Newbie looking for financing info

7 Replies

First off, I would like to thank everyone for the wealth of information on this site. This site has kept me from jumping in head first and making some potentially huge rookie mistakes.

I'm looking to purchase my first rental property and trying to figure out the best financing option for my situation, so I'm looking for some input from others that have more experience than me.


Scenario:

We have $130k in cash, of which we are willing to invest up to around $60k (the rest of the money is for emergencies and any unforeseen expenses/carrying costs not just for investment purposes, but for us as well.

We also have slightly more than $200k in equity in our pri residence.

We are looking to purchase in Collin County TX (Plano, Allen, McKinney) for around $170k max. Those familiar to the area know that property taxes are around 2.5%, so taxes eat into cash flow quickly. I'm considering taking out a HELOC against our pri residence plus the $60k cash for a total of $160k to hopefully leverage a deal (thinking a cash offer could sweeten a deal to make up for the high property taxes)

Idea:

Potentially get a better deal for a cash purchase. Is this true? (It's very difficult to get close to the 1% rule down here, if buying at market prices.)

Pay back the pri residence HELOC shortly after purchasing the rental by taking a HELOC against the rental (looking to get the pri HELOC paid off ASAP.

Questions:

- Does such financing make sense?

- I've read others doing something similar by refinancing a cash purchase. Does that make more sense than a HELOC against the rental? How does one refi a paid off property that they own outright? Is this a purchase from self?

Anxiously looking forward to see responses. Thanks in advance!

Rick

Before you make a decision, find out from your banker if the terms on a HELOC would be the same on a non-owner occupied property. You may find that the lender doesn't offer HELOC on rental property or may have stopped HELOC lending all together as did many lenders post 2007.

Rick Reed for what it's worth, going for a long term hold in the $170k range in that area is going to limit you cash flow. I'm not suggesting you get super low end and become a slum lord, but I would suggest expanding your area to find a property that's in the 80-120k range. You can likely beat the 1% rule and find a quality tenant that is unlikely to be tons of hassle. While 170k is the price of homes right where you are at, start looking in the same place the guy who makes 40k as a teacher who wants to live near you would look to buy his first home. I used to live in Colleyville. We didn't buy there because of this. We bought in Hurst 8 miles away. This might increase your cash flow and Capitol investment issue.

Instead of a heloc, have you considered a cash out refi on your house? The rate would be low and have little restrictions against how you use the money.

Ted, thanks for the feedback. Something I hadn't considered.

Blake, I hear what you're saying. $170k is our drop dead absolute max, not our target price. And yes, I am looking to stay as far away from being a slumlord as possible. Since I'm new to this, I figured I would create as much of a reasonable buffer as possible, and start scaling down from that number.

Last year we refi'd into a nice 15 yr with a very nice rate, so another refi is out of the question. But I like the creativity. I also like your logic about targeting the average Joe who's looking for his nice house, but around here, such a house starts around $300k - $400k, so I sort of figured I was already at the lower end of the scale (without being at the bottom). In fact, most of the houses I see for under $200k are 30+ years old and very dated - meaning reno costs.

Perhaps in my newness to this sort of thing I'm over looking something? Anyone in the Collin County area see a flaw in my targeted range?

Although I'm not in that area I would suggest expanding your search criteria to a radius of up to 30 minutes from where you live. I agree with Blake, keep to the lower end of the market, but try to find a place you would live in if your situation changed.

Look in East Plano, or areas like that,,you can still find a good house at a price more in the $90-$120k range,,that's where you need to be.

I would LOVE to find a rental in the town I live in (Sunnyvale by Lake Ray Hubbard), but you can't find anything under $200kj, so I invest in Mesquite, Garland and Rowlett.

At even $130k is very hard to cash flow (from my experience)

East Plano would be ideal for me since I live just East of Plano in Murphy.

I have to ask though, what is it about the $90k-$120k range that makes you suggest it? Is the cash flow easier to achieve because of lower taxes? Is there some sort of "sliding" rule of diminishing returns above this price point? Can you elaborate on what makes this price more attractive (other than it costs less ;) )?

@Rick Reed In Texas most banks will not allow you to get a HELOC on a rental property since there are rules that only allow you to get a HELOC on your homestead.

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