Looking to get into RE investing. Critique my plan.

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Looking to get into RE investing. Critique my plan.

Mark W.
North Wilkesboro, NC · Member since 2012 · 44 posts · 3 votes

Hi everyone, I have been lurking for a while I think it's time to start posting. I hope to eventually have enough knowledge to contribute, but for a while I will be leeching.

My Plan:
I am looking to pick up my first SFH in a few months in cash. I am looking at foreclosures, my plan will be to rehab and rent it out. I am looking to pick my first one up in the $20k-$25k range. My first question is, do you guys have any luck getting a HELOC on a property such as this? Say the property is worth $65k. My goal would be to use the HELOC to cover some rehab costs and purchase a second rental by the end of the year. If this isn't an option, what would be other options I should consider?

My long term goal is to start to build a portfolio of rentals that would eventually eclipse my current income. I am very new to real estate, I do have an out of state mentor, but no local guidance as of yet. I have been watching the local markets for about 8 months now trying to get a feel for different areas.

I am pretty handy and I plan on doing much of the work myself. I spent 4 years working construction in my earlier years and I have rehabbed the current house that we own. Any tips or reading that you guys can suggest would be great.

Thanks in advance,

Mark

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y

Getting a HELOC on a fresh rental is going to be tough. You may be able to do a cash out refi based on the new appraisal if you wait for a year. Assume a very conservative appraisal and about a 70-75% LTV. If you save the details and take pictures during the rehab, you may be able to justify the higher value. If you buy it for $20-25K and do nothing, it not worth $65K. Its worth... $20-25K.

Hopfully you're not paying much (or anything) for that out of state mentor. The rental property business isn't particularly complicated. You can learn a lot just reading here. And the properties and tenants will continue to educate you no matter what you've already learned.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Getting a HELOC on a fresh rental is going to be tough. You may be able to do a cash out refi based on the new appraisal if you wait for a year. Assume a very conservative appraisal and about a 70-75% LTV. If you save the details and take pictures during the rehab, you may be able to justify the higher value. If you buy it for $20-25K and do nothing, it not worth $65K. Its worth... $20-25K.

    Hopfully you're not paying much (or anything) for that out of state mentor. The rental property business isn't particularly complicated. You can learn a lot just reading here. And the properties and tenants will continue to educate you no matter what you've already learned.

    1Reply
  • Mark W.
    OP
    North Wilkesboro, NC · Member since 2012 · 44 posts · 3 votes
    14y

    Hi Jon, Thanks for the reply. I thought a HELOC may be difficult. My issue with the bank is I started my own company last year and they won't even look at me for a mortgage until I have been self employed for 2 years. So this leaves me looking for other options. I plan to start rehabbing the "new" property with my own cash to hopefully get a renter in it as soon as I can. I am trying to figure out what my options will be to progress to the next unit. I am not sure what is realistic, but I like to at least have a plan for the next couple of years that will give me some focus.

    I will agree, there is a ton of great info on here. I have been spending hours reading. Great site with an amazing amount of knowledge that gets shared.

    As for the mentor, He is a good friend of mine that deals mostly in commercial real estate. No charge :). He is good at helping with the big picture and business side but not so much with dealings in my particular area and with the SFH.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Self employed can be a killer for getting loans. Hopefully you actually show income on your tax return.

    That's the best kind of mentor. I was concerned you were plunking down big bucks for a monthly webinar and a few e-mails.

    Banks will consider the rental income. Many will want to see the rentals on two years tax returns, though. Their formula is 75% of the rent, less PITI. If that's positive, it adds to your income. If its negative, it adds to your debt. Or, they use your tax return if you have actual data.

    You might try to find owner financed deals - straight owner carried mortgage on a free and clear property, wrap mortgage, subject to, lease/option. Most of those (not the first) make me uncomfortable, but they might be options given you situation.

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  • Mark W.
    OP
    North Wilkesboro, NC · Member since 2012 · 44 posts · 3 votes
    14y

    Yeah the self employed thing is going to be an issue from the several banks I have already talked to. I do have one year already with good income from my business so (fingers crossed) come next spring I may be able to get a loan. Not holding my breath though. Like you suggested, I may need to start reading up on Owner financed deals. Thanks for the suggestions.

    Mark

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  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    14y

    I'd keep trying with the local banks. If your business did generate good profits the first year, you should be able to find someone that can do a portfolio loan (i.e. they keep the loan in house). They have a little more flexibility when it comes to income guidelines as long as you're not trying to do a conventional loan.

    If you could show 18 months of solid income from your business and had some decent reserves, I can't imagine a local bank not giving you a portfolio loan for 40k to 45k (you'll probably need to stay around 65% to 70% ltv or better).

    You'll be looking at a bit higher interest rate and a 3 or 5 yr balloon instead of a 30 yr note. But at least it will allow you to get your money out sooner. You can always refi it again into a conventional once you get your two years of self employed income on your returns.

    For now, the key is to buy as many as you can while the prices are ridiculously low. Even at the higher rate and shorter amort periods, they should still cash flow pretty good. At least thats my advice.

    I truly believe that the people that are picking up houses at
    these prices are really going to make a generational change
    in their finances that most of us wouldn't have the opportunity
    to do any other way.

    To me, real estate investing is one of the few remaining "blue-collar" ways to get ahead financially.

    Good luck and stick with it. Its a little daunting at first
    when you've only got one or two houses. And its hard
    to see the light at the end of the tunnel sometimes. But
    if you stay on track, they start to build up fast.

    I'm a little over 4 years in and have 16 houses (plus my own)
    and am closing on #17 next month. If someone with
    my limited construction/housing background can do this,
    everybody can.

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  • Ken Latchers
    Hatfield, PA · Member since 2012 · 1k+ posts · 629 votes
    14y

    The biggest problem with most people's plans is they move too quickly, are too eager, do not have enough money, do not do intensive enough research, do not have enough understanding, and place too much stock in gurus (such as out of state mentors).

    Your construction background can be a big help. But DON'T foirget about the part about being up to code, especially in places like CA, NY, NJ, or big cities, etc.

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  • Mark W.
    OP
    North Wilkesboro, NC · Member since 2012 · 44 posts · 3 votes
    14y

    Mike Hasemann I will have to check into that. I was talking to a friend of mine yesterday who works with a local bank in town. He is going to put me in touch with his contact there. I will agree Mike, there is good money to be made in REI. I have always enjoyed RE and construction so rehabbing seems like a perfect fit. But it wasn't until recently I started to have enough savings to start looking at picking up my first property though. Congrats on #17, that is where I hope to be in the next 5 years. Keep up the good work!

    Ken Latchers Very true about being up to code. That is something I will have to explore as I nail down an area. Needing to have a licensed contractor to do everything would have a big impact on the budget.

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