expert BRRRR Invest members if you have a few seconds to read my long post.

My wife and I, now 23 years old, moved into our first house almost two years ago. We had a bad storm this past summer, which resulted in her and I being able to completely change the look of the outside of the house and also left some dollars over to renovate the inside as well.  We bought the house for around 80,000, and the appraised value I’d assume now is around 140 to 150 at this moment. this is all coming from no money out if our pockets. Some problems that arise in my head when thinking about renting out our place is we live in a small town where renting is not a huge business but has some occurrence.

I have read a few books, and I’m still learning about the whole real estate investing platform. I want to try my hand at the brrrr method. And by any means, I am not up to par with what I should know before starting.

My question is, what should I do. (1) sell the house and use the profit to buy rental properties and a house for myself and my wife. Or (2) should I cash-out refinance and use that money to buy rentals and a house for myself. The only problem with this is that I’m scared there will not be enough money left over to move into a house for my wife and me, plus rental properties. Our first child is expected in July this year, so the house for ourselves is still a priority as my family comes first.

If any of you can help me or give me advice or want to mentor me on what you believe is correct or what I should do, I would greatly appreciate it and would gladly listen to you. I’m new to this, but I know I have an option to start something bigger

Tim Delaney · Answer

@Zachary McCloud if your rent estimates are accurate (but I would double check) it doesn’t sound like your existing home will cash flow if you do a cash out refi. So couple that with the fact that you have already been in the house about two years I would make sure I stayed the full two years and then sell. You should end up with over $50k that you can use for another property. You could use $5-20k of that to try to buy a duplex with a low down payment as your primary residence and then use the extra to BRRRR another property.

If you do go the refi route on your existing house instead of selling be sure to do that before you move out as you will get better terms if you are refinancing your primary home.

Dan H. · Answer

Clearly not San Diego prices.  I have done quite a few BRRRR in San Diego (8 to be exact).  9 of our properties have had all the investment extracted. So I am definitely qualified to answer for the San Diego market,but suspect my response will apply to you in Iowa.

If the PITI is $600 and the unit will rent for $850 you are likely cash flow negative when allocating for all expenses (Vacancy, cap ex/maintenance, PM (charge for PM even if self managing as it requires work), miscellaneous).  The cash flow will get worse when you refinance to extract equity.

I am a big fan of BRRRR and house hacking.  Combining the two is an awesome strategy, but your current property is likely not the best property for this method.

I have an ex-home of ours as a rental.  It is by far my worse performing RE judged by virtually every measure but especially if judged by rent to value ratio.  This is not unexpected as the house was purchased to be a good house for me and my family and not primarily as an investment.  It therefore cannot compete with our properties that were purchased with their investment potential being the primary criteria.

In this case, do what I say and not what I do and obtain an investment property that will provide better return than your current.  I recognize it is tempting to use it as the initial investment property (it is what I did and many others have started this way), but with the 2 of 5 years occupied there will be no tax on the gains and you should be able to use that money into a house hack/BRRRR opportunity that will provide far better cash flow/returns.

By the way for house hacks, I suggest starting with a detached duplex where each unit has its own separate yard.  It provides the least house hack feel but with all the benefits of house hacking.

Good luck

Susan Authement · Answer

I forgot to mention that if you take a cash out refi then place a renter in it the rent collected would cover the new mortgage. In a sense the renter would pay for the costs associated with accessing that equity (IE a likely higher interest rate and larger mortgage amount). That equity money is non taxable i think.  If your rent WONT cover it i wouldnt do it. I would sell it and use proceeds to buy the new properties, i dont think you would have capital gains tax because its your primary but im not a accountant so double check that.

Susan Authement · Answer

Hello Zachary, I find myself in a similar situation as you. I am not a expert, just a normal person. Im even new here. so keep that in mind.  I entered a rent to own contract on a house in rural AZ 4 yrs ago (waiting to close now). Rental amounts in a small town around me are lower than a city and rural areas outside the small town are even lower. I ran the numbers and i think i can break even after i pull out the equity with a renter in place. I cant cash out refi this on my timetable because Im considered a renter not owner right now. Due to the new owner restrictions on how long you have to "season" the loan before taking a cash out refi i have to wait i think its 6 mo. . .Since you have been living in the home as owner i dont believe you have to wait that period like i do but double check that yourself.  I would probably do a cash out refi and place a renter in it. I would use the equity money i got to place a down payment on (This might solve your living arrangement issue) a duplex or tri plex. I would live in one unit and collect rent from the others . You could build equity while there by doing simple upgrades like painting, flooring etc while you get a hang of being a land lord. Depending on how much equity you pull out you might be able to buy that property out right or put a very large down payment on it. After sprucing it up you can pull equity out of it (the down payment dollars and what ever added bonus equity you get from fixing it up to 80-85 % or VA 100% if your a veteran. You could use that to move your family into a single family home if you dont like living there. You can even hire a company to manage it and not let tennets know your the owner and living next door :-) Hope that helps and wasnt confusing

Susan Authement · Answer

Im going to attempt to place a renter in mine, i can always sell it outright if i have issues,my area seems to have a shortage of houses and rentals both. Good luck !

Zachary McCloud · Answer

Yes I forget to mention I am from Iowa. Prices are very different! But I like that idea. Currently my mortgage is around 600/month rent would come in around 850 or 900 I assume. If I could cashflow that much per month on my current residence would you still recommend living there or finding somewhere else to live whilebalso buying rentals? It's a hard questions because only so much of the positive equity money will go so far.

Richard Betz · Answer

If you keep the current house and rent it out, what can you get for rent?  How much cash could you take out of the home and still have decent positive cashflow?

I would probably stay in the home, do a cash out refi and use those proceeds to find another property to buy and rent out.  Preferably a multi unit building, or a couple houses on one lot.

I chuckle at the numbers.  They seem so affordable, here in San Diego, one bedroom condos cost $500,000.  It makes investing very hard.  You should snap up every place you can.  Do it now while you are young and strong and being a bit poor is palatable.  30 years from now you will be on easy street collecting thousands of dollars in rents every month for zero effort.

What would you do in my situation?

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