Home Equity to get started?

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Home Equity to get started?

Brian Prom
Brighton, MI · Member since 2014 · 19 posts · 3 votes

Hey everyone.

I'm a new investor, who is currently in the paralysis by analysis stage.

I'm eager to get started, just having a hard time waiting patiently while I painstakingly build my lump sum of cash for down payment.

My question is, should I use my primary home's equity to get started? A little background.

Just refi'd my primary home, assessment came back at 156K. I owe 81K. If I did get a HELOC I would more than likely only take up to 25K to use as a down payment. Here is the problem I am facing.

I found a good deal, needs some work, but I can do everything so no big deal. I believe I would be getting the home close to %20 below market value after rennovations.

After mortgage and expenses (yes I figured in PM, Vacancies, maintenance, etc) the home will cashflow $170.00 per month.

If I take equity from my PH my payments on 25K would be ~$500.00 per month. (5 yr payoff)

That leaves me with $330.00 per month of extra payments to pay the monthly payment on the HELOC. I don't want to get myself in trouble with monthly interest only, or a super long payoff time.

The math doesn't lie here, I know what the answer will be, I need a better deal, or more cashflow, but properties that cashflow more than $200 a month simply don't exist (or at least come about often) in my selected area.

Is using a HELOC for buy and hold strategy not a good idea? Or am I totally missing something?

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Bryan N.
Investor · Hampton Roads, VA · Member since 2014 · 1k+ posts · 418 votes
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@Brian Prom 

My advice is this. Don't overleverage. If you are going to lose sleep and change your families lifestyle when a unit is vacant, requires PITI, utilities, and $5K in repairs before you can rent it... You went too far. Keep the family life normal. Save up 20% for a down payment, find a property that cash flows after all relevant expenses (PITI, PM, maint, CAPEX, vacancy, HOA) and repeat. Once you have hit your target rental income, payoff all the mortgages and enjoy.

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  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
    11y

    Everyone has a different opinion. My husband and I are DINKS, so we tend to play it a hold lot more liberally than many people on here because we have high disposal income with smaller expense margins.

    That being said we don't refinance. We put as little down as possible and than we leave the money alone. We are famous for putting as  0-5% in our personals and than saving the "Downpyemnt" money for a rental. The key is you have to leave money in equity alone when it does build up. This way we have the equity building up slowly over time.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y

    @Brian Prom Then change your area (ZIP)...you can't change the other numbers.

    I'm not that far from you in Livonia/Plymouth/AA/Ypsi/Redford, etc...and I find my numbers are much better than the sones you've presented.

    Come to our REIC in AA.  Our next meeting is this coming Tuesday the 6th.  I'll show you.

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  • Brian Prom
    OP
    Brighton, MI · Member since 2014 · 19 posts · 3 votes
    11y

    I guess my long term plan is relevant in this discussion. I want the equity, I want to pay my homes off, I've been a little nervous of using too much leverage especially when it comes from my PH.

    My current home is my first home, perfect rental, will cashflow $300 per month, (one of those rare deals in my area. Been thinking of using FHA (since I just refid out of an FHA) on my next home, which I would like to eventually rent out. I like this conservative approach, but like I said, I'm new.......I want to make my first deal a winner.

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  • CK Hwang
    Capistrano Beach, CA · Member since 2013 · 283 posts · 169 votes
    11y

    At 80% below market, why not flip the house and the profits form it can be used as the downpayment for the rental you want to buy? That way, your residence is not at risk if the interests rates move up. 

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  • Brian Prom
    OP
    Brighton, MI · Member since 2014 · 19 posts · 3 votes
    11y

    @Joe Villeneuve

    Could you send me info on your REIC? I work in AA, so that works out great.

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  • Lee S.
    Northern, CA · Member since 2014 · 674 posts · 444 votes
    11y

    It's hard to say not knowing the rest of your financial situation.  I'm new as well, I've got  ~200k  equity in my house and I plan to open a Heloc shortly.  However, i'm not going to use that for anything other than for emergency situation so I don't have to hold as much cash and can put my cash to work.  I plan to use excess income and rental income to add more rentals.  

    If your debt to income ratio is pretty high, I think it's a high risk to do what your suggesting, risking your primary residence is not a good idea.

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  • Brian Prom
    OP
    Brighton, MI · Member since 2014 · 19 posts · 3 votes
    11y

    @Joe Villeneuve 

    Could you send me info on your REIC? I work in AA, so that works out great.

    0Reply
  • Bryan N.
    Investor · Hampton Roads, VA · Member since 2014 · 1k+ posts · 418 votes
    11y

    @Brian Prom 

    My advice is this. Don't overleverage. If you are going to lose sleep and change your families lifestyle when a unit is vacant, requires PITI, utilities, and $5K in repairs before you can rent it... You went too far. Keep the family life normal. Save up 20% for a down payment, find a property that cash flows after all relevant expenses (PITI, PM, maint, CAPEX, vacancy, HOA) and repeat. Once you have hit your target rental income, payoff all the mortgages and enjoy.

    1Reply
  • Brian Prom
    OP
    Brighton, MI · Member since 2014 · 19 posts · 3 votes
    11y

    @Bryan N. 

    It's like you read my playbook, exactly what I want to happen. I just want to get started, been sitting on the sidelines for too long. 

    I'll be ready in a year or less.

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  • Bryan N.
    Investor · Hampton Roads, VA · Member since 2014 · 1k+ posts · 418 votes
    11y

    @Brian Prom 

    I sat on the sidelines for 7 years endlessly reading. I finally decided to pull the trigger last year. My investments in a brokerage account (not IRA/401K) were doing well. But, they were never paying me like they are now with rentals. I cashed in my brokerage account and did it. My latest purchase turned into a flip which I will keep as a rental. My wife and I would be completely stressed out if we couldn't afford to pay for it. Although, we have spent thousands we still lIve our lives like nothing is going on. I don't know how people do it on credit cards or loans. I would lose sleep. If I can't pay for it I wont do it. That applies to cars as well.

    By the way the cool guys spell it brYan lol

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  • Brian Prom
    OP
    Brighton, MI · Member since 2014 · 19 posts · 3 votes
    11y
    Bryan Neal Ha! I've always heard the opposite. Thanks for your advice. Paying off mortgages has been my plan for the past 3 years, just growing that initial down payment has been difficult. But in a better position to get it done now.
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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    11y
    Originally posted by @Brian Prom:

    Bryan Neal

    Ha! I've always heard the opposite. Thanks for your advice. Paying off mortgages has been my plan for the past 3 years, just growing that initial down payment has been difficult. But in a better position to get it done now.

     ...which is why you refinance out of an all cash deal.

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