Sell or borrow against?

Bird Dogs, Wholesaling
1

Hi All,

I’m 25 and just flipped my first place this Spring. It was a town home I bought 2 years ago for $109k and sold for $150k. I bought another place this Spring with the intentions of flipping but, as I’ve been living in it and redoing things, I’ve fallen in love with it. As a place to live, I can’t ask for any better given it’s size, location, and features. It’s been a significant increase in quality of living for me. The problem is, I still want to keep flipping houses, just not this one :slight_smile: So, I’m going to layout my financial situation and I’m hoping you can suggest ways for me to stay in the game without selling this house:

I bought my current place for $171k with $35k down. I immediately took out a HELOC against it for $17k for work I’m going to do to it, so I effectively owe $153k on it. It needs about $21k put into it at which point, it’s ARV is going to be $230k-$250k. Let’s cal it $230k to be conservative.

So, my original thoughts were to just sell it after 1-2 years (depending on market) to avoid short term and capital tax and walk away with hopefully about $68k in my pocket (figuring in 3.5% commission to sell because I’ll have my REA license by then and just have to pay broker & buying agents commission) .

Given where the market seems to be headed, I think I’ll need to budget the following for the next place I want to flip:

  1. Purchase price: $180k
  2. 20% down (because I’m told most banks won’t do investment properties with less, true?): $36k
  3. Closing Costs: $5k (can always try to get this paid for by seller but it’s getting tougher around here)
  4. Rehab money $20k
    5)Assuming ARV of $240k (hunting for this will be tough but doable, especially since time will be on my side if I don’t have to sell/move from my current place), agent commission of about $8k.
  5. One year of mortgage payments: $12k (I make enough at my day to pay two mortgages but I’d really have to tighten my belt and would prefer not to)

That means I need to find roughly $81k to pull off my next flip. Between my 401k, Roth IRA, and savings account, I could scrape together $75k but I am SUPER reluctant to withdraw money from those, especially the 401k given the 10% penalty. I’m not sure if a bank will let me borrow against the equity in my house or retirement accounts?

Withdrawing from my retirement savings is pretty much a deal breaker so we can rule that out. Even though I could, I really don’t want to have to pony up $1k/month to cover the mortgage payments on the flip as that’s money I’d like to be saving for rainy day/car repairs/ etc

So, that leaves me with perceived equity in my house and a lot of motivation. Anyone have any creative ideas for where I can find that $81k for another flip? Am I missing anything when doing this math?

Thanks much!

2

Borrowing against your own home is usually the last resort for established investors. However, it’s a common way for some investors to keep going.

Since you’re just starting out, this might be the most expedient way for you to keep going.

Otherwise, it’s time to study other ways of coming up with down payments.

Start with one of Robert Allen’s books:

http://www.amazon.com/Nothing-Down-2000s-Dynamic-Strategies/dp/1451624255

Be sure to read through at least this thread, too, for ideas.

http://www.reiclub.com/forums/index.php/topic,56201.msg272204.html#msg272204

3

I tend to agree here. I hate the thought of using the personal residence to finance investment properties. It should be the other way around. It is hard to get started, but slow and safe is much better than quick with a foreclosure.

There are some loan options for fixer-upper homes that allow the borrower to wrap the cost of the renovations into the loan. Here are a few:

FHA Loans: FHA which offers many different types of loans geared toward first home buyers and owner-occupants. They have programs that only require 3.5% down. Be aware, however, that loans with less than a 20% down payment will permanently carry mortgage insurance and their rate is higher than other lenders. Their 203(k) loan program even allows borrowers to wrap renovation costs into their mortgage when they buy a fixer-upper.

HomePath Loans: This is a labeling for loans on all Fannie Mae-owned foreclosure properties. They offer low down payment requirements, no required appraisals and they do not charge mortgage insurance. These loans are available both to owner occupied purchases and investors. The HomePath Renovation Mortgage is available to borrowers who plan on renovating the house.

4

You might look at Hard Money lenders.
If you do, you need to rethink your present strategy and pull in outside contractors to get your rehab completed quickly.
You should be able to buy, fix and sell your property all with in 90 days.

You can also look at partnering with someone who has money available to go 50/50 with you on a project.

5

Well I often think I have lost my mind, only to wake up and realize it is still fairly sound.

I have a HELOC against my residence…HOWEVER…I am often “Outside the Box” in this business.

I borrow through the HELOC at 4.0 percent…and invest it at 1.5 percent per month or 18 percent per year, a spread of only 14 percent.

I buy tax liens…LOTS of them.

I normally pay off the HELOC in about 6-8 months.

So I pay 8/12th of 4.0 percent and make 12 percent on it, in the process.

I have NO bum checks, NO stopped up toilets, NO dead beat tenants, NO maintenance and repairs, NO upkeep, and if the liens mature to me I can do pretty much whatever I please with the property.

Have been doing this for a long, long time and so far have found NOTHING wrong with having the HELOC in place.

I am am a firrm believer in OPM, Other People’s Money, in this case the banks $$$.

CAVEAT EMPTOR…I think I know what I am doing…Javipa is correct…done wrong this can be DISASTEROUS.

Investigate BEFORE you invest.

6

Guys, thanks a ton for the great input. I haven’t had a chance to dive into it all but there is some seriously good food for thought here and I’ll be eating up the reading material over the next week.

The more I think about it, the more I don’t want to leverage the equity in my house any more than I already have. I’m currently paying the HELOC down as quickly as I comfortably can.

I like the idea of the HomePath loans as well as finding a partner to go 50/50, though I’m not sure who yet as there aren’t many folks I know, and trust, that could fork out $40k. Any suggestions for finding a partner?

THANKS!

7

I personally shy away from partners. There is a lot that can go wrong with a real estate deal and having a partner only adds another fly to the ointment. If they are solely there for financial support, then they will want an accounting of every last dime. I guess I would rather work alone and enjoy 100% of the profits then having some anxious investor breathing down my neck all the time.