Home equity loan or Line of credit?
Hey everyone! I’m Dominique, a 23 year old future real estate investor from a small town Kentucky. You may be wondering “how is she a ‘future’ investor and she owns four properties?” Well, these properties were actually my mothers. I lost her in February 2020 at just 20 years old. I’m the only child so they went to me and after a lot (and I mean A LOT) of thought on where I wanted to go, what I wanted to do and what in the world is a 20 year old supposed to do with four properties that knows absolutely nothing about real estate. My first instinct was to sell them, at least that’s what everyone was telling me to do. But I didn’t listen (thankfully). I held them until I figured out what was the best move for my future.
Turns out the answer was in my face the whole time. Real estate investing!! So I dug in, I started doing research, I bought books, watched podcasts, watched TikTok’s, watched YouTube videos, gained some confidence and now I’m here on the BiggerPockets forum. I realized I need to put action behind my words in order to achieve my dreams. I want to escape the “Rat Race” as Robert Kiyosaki calls it and be financially free. The issue is, I have no one around me that shares my interests in real estate. Therefore, I have no one to answer my questions! So I’m here with open ears and an open mind, ready to receive knowledge from people that have been in the game! Thank you all for reading!
Also if you’re in my area please reach out, I’d love to hear your stories on how you got started!
Now onto my first (of many) questions.
So I'm planning to start renovations on a property I own within the next few months and need advice/recommendations. According to two different contractors, this property needs about 20k worth of renovations done to be able to be rented out to a tenant, my original plan was to take out a home equity loan, get the work done and have a tenant pay back the loan with their rent. With the money left over, save a little then invest what is left on a down payment to another unit using an FHA loan.
Or should I just open a line of credit, get the repairs done, have my tenant pay that down and continue using the line of credit for down payments & reno on a new property?
* I don’t live in this property and own it free and clear *
Quote from @Dominique Walker:
Welcome to the BiggerPockets forums!
In my experience, the weakest area for most Landlords is knowing how to manage well. I recommend "Every Landlord's Legal Guide" by NOLO. Written by attorney investors, it's full of practical advice pertaining to management of investment property, has sample forms that can be edited, and - most importantly - they tell you what your primary state laws are and where you can read them. It's updated every year and is the best $40 you'll spend as a Landlord. There is one book for 49 states and a separate book for California. I also recommend making a list of Landlord problems (marketing, screening, unpaid rent, tenant wants to break lease early, tenant wants to add/remove roommate, unauthorized pets, etc.), develop a plan for tackling each one in accordance with the law, and then develop a written process so you're prepared.
I also recommend you learn the power of leverage. I like the Unofficial Guide to Real Estate Investing to see how leverage is such a game changer. Here's a very basic explanation to get your juices flowing:
Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.
Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.
Buy four houses with $50,000 down on each ($200,000 total). Mortgage payment is $1,000 on each house, so you're earning $500 per house or $2,000 a month. After five years you'll have earned $120,000 in rent income and gained $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it. There are also tax benefits to consider. My properties earned $150,000+ last year and I didn't have to pay taxes on any of that income because the deductions make them look like losers on paper.
Watch this podcast and listen to how Ashley explains the power of leverage in her life.
