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Rehab property: convention loan or cash/heloc?

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Rehab property: convention loan or cash/heloc?  Reply with quote  

I need some guidance! I'm a couple years post-college (25y.o.), trying to figure out how to position myself financially as I go. I bought my first house about 7mo ago for $141k and pretty much gut rehabbed it, finished the basement, added a back deck, doing a lot of the work myself. With the nicer weather I just have landscaping left to do before I plan to put the house for sale hopefully May 1st. After repairs are done I expect to be into this house for about $190k total (of which, approx 161k is financed). I bought the cheapest house in the nicest area I could and comps in my area are selling for about $300k (give or take) and those houses have 50 year old bathrooms and kitchens unlike my house which is all up to date, new, and high end. I expect to sell for at least $300 if not more. My real estate agent thinks that's realistic as well.

My goal is to sell the house and cash out all that equity and do it again. I don't think I can take a heloc from this property because my debt to income ratio is currently maxed. My question is what's the best way to go about it?

Let's say conservatively, I have $80k-100k cash after taxes and closing costs. My plan is to buy another fixer upper and spend approx $30-40k to fix it up and then sell again. Is it better to buy another $150k property with a conventional loan (only putting $30-35k down and keeping some of the rest for repair costs) or maybe buying a $100k-150 property with cash (I could borrow the extra $50 balance from my brother to purchase house) and then taking out an equity line of credit from that to pay back my brother and finance the repairs? What makes the most sense?

Adding to my situation, once I sell my house I will need to rent a place to live somewhere for 6-12 months while I flip the next house. (Likely I will stay at this rental place for the next two flips if all goes well). So I will have to plan for that cost and the cost of my investment property mortgage/taxes. Rent in my area on the cheap side is like $1100/mo for a 1bed. I live with my girlfriend who is a full time med student. She uses her school loans to pay the utilities while I pay the mortgage/taxes of our current house. In a few months I'll have to pay rent and the mortgage/taxes/utilities of the new investment property. But in 12 months she'll graduate and have an income of $50k for 3 years before becoming a fully licensed M.D.

Aside from my house flipping project, my day job gives me $50k a year on the conservative side (I'm in sales), currently I have $30k student loans and no other debt besides the house I plan to sell ($161k debt ).

Given all of that, how would you make your next move? I have a good understanding of construction and plenty of contacts for good tradesmen. I'd like to keep investing in rehab properties but I'm open to other options. I've heard rumors that the housing market will take a hit this year but I am in the Chicago area which had one of the top three real estate markets this last year. What's the smartest way to position myself here?
Post Mon Mar 28, 2016 3:53 pm
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$30k student loan, what is your degree in? And what is the interest rate on the loan?

One thing to watch - the 2 year permanent residency requirement on capital gains tax. You don't want to get stuck paying shortterm capital gains tax when you sell a house.

And don't pay too much attention to your realtor's pricing estimates - they could be high (maybe way high). The lesson that most folks learn the hard way is that fixing up a house to sell it is a loss. Eg, they spend $15k on a kitchen, $10k on each bathroom, full paint in /out - ie, spend $40k and it adds only $120k to the house appraisal. Also, a finished basement often adds nothing to an appraisal UNLESS it is a walk-out basement. So - things to watch for.

I owned several rental houses over a 40 year period, updated some, sold some as is, etc. Every one of my houses more than doubled in value (one did an 8X). And the rental income was in the $250k range over a 30 yr period for each of the houses. But, just to give you something to think about, the "seed" money that I pulled out of the houses and invested in stocks did more over the 35 years than the houses.

Borrow from bro. In my 40 years of landlording, I followed the First Law of Landlording - "never rent to an acquaintance, a coworker, a friend, and never ever to a relative - you need an arm's length formal agreement with a STRANGER". That law also applies to lending/borrowing, finding a realtor, a lawyer, a car mechanic, yada. (But I admit, if my bro came to me for money I'd likely give it to him).

I've heard rumors that the housing market will take a hit this year but I am in the Chicago area which had one of the top three real estate markets

Plan as if the Chi market will be close to the WORST, plan that you will still turn a profit in a bad market - and then if the market is good you'll do even better.

But in general - keep the real estate loans as large as possible and as long as possible. You want to borrow 30 yr fixed rate capital. Eg, if you borrow $50k at only 4% fixed rate and invest it at 11%/yr, it will be $1,100,000 in 30 yrs.
Post Mon Mar 28, 2016 6:36 pm
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