1st single family rental is paid off. How to buy another?

7 Replies

1st and only rental is paid off. It's worth about $110,000.. rent is $850/mth. After all expenses I make $500/mth for the past 8 years. It's in my name, no LLC. I want to keep this single family rental and buy another with it as leaverage. 1. How do I do this with Little to no money out of my pocket? 2. Should I keep them in my name or create an LLC? 3. I'm looking at buying a $200,000. home with a rent rate between $1200-$1400/mth. Would this be a good next investment? Thanks

1) One option is to take out a HELOC on this rental. It may be a bit more difficult to find a lender that will issue a HELOC on a non-owner occupied dwelling, but I'm sure you can find one. With the HELOC, you can then draw the funds you need to purchase when you are ready to buy. Another option would be to do a cash-out refinance on the property. The main downside of this is that you will start accruing interest from day one of the loan, versus a HELOC that will only accrue interest when you make your draw(s).

2) I would suggest speaking with your accountant and/or attorney. 

3) I wouldn't be very excited about a $200K house that is going to yield $1,200 - $1,400 per month. In my area, a $100K - $120K house can get those same rents. I haven't ran the numbers, but I can't imagine your ROI or cashflow would be strong at $1,200 rent for a $200K property. A rule of thumb that I hear a lot is the 1% rule where you want your monthly rental amount to be at least 1% of the purchase price. For example, with a $200K house you would want at least $2,000 in rent per month.

Jeff, you should not have a property in your name without a mortage on it, just from a legal protection point of view - with 100% equity you are a much more attractive target for a claim than with 25% equity. However, let me say that I have not been sued in ten years and I don't know anyone who has been, so don't get too concerned about this part, okay!

I would stay clear from a HELOC - terms are shorter and you want fixed rates and long amortization. Get a 30 year fixed rate loan (as long as you still can - I wish I still could, I have to go commercial at this point, 5 and 7 year ARMs), usually at 75% of appraised value.

I support your idea of a 150-200k home (at least from my local Milwaukee point of view), it will perform better years 5-30 than a cheaper property. A lot of folks will argue with me on this, but play arround with the BP calculators and pay attention to capex (full rehab every 30 years), appreciation and mortgage pay down. Cash flow is not negotiable, you need it like the air to breath and it pays your bills, but it does not create any significant wealth. Long term wealth comes from items #2 and #3: appreciation and mortage pay down. 

To @Marcus Auerbach 's point on the HELOC - I should of been more clear. I agree that a HELOC shouldn't be used as long term financing. For long term, you would be better off with 30 year fixed. However, by using a HELOC to purchase, you may be able to leverage a "cash" offer to negotiate better purchase terms with the seller. Then, after the purchase, you can refinance into long term financing.

Your $110K  property is a bad investment based on the rental rate it is returning.

It is never a good idea to park cash in a income property, possibly a plan only if you have more than you will ever need and are at the end of your investment life.

As a inexperienced investor you may view your property as having a positive cash flow of $500/month but that is likely impossible. Long term on a SFH expenses will be in the 50% range. This realistically places you at best $425 cash flow but only if you consider your equity/cash has zero value.

For most investors cash actually has a value, generally considered in the 10% range. Your $110K is worth over $900/month. This makes your property a liability, income wise, if you are only positive 400-500/month. Your own money is buying a very low return leaving the property itself producing nothing.

It is not a good investment and the best thing you could do is sell and reinvest your money in better properties that will actually produce true positive cash flow not the cash flow you are presently buying with this one.  

Thanks for the comments!!

So, I'm thinking to:

1. Take a cash loan out of the rental home for up to 70%. Say $70,000.. HELOC or 30yr mortgage?

2.  Put 20% ($14k) +/- down on a new home?

3.  Take the other 80% ($56k) +/- for renovation?

4.  Rent it for $850/mth ($500/mth cash flow). 

5.  Take this cash flow $500. & the original cash flow of $500. and pay the loan twice as fast.  

6.  Do it again to create a snowball effect?

What do you think?

@Marcus Auerbach I have found the fees with loan much higher that heloc. Some say If your making money and the bank makes money every one wins right? I don't like the bank making money off of my hard work. I think it depends on where your at with you strategy. At first leverage high, then use a heloc when you have good cash flow to cover, and a 30year pay model no longer works for you. Eventually creat an LLC and pay a lawyer to protect your assets.