Starting rental property portfolio with 100% equity in one rental property

20 Replies

Hi all,

I am new to biggerpockets and eager to start building a portfolio of rental properties. I currently already own one rental property free and clear. So far with my one property, I have had a great property manager with no more than 2 weeks of vacancies in the last 4 years. Maintenence throughout the last 4 years has been reasonable. My plan is to start buying properties through auctions/foreclosures or anyway that allows me to buy below current market prices and have positive cash flow properties. I know these properties may not be easy to find but I want to be ready to pounce when I come across the right buy.

My questions is this: How do I leverage my current 100% equity in my only rental property? I plan on aggressively building my portfolio from the ground up purely from the equity in the property I currently already own. I inherited the home I am renting now and do not have much experience with mortgages and/or bank lines of credit. I know I am in a very advantageous starting position and want to maximize it... I have been looking at Home Equity Lines of Credit (HELOCs) mostly. What advice do experienced biggerpockets members have for me?

Your advice is much appreciated.

Cash-out refinance. Might as well go ahead and lock in a long term fixed rate if you plan on buying multiple properties.

Cash out refi.  AFter you do this for property #2, you refi that property to buy property #3, and so on...

@Brian G.  Welcome to Bigger Pockets! I would meet with 2-3 lenders in your area and ask what they can do for you. Maybe try one national bank and a couple local or regional banks. The local and regional banks tend to be more flexible in my limited experience.

You probably want to do a cash out refinance. The key is to make sure that the house you have now will still be cash-flowing if you pull a bunch of the equity out. Most banks will go up to 75% or 80% LTV. So if your house is worth $100,000, they might give you $75,000 or $80,000.

Mike

Thanks Justin, Joe, and Michael. 

Cash out refi makes sense. However, what if I am looking at auction properties and have to pay in cash very quickly? What can I do to ensure I have access to the cash very quickly if I have a winning bid?

I do indeed plan on buying multiple properties. I know I need to get my feet wet first and wisely use my equity, but at the same time I think I will be at least attempting to buy multiple properties fairly quickly as I move up along the learning curve. I am pretty ambitious.

Also what are you thoughts on shopping lenders vs. establishing a long term relationship with one lender? Do both over time?

@Brian G.  Here's what I would do:

1 - Focus first on finding a deal or more that are not going to be auctioned.  This is will be your Plan "B"...which will be explained below.

2 - REFI your property in time to have it available for the auction...in case you find/win a bid.

3 - If you don't find/win a property at auction you just go for a property from step #1.  This is in place because you need to have the funds available immediately at auction, but if you don't win at auction, you don't want to be paying on the money (refi mortgage) while the cash just site in your bank...all dressed up and nowhere to go.

@Brian G.  From what I understand (I'm not an expert) you have a couple of choices. You can cash out refinance on a traditional bank mortgage where you can get a 15 or 30 year fixed rate loan. This will be the best and lowest interest rate but there are certain qualifications you have to meet with income/reserves etc.  From what a banker told me after you have 4 loans you can no longer get a cash out refinance traditional mortgage. Some fannie mae/freddie mac rule. You are allowed up to 10 traditional loans but after 4 they can't be cash out refinance. So just something to keep in mind. 

Your second choice would be to refinance with a commercial or portfolio lender where they hold their own loans and usually less strict with the rules. The down side is the interest rates are slightly higher and usually a 5 year ballon payment but you are suppose to be able to get the loan renewed at that point. Monthly payments can be higher cause they usually don't amortize them over 30 years….it's usually 10-15 years. But probably easier paperwork and lighter requirements.

Third option could be a lender like Bob Green from the THG Capital Fund …he's a member of Bigger Pockets and is an asset based lender. I haven't used him before only talked to him on the phone.  His rates are competitive and he will work with a lower Fico Score and doesn't require tax returns. I think his requirement is that the property has to appraise for a certain amount and he does loans though out the US.  I don't want to misquote anything so best if you ask him directly about specific requirements.  

If I were you I wouldn't do a HELOC. I would try to do a 30 year low interest fixed rate refinance mortgage first and if you don't quality for that then try a Portfolio lender or someone like Bob Green….depending on your financial situation. All lenders are going to require that you have some equity in the deal so you're probably looking at 60-80% loan to value.

Originally posted by @Laura Williams :

@Brian G. From what I understand (I'm not an expert) you have a couple of choices. You can cash out refinance on a traditional bank mortgage where you can get a 15 or 30 year fixed rate loan. This will be the best and lowest interest rate but there are certain qualifications you have to meet with income/reserves etc.  From what a banker told me after you have 4 loans you can no longer get a cash out refinance traditional mortgage. Some fannie mae/freddie mac rule. You are allowed up to 10 traditional loans but after 4 they can't be cash out refinance. So just something to keep in mind. 

Your second choice would be to refinance with a commercial or portfolio lender where they hold their own loans and usually less strict with the rules. The down side is the interest rates are slightly higher and usually a 5 year ballon payment but you are suppose to be able to get the loan renewed at that point. Monthly payments can be higher cause they usually don't amortize them over 30 years….it's usually 10-15 years. But probably easier paperwork and lighter requirements.

Third option could be a lender like Bob Green from the THG Capital Fund …he's a member of Bigger Pockets and is an asset based lender. I haven't used him before only talked to him on the phone.  His rates are competitive and he will work with a lower Fico Score and doesn't require tax returns. I think his requirement is that the property has to appraise for a certain amount and he does loans though out the US.  I don't want to misquote anything so best if you ask him directly about specific requirements.  

If I were you I wouldn't do a HELOC. I would try to do a 30 year low interest fixed rate refinance mortgage first and if you don't quality for that then try a Portfolio lender or someone like Bob Green….depending on your financial situation. All lenders are going to require that you have some equity in the deal so you're probably looking at 60-80% loan to value.

 Laura, thanks for the reply, I see there are likely several possible ways to go about things. You have given me something more to think about. As of now, all of my income is coming from other investments, and although I have good credit I am sure the lack of a salaried job will scare many banks. Sounds to me like a private lender could be a great option for me now..... so much to learn, I will keep this thread updated over time with how I do

@Brian G.  You're very welcome :) If you do finance with a bank that isn't familiar with real estate investors,  I've always had to tell them to adjust my income for the loan application….as you know we get the phantom depreciation on real estate income which makes our income appear lower than it really is. But the bank should adjust that when considering your actual qualifying income and add back the depreciation. So if most of your income is from investments it might be higher than you think. I'm self employed too and it hasn't been too much of a problem. Mostly just a pain to explain it and a bunch of paperwork. The banks usually ask for 2-3 years of income and then average it to determine the yearly income. 

Good luck with everything and keep us posted :) 

Originally posted by @Brian G. :

Thanks Justin, Joe, and Michael. 

Cash out refi makes sense. However, what if I am looking at auction properties and have to pay in cash very quickly? What can I do to ensure I have access to the cash very quickly if I have a winning bid?

I do indeed plan on buying multiple properties. I know I need to get my feet wet first and wisely use my equity, but at the same time I think I will be at least attempting to buy multiple properties fairly quickly as I move up along the learning curve. I am pretty ambitious.

Also what are you thoughts on shopping lenders vs. establishing a long term relationship with one lender? Do both over time?

I have a CLOC (commercial line of credit), basically same thing as a HELOC just in a business name. I like them, if I need any amount of cash up to my max credit line its as easy as making a checking acct withdrawal to go an pay cash for a house without any issue. AND I only pay interest (mine is 5%) on money I borrow.

even a better way in my opinion that (im still trying to figure out, will only work if you get balance transfer checks from the card company) is to transfer the balance from your CLOC/HELOC so the cost of the house is on a credit card if you can get a large enough limit. theres a card out there now that gives you 15 months no interest AND no balance transfer fees which is normally what makes it not worth it. My goal is to buy and pay off one SFR per year, close the acct and find a similar deal with a different card company.

@Brian G.  Once you do your refi you'll have money in the bank to be able to go to the auctions. I'm not sure how the auctions work in your area.

In California, there are sometimes auctions with REOs (not so common anymore) and you only have to put up a deposit right away after you win a bid. When investors talk about auctions here, more than likely they're referring to trustee sales, which are foreclosures that take place at the courthouse steps or other public arenas. Here, you have to hand over signed cashier's checks (made out to yourself or to your companies name) for the full amount to the person conducting the sale if you are the winning bidder.

I don't know how much you know about trustee or sheriff's sales but you really have to know what you're doing. I'm sure there are a ton of threads here on BP about them. The sales are final so you have to do whatever due diligence you feel comfortable with ahead of time. The most important thing is being able to check with your title company to be reasonably sure you won't have any issues. (Make sure you know if you're bidding on a 1st or a 2nd!) Lots of stuff to consider. I'm just mentioning it in case you're not familiar with auctions. If you don't know what you're doing you can lose a lot of money.

Originally posted by @Isaac Essex :
Originally posted by @Brian G.:

Thanks Justin, Joe, and Michael. 

Cash out refi makes sense. However, what if I am looking at auction properties and have to pay in cash very quickly? What can I do to ensure I have access to the cash very quickly if I have a winning bid?

I do indeed plan on buying multiple properties. I know I need to get my feet wet first and wisely use my equity, but at the same time I think I will be at least attempting to buy multiple properties fairly quickly as I move up along the learning curve. I am pretty ambitious.

Also what are you thoughts on shopping lenders vs. establishing a long term relationship with one lender? Do both over time?

I have a CLOC (commercial line of credit), basically same thing as a HELOC just in a business name. I like them, if I need any amount of cash up to my max credit line its as easy as making a checking acct withdrawal to go an pay cash for a house without any issue. AND I only pay interest (mine is 5%) on money I borrow.

even a better way in my opinion that (im still trying to figure out, will only work if you get balance transfer checks from the card company) is to transfer the balance from your CLOC/HELOC so the cost of the house is on a credit card if you can get a large enough limit. theres a card out there now that gives you 15 months no interest AND no balance transfer fees which is normally what makes it not worth it. My goal is to buy and pay off one SFR per year, close the acct and find a similar deal with a different card company.

I was also contemplating setting up a business entity and transferring the title from my current property to the LLC (or other entity) and then going after a CLOC. Can anyone comment on this? I thought perhaps that was over thinking it and in due time maybe that is the way to go though given my ambitions. Do you know if there are more or less favorable interest rates for CLOCs vs. HELOCs?

All of my CCs are still fairly low limits, at least not with high enough limits for the price range I am considering buying in. So I just assumed something like that would not be possible. If you can pull it off that sounds pretty good though!

If you do a cash-out refinance, you have cash to do with as you will (including to buy property at an auction).

Originally posted by @Brian G. :
Originally posted by @Isaac Essex:
Originally posted by @Brian G.:

Thanks Justin, Joe, and Michael. 

Cash out refi makes sense. However, what if I am looking at auction properties and have to pay in cash very quickly? What can I do to ensure I have access to the cash very quickly if I have a winning bid?

I do indeed plan on buying multiple properties. I know I need to get my feet wet first and wisely use my equity, but at the same time I think I will be at least attempting to buy multiple properties fairly quickly as I move up along the learning curve. I am pretty ambitious.

Also what are you thoughts on shopping lenders vs. establishing a long term relationship with one lender? Do both over time?

I have a CLOC (commercial line of credit), basically same thing as a HELOC just in a business name. I like them, if I need any amount of cash up to my max credit line its as easy as making a checking acct withdrawal to go an pay cash for a house without any issue. AND I only pay interest (mine is 5%) on money I borrow.

even a better way in my opinion that (im still trying to figure out, will only work if you get balance transfer checks from the card company) is to transfer the balance from your CLOC/HELOC so the cost of the house is on a credit card if you can get a large enough limit. theres a card out there now that gives you 15 months no interest AND no balance transfer fees which is normally what makes it not worth it. My goal is to buy and pay off one SFR per year, close the acct and find a similar deal with a different card company.

I was also contemplating setting up a business entity and transferring the title from my current property to the LLC (or other entity) and then going after a CLOC. Can anyone comment on this? I thought perhaps that was over thinking it and in due time maybe that is the way to go though given my ambitions. Do you know if there are more or less favorable interest rates for CLOCs vs. HELOCs?

All of my CCs are still fairly low limits, at least not with high enough limits for the price range I am considering buying in. So I just assumed something like that would not be possible. If you can pull it off that sounds pretty good though!

thats exactly what I did, its easier then you think, dont need to transfer title of house. file for your LLC, most states you can do it online, less then 100 bucks in my state an a few days and your good to go if you make up the paperwork and file yourself. the bank will give the LLC a loan (CLOC) in the LLC's name, and the bank will file a lien on the property for the LOC max limit as collateral, your name is on the LLC paperwork you will make up. Most people when they start off will simply have to put up personal collateral so banks dont make it extra complicated by requiring you to transfer title. I originally started with a HELOC then decided to switch, I should of done the CLOC first if i would of known how easy it was because I ended up paying the loan origination fee twice.

Originally posted by @Andreas Mirza :

@Brian G. Once you do your refi you'll have money in the bank to be able to go to the auctions. I'm not sure how the auctions work in your area.

In California, there are sometimes auctions with REOs (not so common anymore) and you only have to put up a deposit right away after you win a bid. When investors talk about auctions here, more than likely they're referring to trustee sales, which are foreclosures that take place at the courthouse steps or other public arenas. Here, you have to hand over signed cashier's checks (made out to yourself or to your companies name) for the full amount to the person conducting the sale if you are the winning bidder.

I don't know how much you know about trustee or sheriff's sales but you really have to know what you're doing. I'm sure there are a ton of threads here on BP about them. The sales are final so you have to do whatever due diligence you feel comfortable with ahead of time. The most important thing is being able to check with your title company to be reasonably sure you won't have any issues. (Make sure you know if you're bidding on a 1st or a 2nd!) Lots of stuff to consider. I'm just mentioning it in case you're not familiar with auctions. If you don't know what you're doing you can lose a lot of money.

 Thanks for the warning. I do not have experience with auctions yet. I will be reading the threads and plan to start attending some auctions (trustees/sheriff's sales) to get a feel for things also.

Just to up date this..

I have decided for me I will start from the beginning with a property LLC. I like starting an LLC because it forces me to think like a business from the beginning. It automatically makes my mind set focus on more ambitious goals with a company. My property (portfolio if successful) and everything related to it will be separate from my personal affairs.

It is taking me longer than I like to get started. I have been living in Australia the last few years and my wife and I have had delays getting things  in place to get back stateside (she is Aussie, international visa issues suck, talk the ultimate buaeracracy long story short). We will now officially be back stateside in a couple weeks and then we can really get started.

I'm torn on areas and strategy... Im Considering doing air bnb style short terms rentals in Northern AZ or starting in a different area for standard SFR cash flow deals, maybe west TX. We would rather live in the areas where we see the potential for vacation rental success and already have a great property manager /agent to help. But I think we can pull off finding a good manager in the right area we don't live in after taking some in person trips.

My wife and I are not sure where we will move to yet but will be spending a few months with family rent free in NM while we figure it out. We are leaning towards Denver CO area or AZ. There will be other factors to consider after we are back, but ideally we will be able to make it work in these areas. Job potential and current investment / business interests will also dictate this.

Dumb question, but if I do cash out refi on my free and clear property do you guys think it is best to buy properties that cost less with the cash, or is it still possible to just use the cash for down payments and then take out new loans? I am self employed with no set salary. I am not sure what the bank will think especially if we have already pulled out all the equity of my one free and clear property (in the LLC) . I guess I should only focus on commercial lending if this is done through LLC?

Comments?

Thanks for the info so far it has been really good! This community is awesome! I have been taking down pod casts left and right and trying to get more vocal and connect with more of you out there.

Also I need help creating a cash flow calculator for cash flowing rentals.Does anyone have a good template?

also still really liking Joe's advice from above, that really makes sense if trying for an auction property. A llittle worried about needing more experience for an auction but super keen on landing a great deal

@Brian G. I'll put in my pitch for Colorado. There is incredible opportunity here from a job standpoint. Not so much from a RE investing standpoint but based on what you said it doesn't seem like you will be investing here. You seem focused on auctions, I'm not sure why that is. My experience with auctions says that there are no deals there. I have attended a couple of auctions and here is my experience. 

1) Williams and Williams - cryout auction of foreclosure properties that the banks could not move through the MLS. The couple of properties that I went for actually sold for more than they were listed in the MLS for just a few days before. On top of that, they had to pay the buyer's premium to cover the auction costs.

2) Auction.com - online auction of a foreclosure property. It was never listed that I am aware of. The house went for more than I was willing to pay. The reserve was higher than the opening offer. Search here at BP but others have stated that sometimes you are "bidding against the house" at these actions as they have won the property and not been the high bid. 

3) Public Trustee sale - auction at the court house for foreclosure properties. What I have experienced when I went to this was very suspect. I had buyers tell me they paid people not to bid against them. I've had other bidders tell me the "regular buyers" will bid up newbies even if they don't really want the property. There are people who go to everyone of these auctions and buy property at most of them. They have huge bank rolls and tons of experience. In short, they pretty much assure that there are no deals for others. On top of this, the low inventory and the foreclosure process pretty much assures that only a very small percentage of properties with equity actually make it to the auction. It works like this, the foreclosure notice is issued, and the list is distributed. The people that get the list identify those properties that have equity and descend on the owner in a variety of ways. Agents approach them about selling their property, buyers contact them by mail and potentially by phone, other buyers actually go knock on their door and offer to purchase the property directly. Basically there are no properties with equity that get to the sale unless the owner, through some quirk of circumstances, rebuts all offers. That doesn't happen too often. The only exception to this was when banks would actually offer bids lower than the amount owed. This rarely happens now and was only done back in the period of the foreclosure crisis because it allowed banks to move property quickly. Here those days have passed.

In short, do some research before basing your investment strategy on auctions. I realize that my experience may not apply to the location where you want to invest so it is possible that it might be golden where you are targeting. 

Bill I see what you are saying and it makes sense, thanks for the advice.

I am not stuck on only purchasing at auction. But I do want to get fully familiar with the basic process. There must be some markets where an auction makes sense and I just want to learn and be ready. I know I have a lot to learn and there are a number of things that make auctions risky for a newb. I will try to find a deal I'm happy with (like Joe suggested above), but also attend an auction and have things in place so that I could pull the trigger at auction if I theoretically wanted to. Then I will at least understand the auction process better and have a normal deal to go after without losing my shirvia auction.

CO is the number 1 choice for us! Really excited to check things out in the general Denver area soon.

@Brian G. Please keep us updated! I'm looking to start the same way as you in Tennessee and I'm eager to hear what you decide and how it goes for you.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Join the Largest Real Estate Investing Community

Basic membership is free, forever.