What would you do in my situation?

Question

Hi everybody, I've been reading this site for a few years but finally decided to make an account. Let me give you a little history before taking an informal poll on how to move forward.

In 2013, my wife and I sold a house that we flipped while living in. Bought for 35k, sold for 85k, netted 22k after taxes.

Later in 2013, we bought a small farm for 220k and used all of the 22k as a down payment. 15 year fixed. This is where we live and are raising our kids. We owe 150k currently. 10 more years and it's paid for.

In 2015 we flipped a house that we bought for 47k, sold for 78k. I cashed out all of the 15k principal from my roth IRA (amassed during grad school) for the down payment on a construction loan. Never made a monthly payment and netted 10k after taxes. The 10k profit was used to pay down student loans

In 2016, I took the original 15k and bought a rental for 80k, completely renovated and move-in ready. Rent is 895/month. All rent goes into a separate account. After conservatively budgeting for management, vacancy, repairs, etc I allocate $100/month profit that will be reinvested. Since this money came out of a retirement account, I don't plan on spending a single dollar of cash-flow outside of reinvesting.

Where I am today: I owe 150k on a house worth 250k, I have 50k in a 401(k) and a rental house worth 85-90k that I owe 65k on. I have 25k in student loans remaining. From my 96k salary, I save 6% through the 401(k) which is matched. I save $400/month making 4k+ net per month after taxes, 401(k), etc. I have 10k in savings, but our furnace is getting up in age and I don't want to blow all my cash reserves. Mortgage is $1650 per month.

So! Where would you go from here? I would like to continue doing deals, (flip or rental) but there seems to be little margin in flipping due to minimal inventory and lots of competition in Elizabethtown, KY where I currently invest. My recent focus has been analyzing rentals. Do I expand using a home equity loan, wait until I pull together more cash, or take a 401(k) loan? Are there low down payment options I haven't considered? (maybe tomorrow's BP podcast will have the answers!)

Just curious to see what others would do if they were in my shoes. I troll Zillow and always look at houses when I drive around, but being on the sidelines is killing me! Then again, if a correction is coming, this might be working out for the best.

James Wilcox · Answer

@Ian Olmsted that is definitely an admirable goal. You need to start to build out a team. Like you have found out with your flipping you are trading your time for dollars. I have found that always isn't the highest and best use of your time, even if you know how to do the work. It is hard to scale to the point you likely want to be if your whole business depends solely on you. What happens if you get sick, get injured and can't work, or even want to move to a different city? You need to work on the business, not in it.I don't really comment on what neighborhoods or areas to look into much. Basically, because you need to define your buying criteria. However, the many common MFH areas are usually Cardinal Valley, Winburn, Eastland, some around Patchen, and many student rentals downtown respectfully. However, MFH can be found all over Lexington though. What neighborhoods that may work for me, may not work for you. Once you know what type of property you are looking for the area will then show itself to you. Just make sure the numbers work and you are going to cash flow. Also, @Brandon Stevens does hit the nail on the head. Lexington is a high competition market. You are really going to need to be on your game to compete there. Likewise, that drives the prices up and the margins can be slimmer. Yet, you are likely going to at least see some appreciation. Right now the market is pretty hot. I always encourage to invest in your own backyard. Maybe trying some of the off-market techniques I mentioned will help you find better deals?Louisville has a great group of people up there. I have never personally been because we also have a great REIA in Lexington, which you are also welcome to attend anytime. I know it is a bit of a drive though. Check out Bluegrass Real Estate Investors Group on Facebook. I am sure those up in Louisville will treat you right though. :)

Brandon Stevens · Answer

If you cant find it in Etown ya definitely wont find it in lexington :)But like @jimwilcox said depends on your long term goals. If you are risk adverse a heloc would probably be the safest. Try to get 30-50k out to play with and id look for eirher single or mutli family value add propositions in which you could get your money in to either flip or refi after 6-12 months to get your $ back out. Id probably stick to etown or one of the closer surrounding cities to minimize your competition. Set a goal buy two a year, something like that. 1st call id make would be to your banker tell him what your plan is than talk about how ya get there. Gl

James Wilcox · Answer

@Ian Olmsted it just depends on your own personal goals and where you want your financial life to look like in the next year, five years, ten years, ect... You also need to gauge your risk tolerance. It seems you are doing just fine and the fear of getting started has not been a problem for you in the past. IDK how you find your deals, but maybe you need to start focusing on finding deals off-market. Are you going to REIAs? Do you have relationships with good wholesalers? Do you know a great broker that might bring you larger deals? Have you done any direct mail campaigns? These are all questions or routes you might want to look into. You also might want to look in other areas to invest in as well as another property type. Perhaps buy and hold MFHs are in your future...?If I were you, I would look into getting a HELOC on the home you have the most equity in. Also keep putting some money away for reserves and pay off your student loans as quick as possible. Student loans, depending on the type, can be real back breakers because of the interest they accrue. If that is not the case then maybe your student loans are not the highest priority. I wouldn't worry much about a market correction at this time. We are well from the mindset of the subprime mortgage crisis. Even if there is a correction, IMO I doubt E-town will be the center of that wave. Good luck in all your future REI ventures!

Ian Olmsted · Answer

Great advice Jim! The term "buying a low paying job" comes to mind when discussing the difference between working on a business vs. in it.

Ian Olmsted · Answer

Hey Jim, I really appreciate the feedback. My long term plan is to build a buy and hold portfolio that is professionally managed so I can spend maximum time with my family. I enjoy flipping, but so far the two I've done, all work was done by me alone - future flips will need to have margin to pay others to do a majority of the work. I have a good relationship with a handful of realtors and a property management company, but nothing as far as wholesalers or brokers. I didn't get serious about learning about "driving for dollars", direct mail, etc until a few months ago. I will use those techniques in the future. My wife is extremely risk averse and has been the one to encourage me to prioritize student loans - I've gone from 60k to 25k in the last 3-4 years. At this point, I'm paying about $250 a month and the interest is 4%. You mentioned MFH buy and hold - that's exactly what I have been looking at today and as luck would have it, I was looking at the Lexington market. Any suggestions as far as neighborhoods or specific areas in Lexington to focus on? When the time comes, 2-300k 4-plex could be the way to go. I'll be attending the June REIA meeting here in Louisville.