Hi BP friends,
I'm a landlord in upstate NY looking for some advice about generating revenues to purchase another buy and hold.
For the past few months, I've been reading a great deal about wholesaling (I even started blogging about my journey here on the BP site). I took an excellent day-long course on wholesaling here in upstate NY that was incredibly informative. But, in the end, I'm circumspect, and when I shared my hesitation with someone here on BP -- and shared the fact that I have about 250k in equity in my own home -- he encouraged me to put this money toward buying another rental property. And to forget about wholesaling altogether.
That's hard to do. I've spent so much time planning for wholesaling. But, okay.
Can someone here explain the process of using home equity to buy a rental property in a bit of detail for me? Or recommend some further reading on the subject? Forgive me if I have overlooked a vital BP post on the subject.
Here's what I understand thus far (forgive my novice naivete): I take out 100k on my home and purchase a buy and hold for the same price that cash flows out enough to pay off the equity line, pay all rental costs, and provide cash on the plus side to reinvest in the next property. Where I get a little confused comes next: How would a potential refinance go on the new rental property? And would I then take out another equity line on the new buy and hold to purchase the next? If I think about this too hard I imagine myself holding up a mirror to a mirror where my eyes are rolling into the back of my head like a pathogenic animal and I'm trapped inside infinite regress...
I love landlording and want to build a rental empire that includes retirement income alongside a way to revitalize my neighborhood. But we're levered up on our 1 main rental property and I admit I'm pretty scared to take out $$ on our house. Not that I wouldn't, but I need to spend some time reading and learning about how this scenario plays out in the long term.
Thank you in advance for taking the time to proffer up insights. All best.
I would also second the advice you were given on forgetting about wholesaling and using your equity instead.
Most people recommend going the wholesale route because they simply have no money to use to invest. But you have 250k to use (granted thats the equity and your heloc can only use up to 80 or 90% of the LTV of your homes).
Why spend all the time, energy and effort to find a deal only to turn around and sell it to another investor for 4 or 5k? If your goal is to make some extra money then sure, wholesaling makes sense.
If your goal is to start building a portfolio, then keep the deals to yourself and use your heloc to make it happen.
As far as an example of what you can do, here are two scenarios that might be used to grow a portfolio with a heloc. One thing I'd preface this with though is that I started with a 42k heloc and now have 41 houses (#42 under contract) in about 8 years' time. These aren't war zone houses either. 3/2's, 1500 sq ft, in nice areas with good schools that rent for between 1200 to 1600 depending on the home and area.
I'll let you know which one I went with but here are two scenarios you could consider for using a heloc to grow a portfolio.
OPTION 1) USE HELOC TO BUY HOUSES AS CASH - THEN DO CASH OUT REFI'S TO PULL MONEY BACK OUT.
a) Take your 150k heloc and pay cash for the house (say 80k) and pay for the rehab as well (say 20k). So you're all in at 100k. The house should be worth 135k to 145k or so (70 to 75% ARV is what you'd want to target for a deal).
b) After you rehab and rent the house, then you can do a cash out refi up to 70 or sometimes 75% of the newly appraised value. Fannie mae has a special cash out refi program for people that pay all cash for the deal. Technically, they'll only allow you to get your purchase money and rehab costs back out up to 70% of the appraisal value, so its not truly a cash out refi.
But in your case, if you bought the deal right, you could get all your money back and then pay it back to your heloc and look for another deal.
Or maybe you end up having to come out of pocket 5 or 6k to make the numbers work. That would still leave you with 94k of your 100k heloc.
c) At some point, you will hit a ceiling on the number of loans you can do this way. At that point, you'll need to find local banks and do commercial loans that will allow you to do cash out refi's. Not as easy as you think as most local banks want to see skin in the game when doing cash out refi's. So you might have to leave 10k or so into each deal. At some point, you'd run out of money.
But you'd also be building revenue/cash flow with each deal you add. And you'll reach a point where the rental income will be able to feed your deals. But still, 10k (10%) is a bit pricey.
OPTION 2) Use hard money lender to finance the deals and use your heloc to feed the points/fees.
a) Find a hard money lender that will lend 100% of the purchase plus rehab costs. That leaves you having to pay points (typically 4) and a higher interest rate. But once you rehab and rent it, you would then do a rate/term refi for the 100k with a conventional lender (up to 10 properties) and after 10 properties, you'd be going to local banks to do commercial loans.
The benefit to rate/term refi's are that most banks are much more likely to do rate/term refi's on investment properties than cash out refi's. Seasoning is easier as well.
Again though, you'd be pulling out money out of your heloc after each deal to pay the points. At some point, though, you should have enough income to where your rental income starts to pay for the points directly.
A lot depends on how many houses you intend on buying a year.....
For me, I started out with Option 2. I pulled out the entire wad of money from the heloc (42k or 43k) and set it in my bank account. I now had plenty of reserves to qualify for loans.
I then bought houses via hard money loans and only had to come out of pocket for closing costs/points. Tax credit helped offset most of that though. I was buying about 3 houses a year. And all my rental profits were going right back into the business to buy more houses.
Over the last 2 years, I've bought about 20 houses and seem to have settled into a pace of about 1 a month. Even with having to come out of pocket, my monthly rental profits have now far exceeded the amount i'm having to feed into my deals.
But there's nothing wrong with going slow and steady either. Pick a pace you're comfortable with and stick with it. You'll be surprised at how fast the time goes by and how much income your portfolio is able to start generating.
1 house a year making 200 to 300 a month would not be that big of a burden. In 10 years, thats 10 houses making 2k to 3k a month!
To me, I would definitely not want to spend the time, energy and effort for wholesaling to build enough capital to start building a portfolio. By the time you did, you may find that the cash flow numbers don't work anywhere near as well as they do today.
Use your equity in your home and keep every deal you find.
That would be my 2 cents (maybe 3 cents given how long this post was). :-)
Hi Mike H.
Your response was intense and I'm still recovering from it. Are you for real or are you some kind of real estate unicorn? You seem to take it all in stride -- does this process ever cause you anxiety?
Thank you so much for taking the time to respond so thoroughly and thoughtfully. Would you consider talking to me on the phone to clarify a few things you mentioned that I don't fully understand? Or would you prefer that I ask my questions here in the forum?
Again, I am continually amazed (and grateful) for the time that folks are willing to put in to explain things to novices.
Wow! I had to take my notepad out on that one. I had a similar question and Mike's answer had me dumbfounded until I took notes and researched some of the details he covered. After doing more reading and even walking into a couple of financial institutions, Mike's Wah wah wah (Charlie Brown's teacher) actually began to make since TO ME! Heck! I left and came back several times... Each time I left, meant there was more to learn...
Came back and was happy to see that you were as blown out of the water with eye brows raised as I was... But... I bet I now know what a "Heloc" is and can now partake in a conversation regarding one or it... I love BP, you search hard enough someone has or had the same question as you...
Still unsure of the options I would use, but the second seems best for me and slow will be my starting pace... Thank you Amy for asking and thank you Mike for that answer, ensuing further research...
Best to the both of you,
@Mike H. Great reply/post.
@Amy Zemser Mike is not a RE Unicorn. The hard part is finding deals all-in at 70-75% of ARV. These are more common in some markets than others. I'm happy with 85% all in (including financing costs) - but that means my cash does not go as far. The special program Mike mentioned from Fannie Mae is called the Delayed Financing Exception - it's part of their rules on Cash-Out Refinance. I did 3 of those last year. I also did several deals with hard or private money. If I had enough equity in my house, I would do the HELOC.
Get educated, ask questions here, and then go for it!
Thank you Doug! I'm stilling mulling and reading and stewing and worrying. My neighbor, a commercial real estate guy (very successful) says that you don't get anywhere investing in SFHs and that if I want to make money as a landlord I should start with nothing less than a four unit. I don't understand - what's the difference between owning 4 SFHs as rentals vs a fourplex? Isn't it all a matter of the deal/cash flow/particularities of each case, etc.?
I get that finding a house at 75% of ARV is hard, so why shouldn't I use what I learned from my wholesaling course and direct market to motivated sellers? Probate, absentees, Junkers - all houses with high equity...
I've been reading this stuff for about 2 months and frankly I'm completely overwhelmed by the options. Everybody has a different piece of advice and I don't know who to listen to.
250k in my own home and want to build a retirement portfolio at 46 years old - what would you do?
Thanks again, all! :-)
Thanks Amy for raising the question, myself a newbie from Houston, Tx. And thanks to Mike & Doug for chiming in with wisdom...Thanks to BP. I would lean on HELOC Amy, that is the way I would approach rather than hard money lending since we are green at this...my 0.5 cents :-)
My situation is slightly different..I have about 45 K left on my "only" 3/2/2 rental property. I am hoping to pay it off by taking out a 401k loan and then pay the same 5.25% mortg. interest into my 401K loan thru paycheck deductions. The property will be worth 140-160 K worth which may qualify for a HELOC to buy another property. Thoughts?
My current home is values at around 240-260 k or so, with 160K in primary mortgage. So maybe another 50K available for HELOC here. But ? is how many HELOC's can one take out. And do we go with large banks or smaller banks?
I want to get to a 10+ unit ownership in the next 5 years. Suggestions, advise welcome.
"I get that finding a house at 75% of ARV is hard, so why shouldn't I use what I learned from my wholesaling course and direct market to motivated sellers? Probate, absentees, Junkers - all houses with high equity..."
I think you've hit on a potentially good compromise here. You could take money out via the HELOC, set aside say 5-10k to do direct marketing (budget perhaps 1k per month) and use the leads you generate to find the best deals for you own personal investments. There's nothing forcing you to wholesale the leads you generate. Really it's not too hard to imagine that you'd find a deal that was 10k better than whatever you'd find otherwise, thus making back you direct marking investment. Obviously you could then wholesale your additional leads and or buy multiple properties depending on your strategy.
As you say the trick is to find the right properties that give you the ARV needed to cash out properly. However, this quality can actually be independent of a properties ability to cash flow (obviously getting both a good ARV ratio for the refi and good cashflow is the goal) so be sure to confirm that the market rents will cover your long term costs (i.e. a loan for 70% ARV, plus taxes, insurance and everything else). It doesn't do you any good to get all your money back out if the property can't be rented profitably.
To attempt to answer part of your initial post, once you've gotten the HELOC on your current home, you can do whatever you want with the money. If you happen to buy a home free and clear with that cash, that's totally fine. You could then take the property you own free and clear and get a mortgage that will hopefully (if you've done your homework correctly) pay off the HELOC and/or fund your next property.
Basically it takes a wad of cash to keep the buy, renovate, rent, refinance, repeat train going. That cash has to come from somewhere. If you don't have it in a liquid form, you'll have to have some kind of loan on your books at all times in order to keep the money in your hands.
The most simplistic strategy would be to have the original HELOC get you property #1 which is refinanced to get property #2, which is refinanced to get property #3, etc. The monthly payments on the HELOC would be your cost for maintaining access to the bankroll of funds.
The most simplistic strategy would be to have the original HELOC get you property #1 which is refinanced to get property #2, which is refinanced to get property #3, etc. The monthly payments on the HELOC would be your cost for maintaining access to the bankroll of funds.
Thanks for this response. I just want to make sure I understand you. The HELOC, then, never actually gets paid back fully? You're always just feeding it monthly with whatever you get in rental income assuming you are cash flow positive on the properties and paying in full to HELOC each month? I get confused about paying back the HELOC vs using refinancing/cash out to acquire the next house. I'm new, scared, and risk-averse, so the idea of the HELOC gives me an ulcer.
Also -- which strategy is better -- 4 houses or a 4plex? Or does it completely depend on the particularity of each deal? My neighbor says I'll never get anywhere buying SFHs as investments. He says the smallest I should get is a 4 unit.
Lastly, if your only access to cash was what was directly in your own home -- is this what you would do? What is the risk involved in using the HELOC on the home you live in? I've been told not to do it by some investors. Why?
Again, I'm so grateful for the advice of others. I can't thank you enough for taking the time to respond to this thread.
Also keep in mind that (depending on you local prices) you can take that HELOC and use it for the down payments on multiple houses instead of paying all cash for 1.
If houses are selling for $100,000 in your area, then you could acquire 3 houses for 30% down each (with the other $10,000 going to closing costs, reserves etc). You would have 3 mortgages but you would also have 3 sets of income.
With regards to to single family vs. multi; single family units either have rental income in a given month or they don't. With multifamily houses you can have an empty unit and still have income from the other units so it is not an all nothing cash flow.
Using leverage (mortgages) and multifamily combined helps to ensure that money is always flowing in to cover costs.
I prefer multifamily properties and use leverage and used my HELOC for all the acquisitions. Others prefer to own free and clear and to buy single family units which tend to have less drama. Hopefully all of these answers will help you chose the right path for you.
The HELOC has to get paid every month regardless of your cash flow because it's a loan that's secured by your primary residence (thus the ulcer). It does therefore get paid back eventually, according to whatever terms you agreed to. Ideally you can scrape together enough money to pay the HELOC without any help from your rental properties if you have to. If you're like me some examples with numbers will help to illustrate the point.
Lets say you do a HELOC or cash out refi on your house and get $70,000 dollars cash to invest. You then go buy a property for $60,000 and put $10,000 into it for an ARV of $100,000 (sounds simple but that's actually the hardest part - finding the right deal). You can then refinance the investment property at 70% LTV (this transaction is completely separate from your original HELOC/refi on your personal residence) and get your $70,000 back out. This money is then free to be invested in another rental. Make sure you have identified a lender who will be able to do this cash out refi before you commit to this strategy
Throughout this process you'd have to be making monthly payments on the HELOC/refi loan. You can think of this cost as an increase to the mortgage payment you make each month for your personal residence or you can consider it a "business" expense and try to fund it with a portion of your rental property cash flow. At that point is just a personal accounting preference.
After one, two or fifty rental properties, you should still have your $70,000 thanks to the latest rental property refinance. Once you're done acquiring properties, you can simply take the cash and kill off the balance of your HELOC/refi loan, possibly with a good bit of cash left over. Once you do that all the loans are either paid off or covered by cash flowing rentals (at least that's the theory).
For me the SFR (single family residence) vs multi debate is trumped by the quality of the deal(s) that you find. If you have a great opportunity of a triplex, do it. If the next property is a SFR, that's just as good. If the math makes sense and you're confident that you can get it rented quickly to QUALITY tenants, then go for it. As a counter to your neighbors point, it's generally easier to sell SFRs at retail prices once it comes time to cash out. There's a larger pool of buyers for SFRs. Fred is right in that multi-family spreads your vacancy risk out over more tenants but it only takes one great tenant to get an SFR locked down for years. With multi-family you'll have to face turnover/vacancy more frequently.
If my only major assest to leverage for real estate investing was a large pool of equity in my personal home, I'd look into the following:
- Can I sell my current residence, buy something less expensive and pocket the tax free gain for use with investing? In this strategy, there is no HELOC or refi loan to worry about
- Can I sell my current residence and buy a multifamily to "house hack" by moving into one of the units? This can allow you to but an otherwise unaffordable multi-family unit thanks to owner financing if it's 4 units or less
- Can I get a HELOC and/or cash out refi and use the money to pay down my other personal debts (which are potentially at a higher interest rate) and thus free up more of my regular monthly income (assuming you have a w2 job) to build a cash bankroll over time
The last strategy of paying down other debts first is what I'm personally doing and something that I consider to be good financial discipline. By reducing my effective cost of living, I can maximize my ability to absorb setbacks in my real estate investing. I'm ok driving a car that's 10 years old and having a TV that's not Ultra HD when it means that every month I can put thousands of unused dollars in the bank. In the end it doesn't matter where it comes from, cash is still king.
Amy maybe I am thinking small or too cautious (I know of a lot of people who lost their homes like this here in AZ and NV) , but I would do a single family house at a time.
Take out HELOC on the main residence (keep in mind that interest will not be tax deductible on personal or on schedule E come tax time).
Purchase a property, take out mortgage (not a HELOC) on that one, pay off the HELOC with the funds. (then you can use the mortgage interest deduction on the rental sch. E keep very good documentation about the money movements though, and maybe even use same bank/banker), and your main fear of loosing your "home" will be gone, try to payoff the line of credit on the main residence as soon as possible.
You can then either use same strategy, using and paying off HELOC right away (then your main house will never be in jeopardy of being taken away) to buy rental houses, or in addition to it, using all the rental 's surplus income from all properties, on paying down one rental, and then you can use that rental as your "financing" other properties house, instead of your main house.
Thank you again.
My cousin in Boston, a real estate agent and investor, is wondering why I wouldn't just take out a mortgage on our house (30 yr) for the cash rather than the line of equity. Can anyone speak to the difference or does it just depend on the structure of the financing?
A cash out mortgage will typically have lower fixed rates but higher fees to close and possibly take longer to close than an equity line or loan. The line is more like a credit card and interest rate will follow the prime rate.
The method you are referring to is the brrrr strategy buy rehab rent refinance repeat. Brandon Turner has written and done podcast/webinar about it. Look it up for more info.
Hi Byron --
I do need to get the low money down book that Brandon's been promoting here. But still need to finish reading a few others on my list...
Wow, great advice on this thread- I've learned a thing or two. @Mike H. , thank you for taking the time to write all of that out, very helpful. @Amy Zemser , I'm not a big fan of wholesaling (or flipping) for the same reason- it's not an an investment strategy, it's a job. A hard, stressful job- no equity, no dividens far fewer tax benefits. Finding great deals really is the hard part, and if you love being a landlord, why not reap the benefits of THAT work forever?
I've used my HELOC to buy a couple properties, but the strategy that is detailed above is a potential game changer. Just have to find those deals. Best of luck!
You have a fabulous name, by the way. You sound like a character in a book (I'm a writer, so I look out for these things).
What strategy are you referring to being a game changer? The BRRR et al strategy? Why did you use the HELOC vs regular mortgage on your home to buy properties and how did you find your deals?
Hi Amy :)
My opinion, HELOC vs 30 years fixed on your primary residence, you win with HLEOC.
HELOC is a quick turn around of money, you borrow, and pay off within the same year and keep borrowing and paying off without the approvals.
Mortgage, you borrow and pretty much done (it is more expensive to refi or after pay off to obtain another one)
HELOC means you draw the amount of money you need out of the house, buy a property, find that money in the property and pay off the HELOC, you still have the ability to draw money for the next 4-5 years (depending on your financing).
The trick is to have the loan/financing to be secured by the rental property not your own. Cash in your house gives you a step toward that.
Like borrowing from friends, you want to borrow/repay for short time often, without owing them for the rest of the life constantly.
Ryan has excellent points!
Good luck :)
loved the advice
What a great thread. I've been researching the brrrr strategy and it seems this thread hit the nail on the head. So glad I set up brrrr as one of my keywords!! As far as the Heloc I believe it can only be taken out on your own personal residence not on a rental. For those cash out/refi is your option to pull equity out . Wish I could add more but gotta head to work. Will be closely monitoring this thread. Thanks everyone
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Hey @Amy Zemser here's the post about BRRRR strategy Byron talked about:
Yes, I've read this post many times already. Thank you!
HELOCs vary in terms but will typically have a "draw" period where you can use it like a credit card and only be on the hook for interest payments. This allows you to tap into the equity of your home with a lot more flexibility. If you need it, it's there. If you don't, it doesn't cost you anything to just sit on it (assuming you haven't pulled any money off of it). If you have the opportunity to pay it down for some reason (i.e. inheritance, flip, etc.) you can easily access it again whenever you want. That is why it is ideal for strategies that allow you to cash out, either through flipping or refinancing. You will be able to move faster than people who have to secure financing because you do not have to ask to borrow money on your HELOC. Essentially, you will be doing cash deals. If you don't cycle it though, you will eventually tap out the HELOC and be looking for capital again.
During the interest only period, the payments on a HELOC are usually very reasonable. I have several HELOCs at prime (just above 3%) from the glory days of lending before the crash and one at 5.75% at 90% LTV from after the crash. Always remember, though, that after the "draw" period, there will be a repayment period where any outstanding balance will be amortized for some period of time. For example, you may have a 10yr draw period that will switch to a 20yr repayment period. That means your payment on the balance will jump considerably when it switches. That is kind of a worse case scenario. I have one HELOC like that. Others that I have are 20yr draws with a 20 or 30 year payback and one that they just keep renewing the draw period as long as I keep making the payments. Shop around for the best rate and terms that work for you and your strategy.
If you refinance your house you will have a pile of money that you will need to employ for it to be profitable. Even if you never do a deal you will be paying for that cash and your mortgage payment will be much higher too. Also, if you decide to pay down your mortgage with a windfall of some sort as mentioned above, not only will your payment not go down like it would with a HELOC, but you will not be able to get that money back without refinancing again or selling your house, unlike the HELOC. If it is not obvious, I would definitely recommend the HELOC over refinancing.
Always remember too that these loans are on your personal residence. So if you blow the money and can't make the payments you will lose your house. I don't say that to discourage you or scare you but to ensure you understand the potential consequences and adopt a strategy accordingly. I would certainly be more conservative with this money than I would other sources of financing. Also, if you are responsible with your money, I would highly encourage you to get the HELOC regardless. Just having access to that kind of money is very powerful, assuming you only use your powers for good.
As far as wholesaling is concerned I would not dissuade you from giving it a go if you think you have what it takes. Personally, I know that is not for me. Those are the guys that find the best deals, though, and I completely agree with the person who urged you to do it and cherry pick the best deals for yourself. Would that I could do that. It does take an investment of time and money though, and it is not nearly as easy as many gurus make it out to be. Still, many people, and many people on BP, have been very successful doing it.
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