Cash strapped but want to purchase
Member since 2023 路 2 posts 路 1 vote
Cash strapped but want to purchase
Most Popular Reply
Real Estate Broker 路 Cody, WY 路 Member since 2010 路 28k+ posts 路 41k+ votes
3yAllow me to play the devil's advocate since nobody else is chiming in.
You want to borrow money to borrow money, thinking a shortcut will make you wealthy. It rarely works out. All those YouTube 24-year-olds with 300 houses in six months? They could be wiped out just as quickly. Ever hear of Dave Ramsey? He was a young millionaire in a hot market . . . until the market changed and he lost everything. I would argue he's smarter than the average person on YouTube or BiggerPockets podcasts, yet he lost everything. You can learn from that or repeat it.
Buying a property with negative cashflow? That's a game for the wealthy and experienced like David Greene. For someone that's "cash strapped" it's a recipe for disaster. The market can still turn south and we could easily see five years with no appreciation.
I know it's not popular around here, but how about building wealth using a tried-and-true formula: save money, invest in a strong location, hold on long term.
Playing with borrowed money or some of these other tricks are for people with experience and the financial freedom to absorb a loss. It's not the smart way to get started.
The DIY Landlord Book4.7248 Reviews
8 Replies
- 3yScott JohnsonBusiness MemberSpecialist 路 Greenville, NC 路 Member since 2019 路 673 posts 路 408 votes
I like to stick to straight mortgages and refinancing when I can, but HELOCs are a way to go if you'd like. The interest is just calculated per diem (per day) so it tends to be a bookkeeping nightmare.
I'd personally recommend that you build up your capital and let your loans get paid down, especially if you're not finding anything that'll cash flow.
Also, you may want to look at your current rental income and see if its worth buying a property that will provide an income loss (via depreciation) to offset that cashflow. Talk to your CPA first, but the viability of buying higher priced properties increases when you're looking to use them to offset taxable income.
Hope this helps!
- 3yAustin WyrickBusiness MemberReal Estate Agent 路 Cedar Rapids IA 路 Member since 2022 路 26 posts 路 16 votes
I recommend Speaking to a lender in your local area that specializes in hard money and other investor type programs. They typically have a great wealth of info due to them doing loans for other investors in the area. Hope this helps.
- Real Estate Agent 路 Columbus, OH 路 Member since 2020 路 44 posts 路 36 votes3y
Quote from @Scott Johnson:
I like to stick to straight mortgages and refinancing when I can, but HELOCs are a way to go if you'd like. The interest is just calculated per diem (per day) so it tends to be a bookkeeping nightmare.
I'd personally recommend that you build up your capital and let your loans get paid down, especially if you're not finding anything that'll cash flow.
Also, you may want to look at your current rental income and see if its worth buying a property that will provide an income loss (via depreciation) to offset that cashflow. Talk to your CPA first, but the viability of buying higher priced properties increases when you're looking to use them to offset taxable income.
Hope this helps!
This is golden advice! Right now everyone is struggling to find cash flow in deals. Taking a "loss" may not be such a bad idea to set your self up long term.
- Real Estate Broker 路 Cody, WY 路 Member since 2010 路 28k+ posts 路 41k+ votes3y
Allow me to play the devil's advocate since nobody else is chiming in.
You want to borrow money to borrow money, thinking a shortcut will make you wealthy. It rarely works out. All those YouTube 24-year-olds with 300 houses in six months? They could be wiped out just as quickly. Ever hear of Dave Ramsey? He was a young millionaire in a hot market . . . until the market changed and he lost everything. I would argue he's smarter than the average person on YouTube or BiggerPockets podcasts, yet he lost everything. You can learn from that or repeat it.
Buying a property with negative cashflow? That's a game for the wealthy and experienced like David Greene. For someone that's "cash strapped" it's a recipe for disaster. The market can still turn south and we could easily see five years with no appreciation.
I know it's not popular around here, but how about building wealth using a tried-and-true formula: save money, invest in a strong location, hold on long term.
Playing with borrowed money or some of these other tricks are for people with experience and the financial freedom to absorb a loss. It's not the smart way to get started.
The DIY Landlord Book4.7248 Reviews - Realtor 路 Hanover Twp, PA 路 Member since 2018 路 3k+ posts 路 3k+ votes3y
@Jonathan Cooke, why not just "trade up"?!? I echo what @Nathan Gesner said because cash-flow is King! Always will be. Nothing beats money today and especially tax advantaged money.
It sounds like you have a property you struggle to make cash-flow. You presumably aren't looking to refinance because your existing loan is at a much lower rate than is available now.
If this property isn't cash-flowing with a low interest loan and despite rents having gone up the last few years, maybe this isn't a property to hold onto long term.
You were looking for a HELOC and since most loans will not exceed a total of 75-80% LTV it sounds like you believe you have MORE equity than that in the property. So, why not SELL and do a 1031 exchange into a better cash-flowing property or maybe 2 depending on the equity you have and the market you buy in?!?
- Cincinnati, OH 路 Member since 2020 路 4k+ posts 路 3k+ votes3y
@Jonathan Cooke, generally speaking, I use my HELOCs for flips only and only when I can utilize my HELOC to fund the full thing (or a combo of HELOC and cash), but never for a down payment to combine with additional debt.
First, I need a clear path to pay off my HELOC. Even if the market shifted and my flip becomes a rental or Airbnb, I can still refi the property to pay off my HELOC, if needed.
Second, as you note, if you are already having a hard time cash flowing, you will be cash flow negative with additional debt, and/or your next investment will not be cash flowing.
Could you take the gamble and lever yourself to the moon and acquire a lot of assets? Yes. As Nathan notes, there are lots of people in YouTube and podcasts selling masterminds on how to do just that (I am a believer in the statement: those that can, do; those that can't; teach, especially for those that are clearly capitalistic in nature). In this scenario, you are banking on appreciation. Could it happen? Yes. Is it risky, especially with what feels like still inflated prices? Also, yes.
- Member since 2023 路 2 posts 路 1 vote3y
Thank you all for the super helpful advice. My views on the utility of a HELOC in our situation are confirmed.
Now, for the next part. One of our previous properties was purchased partially with a HELOC. We have ~6% rate on the mortgage and we converted the principal and adjustable interest HELOC that was at ~10% to a 15 year ~7% rate to help the cash flow. The property is much closer to cash flowing now. I was curious if there were lenders that would use the monthly income to calculate the value of the property for a loan to wrap it all up. We were able to more than double the rent and we fixed up the property. In doing so, we were able to get my taxable income down to ~0. If the house is underwritten for a loan using comps in the area it won't have much equity added. If the home is underwritten taking into account the improved income, it might have enough equity to put the majority of the mortgage and HELOC into one 30 year note. Are there lenders that do this? - 3yScott JohnsonBusiness MemberSpecialist 路 Greenville, NC 路 Member since 2019 路 673 posts 路 408 votes
Quote from @D鈥橝ndre Ortiz:
Quote from @Scott Johnson:
I like to stick to straight mortgages and refinancing when I can, but HELOCs are a way to go if you'd like. The interest is just calculated per diem (per day) so it tends to be a bookkeeping nightmare.
I'd personally recommend that you build up your capital and let your loans get paid down, especially if you're not finding anything that'll cash flow.
Also, you may want to look at your current rental income and see if its worth buying a property that will provide an income loss (via depreciation) to offset that cashflow. Talk to your CPA first, but the viability of buying higher priced properties increases when you're looking to use them to offset taxable income.
Hope this helps!
This is golden advice! Right now everyone is struggling to find cash flow in deals. Taking a "loss" may not be such a bad idea to set your self up long term.
Just want to make sure I'm clear, because @Nathan Gesner brought up a good point.
I never said "negative cashflow". The strategy I'm speaking of involves minimizing cashflow (while still making sure it's positive) to around $50/month. This is a total of $600 cashflow each year.
Let's say your depreciation on a condominium (I like these because there's zero land so the entire purchase price is depreciable. Yes.... even with the HOAs....) is $3,600 for the second year (the first year depends on what month you buy it in). All of a sudden you're showing a loss on paper of $3,000, which offsets the cashflow of your other properties and reduces your taxable income.
Buying a negative cashflow property is a terrible idea for most people! So don't do it 馃槣
When you minimize the cashflow, you're able to pay a higher price or reduce your loan term so your payments are higher (depending on the type of market you're in). If you reduce the loan term, your loan is paid down faster and you realize the tax-free cash out refi earlier.
Hope this clears up any misunderstanding! If you have questions post them here or send me a message.
Join the conversationCreate a free account to reply, vote on answers and follow this thread.