All Forum Posts by: Kevin DeBoer

Quote from @Glen Wiley:

If you can service the increased debt on your primary without the investment income then this isn't significantly more risk. If you would not be able to service the increased debt on your primary without the rental income then I would recommend NOT moving forward with this approach.

You could sell your primary and downsize to a smaller/less expensive home to free up that equity.

The goal isn't rental income but vacant land improvement. I'm finishing a similar project (primary home) where I'm building for $110/sf in a market where homes sell for $400/sf. 

Selling of my primary home to access the equity would certainly be an option but I don't see a difference in selling it versus using it as collateral. If I sell, then I move into a small home. If I borrow against it and the investment somehow fails, then same result, right? I'd sell the primary home to pay back the lender and use the excess to start over. 

Quote from @Derek Dombeck:

I would caution anyone who uses their family homes equity as a vehicle to in invest in other deals. It seems like a great and cheaper option to many, but if you fail in your investment and lose your home, how would that change your life?

Ask me how I know???

That said, you can always find a private lender or individual who may be very happy to do that loan. Especially a self directed retirement account holder. Or, here's a completely different angle, sell your home subject to your 1st mortgage, for 1 million to a financial friend for example. You simultaneously have an Option to purchase your house back for 1.1 million and you have a lease that you will pay to your new landlord which will cover all their expenses. This is a capital gains tax free sale of your personal residence ( up to IRS limits ) and not a loan that will affect your DTI ratio. The financial friend gets a super safe investment and when you want your house back, you exercise your option and buy it back.

The numbers I used in this example were just round numbers for example purposes, please don't get hung up on them.

If it didn't work out, I'd be right back where I was two years ago. If it did, then I'd never have to go to my 9-5 again and I'd get to spend the rest of my life being the present dad I hope to be. 

Thanks for the thought on selling with a rent-back and buy-back clause. I may need to put that to use. 

Thanks all. I had no idea there was a federal regulation against it. It's a little frustrating that the government is taking the position of protecting us from making decisions with our own property, but I guess that's the role they take on sometimes. 

So it sounds like the options are: 

1. Individual lender 
2. Liquidize the primary residence to extract the equity
3. Move into a rental so that I can list my primary residence as a STR and pull equity out of it as it sounds like I'd be able to if it were an investment property.

I wish I wasn't the first to respond here as I'm working through something similar. From what I've been able to track down over the last 6 months is no institutionally backed investor is going to lend money on an under-construction home. It's too risky for them. 

Is your primary goal to avoid the logistics of the construction financing or do you have reasons that you're trying to supplement the construction loan? 

My only thought right now is leveraging the potential buyer to provide out of pocket finances as part of the initial contract. 

Eric,

What strategy do you have in mind in terms of flipping? I agree with Don, but if you're somehow adding value to land through improvements, re-zoning, developing, then there's definitely an opportunity in doing so. 

I've been trying to understand what opportunities there would be to find a lender that would be willing to take a second position on my primary residence in order to finance an investment opportunity. I've been working my way through different institutions and this seems to be a strategy that isn't generally accepted if the loan is in excess of my DTI.

If my home is valued at $2m and my primary mortgage is at $500k then I would think a lender would be interested in anything up to 70-80% LTV. I'm hoping to pull out $800k-$1m to immediately reinvest and allow for this to even function as a cross-collateralization situation, but even though the risk seems much lower than in other types of lending, I'm not seeing a clear path forward.

Am I missing some type of risk associated with this type of investment? Should I be looking at this differently?

Thank you

Investment Info:

Single-family residence other investment.

Purchase price: $232,500
Cash invested: $237,500
Sale price: $700,000

This property has not actually sold, but is the prototype for future investment properties. It was appraised at $700k after completion of the first permit. I've since pulled a second permit and will soon be appraising right around $2m with an additional $330k invested for total equity of approximately $1.2m.

How did you finance this deal?

I utilized a personal investment of $250k and a land loan. Once the first permit was closed out I was able to refi and pay off the land loan. It also allowed me to pull enough value out of the home to finance the rest of the build.

How did you add value to the deal?

I built a 6400sf house on a piece of vacant property for $75/sf in a market where new homes average $380/sf.

What was the outcome?

I got the first phase appraised at $700k. Upon completion of the home I expect the total value of the home to appraise over $2m.

Lessons learned? Challenges?

I've learned way more than I even know. The biggest takeaway is that this is the way I want to be involved in real estate - building custom homes as the owner, AE, GC and labor. Having the ability to design and engineer solutions on the spot while knowing every intricate detail of a home allows me to ensure a quality of construction that can't be as easily met any other way.

I also learned where I would benefit from engaging more experienced labor and look forward to doing so on the next one.

Investment Info:

Mobile home fix & flip investment.

Purchase price: $83,900
Cash invested: $3,500
Sale price: $135,000

This was my first home and was an investment from the very beginning. I rented out 2 of the 4 rooms which allowed me to bring in more than the cost of the mortgage. I was hesitant to invest very much money into a mobile home, but I renovated a very dark kitchen to brighten things up, replaced some flooring and worked on improving the curb appeal. I've always felt that someone should want to buy a house before they even step foot into it.

What made you interested in investing in this type of deal?

I'm always looking to alleviate risk. I realized I could rent out spare bedrooms to pay my mortgage and live in this home for a while for free, while guaranteeing that I would turn a profit when it was time to sell. It made a lot more sense to me to buy something at the bottom of the market than try to find something mid range where payments may have been tough to make while working to turn it over.

How did you finance this deal?

Traditional financing

How did you add value to the deal?

I'm sure with this property a lot of the value was added due to population growth and the market. I added a kitchen island that provided substantial working space in the kitchen. I also painted a lot of very dark walls and replaced light fixtures to brighten the interior up. I replaced the front deck and landscaped the front of the house with more appealing palmettos and hydrangeas to increase the curb appeal.

Lessons learned? Challenges?

I learned a lot from this house, but most of it from watching the value of the house since I sold it. I've learned how much gentrification can add value to a home without actually changing the home. I also learned that spending the money to do something permanent rather than finding short-term solutions is going to payback better in the long run.

I realized electrical and plumbing fittings/sizes in mobile homes are unique so had to work through the challenge of finding the right materials.

Investment Info:

Single-family residence fix & flip investment.

Purchase price: $295,000
Cash invested: $11,000
Sale price: $409,900

My wife and I didn't have many options purchasing our second home. The price of real estate was sky rocketing and we knew we needed to get in the market. We had been looking for homes and nothing felt quite right until we walked into this house covered in cat hair with purple and pink kitchen cabinets, bright green receptacle covers, etc. We ended up purchasing and utilized the home as our primary residence as we self-funded the improvements.

What made you interested in investing in this type of deal?

At the time it was our only way into the market and I knew adding value to the home was going to take a lot of sweat equity but cost very little.

How did you find this deal and how did you negotiate it?

Not much had to be negotiated. The house was in such bad shape that even though competition was pushing up sales prices of homes in the area this one wasn't impacted.

How did you finance this deal?

We had made some money on a previous real estate investment that we were able to use as a down payment on a conventional mortgage.

How did you add value to the deal?

Started with deep cleaning and painting which turned the house around pretty quickly. From there we renovated the bathroom with a new shower/tub, new vanity and new floor. I took out a wall separating the kitchen from the living space to open up the floor plan and put a concrete counter on some new custom cabinets. We created more storage down low in order to remove some upper cabinets. Lastly, we refinished the hardwood floors and painted the old brick fireplace white.

What was the outcome?

Night and day. A house that used to feel cold and dark had life and light.

Lessons learned? Challenges?

I kick myself realizing if we would've sold a couple months later we probably could've made 10-20% more on it. Going into Covid lockdowns we originally thought we sold at the best possible time, but prices just went up from there!

The house had some old cast iron piping and older electrical panels and distribution. Figuring out how to work with those items with modern day building materials and strategies took some brainstorming.