Leverage Equity in our Bklyn Apt for first investment property

Emily Gorski · 2019-01-10T12:56:03-08:00

Hi everyone- Emily and Colin here!We closed on our apartment in South Slope, Brooklyn in March 2018. It was a condo conversion, so after a few years of lawyering up we negotiated 30% off the asking price of the unit. Since we have no immediate plans to vacate the space that we love and the mortgage was comparable to our rent (minus HOA fees) we figured it was a win-win. The property is in an up and coming, quickly gentrifying area. We purchased for $644k with 20% down and the property appraised at $870k. The mortgage is under Colin's name only. In June 2018, we had a unexpected opportunity to purchase an Airbnb rental property in the Catskills. It was a property we rented for the past 5 years, fell in love with it, the area and the owner. Our dream of having an upstate escape was finally coming true- but at it's price. We purchased for $297k with 20% down, the mortgage is in both of our names and is a 2nd home not an investment property w/ LLC etc. The cash flow per month varies by season, but we at least break even on costs annually and we get to enjoy it whenever we want! However this is not a passive endeavor whatsoever.Fast forward to now where we are looking to move forward with some passive income streams through real estate. Our interest is peaked in multi-family, but looking at everything. Needless to say from that purchases (and Colin maxing out his 401k for his S-corp each year) we are out of cash, but after attending a webinar on BP this week we heard all about ways to finance multi-family properties. (we are also signing up for BP Pro for sure!) Is there some way we can leverage this Bklyn apartment given its equity, through refinancing, HELOC or something? We don't know where to start.Thanks!

Jaysen Medhurst

Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes

7y

Hi, @Emily Gorski, congrats on the very smart apartment purchase. You can probably do a HELOC pretty easily. Typically you can get 80% LTV, which if I read your post right means you can access ~$180k. I think this is a better choice than refi since rates are just going up and HELOCs are so cheap--interest rates are higher, but low/no closing costs and you don't pay anything until you actually use the money.

$180k is a good chunk of cash to invest. I would suggest looking for a multi-family BRRRR opportunity w/in 3 hrs of the city--Central CT, upstate NY (Albany or something near your vacation home), Eastern PA, to start your search. Prices are pretty good there and you can get cash flowing properties.

Might be worth talking to a lawyer/CPA about getting your Catskills place under an LLC and set up as a proper investment property. Even if you don't make a profit, you'll be able to capture the depreciation and your trips up there to "check in on the property and perform maintenance" should be tax deductible (*I'm not an accountant*).

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Jason LeePro Member

Real Estate Agent · New York, NY · Member since 2015 · 401 posts · 235 votes

7y

I would look into getting a Heloc on your condo. You should be able to find a lender that will go up to 80ltv which would give you around 175k to work with. I would also explore converting the 401k to a solo 401k. If you can convert to solo 401k you could use those funds to purchase rental properties within the solok.

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Emily Gorski

OP

Brooklyn, NY · Member since 2019 · 5 posts · 1 vote

7y

Thanks for the fast responses Jaysen & Jason!

Jaysen: Colin here - My CPA is just conservative but he's against a HELOC and has pointed out a few things to me after closing on these two properties in 2018. I also had a convo with the people at Chase we did the two mortgages with, and both reminded me of some important things. 60% of my assets are in real estate at the moment, 26% in retirements accounts. If having assets balanced in different vehicles is part of the deal then my accountant argues I need to balance better and not so much weighted in real estate - diversify. He reminded me of the need to have a 6month cushion in savings as well of course, I am wondering if he will be the right accountant for me as I change my views on investing and passive income / financial independence, real estate, etc...yes I read Rich Dad Poor Dad and it opened my eyes. Our contacts at Chase gave us some stats after the second closing in June worth noting - that is my debt to income ratio was 49.677% at the time and generally 36% or lower is best. The $180K chunk going into a multi-family in one of the areas you mentioned or Hudson Valley, Buffalo or Union County NJ (Asbury Park / Rahway) seems like a logical next move.

Jason: To clarify I do have a solo 401k for my s-corp which I put $33K into for this year's year end bonus - my cpa explained this year maxing out to $54K is actually less tax advantageous as opposed to previous couple of years where I did make a max contribution. Of course he is also conservatively against touching my 401k : /

We've talked about HELOC and/or leveraging the solo 401k funds ($156K) with my CPA, family members and the people at Chase and everyone is against doing either because of the risks. So we were a bit taken a back by that as it seems to be our only option if we dont find lenders/investors. In terms of my retirement accounts the majority is in the 401k but I also have an IRA and ROTH IRA so when combined all three total $194K right now - my CPA argues dont touch that at all.

Hope that wasn't TMI and thank you so much for taking the time to chime in, Emily and I greatly appreciate your help!

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Jason LeePro Member

Real Estate Agent · New York, NY · Member since 2015 · 401 posts · 235 votes

7y

Your DTI seems too high to get another mortgage, and not sure how they underwrite Helocs but that might be an issue. Your CPA's advice to have 6 months cushion is sound but just because you get a Heloc doesn't mean you need to use it. It can just sit there and it could also be used for emergencies.

I should have been more specific and said a self directed solo 401k with checkbook control. With that you could purchase real estate within the account just like you would stocks, funds, etc.

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Alex Furini

Architect · Cary, NC · Member since 2018 · 96 posts · 63 votes

7y

I agree with @Jason Lee regarding the HELOC. A HELOC is similar to having an Ace in your pocket. As opposed to a refinance, you just have essentially a large credit card to use in case you need it. With refinance you are taking that loan from day 1. You don't have to use the HELOC, but its great to have options. A HELOC purchase just means that you need to figure in more variables for the financing costs. If you can make the numbers still work, then its a good deal. Good luck with your investments!

Alex Furini

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Emily Gorski

OP

Brooklyn, NY · Member since 2019 · 5 posts · 1 vote

7y

Thank you so much guys!

A few things come to mind after absorbing these responses.

1) Was it a bad move to put 2nd home in both of our names therefore further effecting Colin's DTI after the apartment purchase which is solely in his name in a 30yr fixed.

2) We are going to explore the HELOC options with Chase just get a better understanding of costs and amount available etc, but worried about the risk as we don't want to jeopardize the apt (our main home), with market so high and a dip in the economy likely in the next 2yrs etc.

3) @Jason Lee - We will ask accountant about this but believe his conservative view on this just like the HELOC is to fall back given Colin's DTI and percentage of assets weighted in real estate vs retirement solo-401k, IRA & Roth IRA.

We know we are both pretty green, just signed up for the BP Pro account and are excited to educate ourselves but know we have a lot of work to do.

Thank you again for the help and advice.

Best,

Emily

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Odie Ayaga

Specialist · Delran, NJ · Member since 2016 · 2k+ posts · 951 votes

7y

@Emily Gorski you clearly seem well-informed and intelligent so I think you've already got a pretty good head start (as well as the experience from the properties you already own). I'm not a big fan of taking diversity as meaning investing in real estate, stocks, bonds, gold, etc. At this point in time I want all my investments in real estate because I understand it better and can thus make better decisions. You can diversify within real estate itself, be it acting as a private lender, purchasing notes, investing in a fund, buying a storage facility, etc.

Also, it sounds like you've somewhat already decided in your mind that this CPA might not best align with your interests. Does he invest in real estate himself? There are a number of very knowledge and experienced CPAs on these forums who are also investors and may be a better fit for you. Also, when he says not to touch your retirement funds does he mean not to invest it at all or to just invest it in stocks or something to that effect?

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Jason LeePro Member

Real Estate Agent · New York, NY · Member since 2015 · 401 posts · 235 votes

7y

I look for tax guidance from an accountant, not asset allocation. Or is your accountant also your financial advisor? There are accountants that aren't familiar with self directed IRAs and SoloKs, and I've seen financial advisors steer clients away from real estate (my guess is because they can't manage it). I'd look for advice from those that invest themselves or have a bunch of REI clients.

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Leverage Equity in our Bklyn Apt for first investment property

Leverage Equity in our Bklyn Apt for first investment property

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