Hi everyone. I'm Andrew, I'm 28 and I've lurked around for a bit while trying to gain knowledge and finish building my own house. My wife and I have been talking about getting into real-estate investing for the last two years, but with so much on our plate, we felt that it just wasn't the right time. Now that all of the dust has settled, we are looking to buy our first property.
The goal for us is to buy & hold, fairly local (<1hr away) single family homes to help supplement the income from our full-time jobs and allow us to retire sooner. We thought about duplexes, but there's only 1 in town that's for sale and its in an area I'd rather stay away from. Because we built our house ourselves we've got about $75k of sweat equity in it. The idea is for us to use a HELOC to fund the down payment(s) and use a traditional mortgage for the remaining balance. We would funnel the extra cash-flow into the principal and repeat the process to buy additional properties. The idea is, more cash-flow from additional properties will allow each property to be paid off sooner than the previous one... compounding. Ideally we'd like to be able to produce $1,200/month from rent within 5 years.
I've found 3 properties near my area that I'm very interested in; all in similar price ranges. I've tried calculating the ROI on each, but it was a back of the hand calculation and didn't include cap-x. The numbers looked good... About 30%-35% ROI. However, because the homes are only in the $50k price range and will only rent between $700-$800/month, cap-x is going to take about 15% of total rent.
Here are the numbers in the one I'm most interested in, but all three are incredibly similar. I've scheduled to see all 3 this week and I'm in the process of obtaining the HELOC.
Year built: 1965
Tax Assessed Value: $28,640 (Everything is way lower than sell price in the area IDK why)
Estimated Taxes: $56/mo
Estimated Rent: $750
Any idea if this is a worthwhile purchase/strategy? Need any additional information?
Thanks for taking the time to read and respond.
Forgot a question for everyone. Would it be crazy/stupid to purchase 2 "first" properties considering the fact that we have no experience in this, apart from our own home construction? This way the cash flow would come faster, allowing is to pay down the principal on one in a very short time.
Would that make financing difficult? Oh BTW my credit is in the 720's and my wife is in the 730's.
@Andrew Barrios using HELOC's as a down payment is a great strategy on paper, but it provides way more risk than many people realize.
HELOC's are perfect for deals where rehab is involved and a sale or refinance is expected in <6 months. You don't want a credit line fully utilized when an unexpected event happens that puts you in a financial bind. Every investor, including you and me, think we have all of our risk mitigators in place. But life is tricky and can throw you just the right curveball when you can least afford to have it happen.
You're also looking into a strategy where you will be 100% leveraged on a retail property at what could be the peak of the market. Not exactly sound investing principles.
IMO, your goal should be to use the HELOC to bid low as a cash offer on one of these houses until the owner accepts your offer. Use HELOC for purchase and rehab, then refinance so your HELOC will be paid off and you'll have your single family rental.
Originally posted by @Spencer Cornelia :
"You don't want a credit line fully utilized when an unexpected event happens that puts you in a financial bind. Every investor, including you and me, think we have all of our risk mitigators in place. But life is tricky and can throw you just the right curveball when you can least afford to have it happen."
You're right that we like to think we have everything in place to mitigate financial hardships. I've got enough in savings for about 1 year's mortgage. However with $75k available equity to pull from and 20% down payments being <$15k, I'd be less than 50% utilized on the HELOC.
"You're also looking into a strategy where you will be 100% leveraged on a retail property at what could be the peak of the market. Not exactly sound investing principles."
I'd be about 65% leveraged on my home residence, which probably doesn't seem like a great idea, but it's far from 100% and I also make over double payments on a bi-weekly basis. Pulling that amount of equity would only about 2 years to my payoff date.
"IMO, your goal should be to use the HELOC to bid low as a cash offer on one of these houses until the owner accepts your offer."
I thought about that, due to the extra bargaining power a cash offer could have, but it would actually force me to pull more from my HELOC which will probably end up having a higher I interest rate than a mortgage. Is there something I didn't think about in this scenario?
Thanks for replying. I really appreciate the outside opinions. I know there are plenty of things I haven't thought of and having people here willing to share their experience is incredibly valuable.
"The idea is for us to use aHELOC to fund the down payment(s) and use a traditional mortgage for the remaining balance. We would funnel the extra cash-flow into the principal and repeat the process to buy additional properties."
Unless I'm misinterpreting what you're doing, this is being 100% financed on a retail property. If you're buying these properties way under market value and can refi within 12-24 months after some rehab/value-add, then it's a sound strategy. But this is exactly what happened to a lot of people in 2006. Use 100% leveraging because what can go wrong?
What happens when some big expense happens in life outside of real estate? Car wreck? Health issues with a family member? $10k damage from a lightning storm? Your main income source goes to $0 completely unexpectedly? Literally anything could wipe you out.
Using a HELOC for a down payment creates a house of cards.
Ah, my misunderstanding. Yes the investment would be 100% financed, however my wife and myself both have full-time jobs and not planning to have children. Our annual expenses are about $20k and our income from our jobs more than triples that. We are on track to retire in 10 years, but see the potential of how rental property could allow us to retire with more income while also allowing is to retire a year or two sooner.
What happened in 2008 was terrible, but it's in the grand scheme of things it's just another market fluctuation. If the market fails, my savings and full-time job can cover the costs until it recovers.
Anyone else have an opinion on using the HELOC method? Or how about any opinions on the property I'm looking at? Could it be a worthwhile purchase?