What is to stop me from......

Question

Paying cash on an initial rental investment. Let's say $125,000 on 3 rental properties.

Can I then turnaround and get a home equity line of credit on those three paid off houses to then purchase new rentals? and then continure this process on and on Until I've amassed a decent portfolio?

Thanks

OB

Account Closed · Answer

These are the advantages of using cash for the purchase:

You can usually get a much better price.

You can buy properties that are not financable and fix them up so that they become financable. "Cash buyers only" on this type of proeprty, so there is very little competition and prices tend to be quite low. If you are the only one who can buy, the seller doesn't have much negotiating room.

On really attractive properties, you have a much better chance of getting your offer accepted over other offers, because there is no financing contingiency, which makes your offer the most solid one.

If you intend to re-sell after 1 year (tax advantages to waiting for a year), I would not cash out refinance. Just wait and sell it and take all your money out at the sale. Financing costs a bunch of money.

If you intend to hold, then you can finance and get your cash back out and go and find another property and do it again.

John M. · Answer

Maat55,

Using the typical rules of thumb, and some assumptions about the loan:

80% LTV, 30 year fixed on Non-owner occupied...say 7% would cost $320/mo.

Expenses, including insurance, taxes, maintenance, repairs, etc. should run 45-50% of fair market rent over the long term, which equals $326.5 (using 725 rent and low end of expenses since property has just been rehabbed)

So...
725 monthly rent, minus
320 mort. payment, minus
327 expenses, equals
78 positive monthly cash flow

Or, looked at another way:  Zero cash invested to yield $78/mo., plus equity paydown, plus the possibilty of appreciation...seems like a good return to me, especially if you can repeat many times.

JMac

Mark Betche · Answer

I hope this doesn't sound stupid, but what is your appr. cash flow on this type deal?

Tom C · Answer

Another problem I run into is that a bank will not loan less then 30K on a property and all of my purchases are less then 25K. So cash is the only way to purchase these homes.

Jeremy Hardy · Answer

There are still a few that will do 90 day seasoning min..

Jim Doine · Answer

Most lenders require 6 to 12 months seasoning before they will do a cash out refi on investment properties. Check with your lender if you need your cash back quickly.   Jim

Jeremy Hardy · Answer

that would be a cash out refi, you would take at least a .5 pt hit on your rate for doing that. I think that is a vicious cycle, why not just put down what you need to put down to qualify, then use the rest of your capital to make upgrades/or purchase other RE

Jason Hanson · Answer

I would NOT pay cash for these properties. The name of the game is making millions using other people's money not yours. I would purchase the properties putting as little money down as possible.  With the remainder of the money purchase more properties or put it in a money market account.

Jason R. Hanson

Michael Rossi · Answer

I doubt if you're going to get a home equity line of credit on 3 rental properties (since they are not your home).  In addition, I wouldn't get a line of credit on the properties, I would just refinance them to get your money back.  However, being able to keep doing this depends on having sufficient cash flow to stay in business.  If you over leverage the properties (through the line of credit, refi, or an original mortgage), the negative cash flow will put you out of business.

Good Luck,

Mike

Richard Warren · Answer

That is similar to my business model.  I pay cash and do the rehab.  I will then refi the property to do it again.  However, I never leverage beyond the cash flow and in most cases my LTV is 50% or less.

It is possible to get a HELOC on an investment property.  Washington Mutual, Wells Fargo and a few other banks have had programs for that in the past.  I don’t know the status of those programs with the current credit crunch.  The rules are different from a HELOC on a personal residence so you need to do a little homework here.

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