I own 2 homes and would like advice on investment options

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I own 2 homes and would like advice on investment options

Mir Ali
Member since 2019 · 4 posts · 0 votes

Hi everyone! I recently joined and have been reading and doing some research on this site.

FYI, I work in construction so I have home repair experience. 

We own 2 houses in New Jersey under my wife's name as my credit wasn't great until a few years ago.

1) 1st house: single family, purchased in 2009 @ 200k, 50k in renovation costs paid by me. House is in great up to date condition. We refinanced the house a while back for 15 years @ 2.875% fixed. Our payment is $2100/mo which includes tax ($9k/year). It is currently rented out for $2150/mo and we owe about $70k balance on the mortgage. We always paid more on the principal every month.

2) 2nd house: large single family, purchased in 2016 for @465k, 100k down payment. I spent also $50k in home renovation. 30yr fixed @ 4.5%. Payment is about $3200/mo which includes tax ($14k/year).

I would like to tap into the equity in the first house and use it to invest in a rental property (HELOC). However, a lot of banks don't offer HELOC on investment properties. What other options that someone recommend? Our credit score is A+.


Thanks

Ali

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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
7y

@Mir Ali, house 1 is a money loser. Sell and re-deploy the capital using a 1031 exchange to defer capital gains taxes. If house 2 is a personal residence, you shouldn't have much trouble getting a HELOC. If it's an investment property, both Pen Fed CU and Figure offer HELOCs.

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  • Jim Pellerin
    Real Estate Consultant · USA · Member since 2014 · 1k+ posts · 751 votes
    7y

    @Mir Ali I have never had a problem getting a HELOC on my investment properties. Talk to a good mortgage broker in your area. I'm sure they could help you out.

    1Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Mir Ali, house 1 is a money loser. Sell and re-deploy the capital using a 1031 exchange to defer capital gains taxes. If house 2 is a personal residence, you shouldn't have much trouble getting a HELOC. If it's an investment property, both Pen Fed CU and Figure offer HELOCs.

    2Reply
  • Axel MeierhoeferPro Member
    Rental Property Investor · Escondido, CA · Member since 2017 · 684 posts · 550 votes
    7y

    @Mir Ali I agree with Jaysen on the profitability. In general I suggest considering the All in One loan. I can get you the contact so you can apply. it is specifically developed for the investment property HELOC situation. just PM me

    1Reply
  • Mir Ali
    OP
    Member since 2019 · 4 posts · 0 votes
    7y

    Why is the 1st in a losing situation? What if I increased the rent? I know I can get more for it. Also houses in the area are selling for 300k.

    0Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    Exactly, @Mir Ali, you could get $300k. Capture that appreciation and make it work a lot harder for you. You're only getting $50/month more in rent than your mortgage (I assume that payment includes taxes and insurance, right?). Once you figure in vacancy, repairs, CapEx, and management, you're probably $500-$700 in the red each month. If you're vacant for even 1 month, you'll wipe out nearly 4 years of cash flow. What happens when the water heater needs replacement or the roof?

    Even if we ignore those expenses for the moment, which no responsible investor would, and let's say you raise the rent to $2500. Now you're "cash flowing" $4800/year ($400/month). That's a 2% return on your $230k of equity, which is horrific.

    With a SFR at this price point you need to get very close to the 1% rule to cash flow (especially in a high-tax state like NJ). So in your case, you need to be ~$3k/month. The problem is that anyone who can afford $3k/month in rent can easily afford a $300k house. So you're left with an incredibly small tenant pool.

    BTW: make sure you "@" people in the forums, so they know you've responded.

    1Reply
  • Axel MeierhoeferPro Member
    Rental Property Investor · Escondido, CA · Member since 2017 · 684 posts · 550 votes
    7y

    @Mir Ali Jaysen is right and in addition, you should take a closer look at the historic interest rate situation. Unless you just absolutely can't live with debt, you should use leverage as your friend. If you imagine you had $250K of equity to invest you can, right now get more than $1 Million in assets producing around $10K in gross rent and, as Jaysen was hinting at, could make you between $2500 and $3000/month in net income. In reality, it could be even more because I discovered when I reached a level of more than 10 usints that the slavish saving for each unit individually for the vacancy, maintenance and Capex is no longer an easy calculation because risk management becomes more prominent. With 10+ units you really can't assume that all of them will be empty, in need of repair and capex investments simultaneously. Its a little complex but the bottom line is that after about 6 months of reserve building you would actually have even more monthly next cash flow consisting of a "for sure amount" and a "flexible amount". In any case, it would be much more than what you do right now and we are talking really conservative turnkey properties, not even aggressive flipping or c/d class properties. Happy to discuss in more detail. I literally did that myslef this year from 2 underperforming properties to 12 units that work well.

    1Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y

    For a long term loan such as down payment on home, I prefer a refinance over the HELOC because of the 30 year fixed rate terms rather than the variable rate. We are near historical low on interest rates, my preference is to lock those low rates when using the funds for either a long term or unknown duration use. Nothing makes me sleep better than knowing that my loan rate is not going to adjust upwards messing with my return projections.

    If I were purchasing a RE with a value add and am expecting to pull most of my investment back out via a refinance in the near term then a HELOC is ideal. Similar for a flip where the hold is expected to be on the order of months and not years a HELOC would be ideal. But I would choose to use a refi for a buy and hold that has no value add (i.e. where the money is expected to be tied up in the property for a longer term).

    As @Axel Meierhoefer indicated, leverage can provide for much better returns. it does come with some risk. I personally feel comfortable if my total LTV is at 75% or lower but in practice I am typically far lower than the 75% due to the cost/effort to extract equity. My current total LTV is around 50% which is very low risk but such low LTV implies that I am not optimizing my investment opportunities. You need to define your own comfort zone but you need to realize that with low leverage you are missing out on investment opportunities.

    As for the house #1 and selling it … Cash flow at a moment in time does not define cash flow over a holding period. In appreciating markets the cash flow will typically be at its lowest at the time of finance/refinance. The actual cash flow is the cash flow achieved over the holding period. A higher appreciation area will always have better actual cash flow given enough time than the lower appreciating area (simple math). In addition, there are other factors besides cash flow that figure in the overall return of which the big one for me is appreciation (rent and mortgage appreciation). Another one, one that is large in your case, is equity paydown. The 15 year term coupled with such a low interest rate likely means that your equity paydown is higher than many RE's cash flow. You did not indicate if you were paying PMI and insurance in your payment, but assuming you are not you have an equity pay down in excess of $1300/month. That more than covers maintenance/cap ex, vacancy, PM, etc. Using the 50% rule gives $1075 after expenses other than mortgage (no escrow). Subtract the mortgage gives 1075 - 1350 (assuming no insurance withholding, less subtracted if there is insurance withholding)= -$275. Add equity paydown for a positive $1025/month. Note if the insurance is in the mortgage payment, the insurance is double counted. if you are in a historically appreciating market this return will go up long term due to the appreciation and the equity aspect also increases each month so this is a conservative estimate of the return on multiple aspects.

    I have purchased RE that projected zero cash flow at purchase and at year two had far over 100% return on my investment (value add with refi).  Cash flow is one parameter in the profit equation.  My RE investments have achieved great cash flow (most initially had poor cash flow) but the cash flow pales compared to the appreciation (and appreciation is why they have achieved great cash flow).

    Look at all the things that define a good investment RE when deciding to bale on an RE investment.  If I only looked at initial cash flow, I would have missed some great RE investments.

    Good luck

    1Reply
  • Mir Ali
    OP
    Member since 2019 · 4 posts · 0 votes
    7y

    @Dan H. @Axel Meierhoefer @Jaysen Medhurst

    Yes the rental is practically breaking even because I didn't think I would be able to find a tenant that could pay such a high rent. However, things have changes in my area over the past years and the rental market is very strong due to close proximity to NYC. I also have a real good tenant who does roofing/siding and also pays cash.

    So the recommendation is to sell the rental in which I owe currently $65k and is worth probably $300k. Take the $235k using the 1031 exchange reinvest into income producing properties.

    What about the house I live in? I bought it for $465k three years with 100k down so I owe 355K currently. 30yr fixed @ 4.125%. Should apply some of the money earned from the rental to the mortgage? 

    0Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Mir Ali, I wouldn't apply toward your primary mortgage. If you do, that portion won't be eligible for tax deferment and you'll pay capital gains on it. Plus, you'll get much better returns by reinvesting than you will by paying down a ~4% loan.

    0Reply
  • Axel MeierhoeferPro Member
    Rental Property Investor · Escondido, CA · Member since 2017 · 684 posts · 550 votes
    6y

    @Mir Ali I would not do that. Tax reasons are one thing but you also have to ask yourself why you would want to dilute your leverage. The money you could apply to your current residence is at best making you the 4% you get thru not having to pay the interest on your mortgage and with the loss of tax benefits it is probably even worse.

    The one thing you might want to consider is mortgage insurance. If you have that on your residence (your numbers are right around 20% down, so you may or may not), then refinancing it would be a good idea to 1. get rid of the mortgage insurance and 2. (as crazy as it might feel) lower your interest rate even lower. I have seen offers as low as 3.65% for 30 years in the media. That will lower your cost on your residence and retain full leverage on the exchange. 

    If I use my numbers from my exchange and apply the worst-case scenario on net cash flow, you will get enough money from your exchange to pay the mortgage on your residence - basically, live for free in it. As a bonus, after the exchange you will be holding investment assets worth about $1 Million. (+ your residence at about $500K)

    It sounds like a good package to me. Happy to explain details if you want.

    0Reply
  • Mir Ali
    OP
    Member since 2019 · 4 posts · 0 votes
    6y

    @Axel Meierhoefer The house I currently live in, I do not have PMI because I put down 20% at purchase. I guess I should just leave it alone but pay down my mortgage with an additional $1k a month in principal to lower my overall interest.

    Selling the investment property seems like the best thing to do and invest into an income producing property. Even though the rent is paying the mortgage, I am still in the red for any upcoming maintenance costs. If I leave it alone, the house will be paid off in about 4 years and will make me around $1k in income when you taking the taxes, insurance and other costs.

    0Reply
  • Jeff Joachim
    Investor · Orlando, FL · Member since 2013 · 99 posts · 69 votes
    6y

    @Mir Ali , you are getting some spot on advice from @Jaysen Medhurst , and the others on this post. I think you should definitely consider restructuring your current holdings to more effectively capture better cash flow, and position yourself for a better internal rate of return as the others have mentioned. The suggestions you have been offered can dramatically alter the trajectory you are on in a positive way.

    Cheers to your success so far! Please keep us posted on what you decide to do.

    0Reply
  • Axel MeierhoeferPro Member
    Rental Property Investor · Escondido, CA · Member since 2017 · 684 posts · 550 votes
    6y

    @Mir Ali when we talk I can describe why even paying the extra $1000 into your home is potentially something you might realize as not being the best use of your money

    1Reply
  • Andy Chan
    Member since 2019 · 1 post · 0 votes
    6y

    @Mir Ali

    Don't listen to these fools. Do not sell it now. You are in the right path. You have only 70k mortgage on your first house. Pay it off. Collect the cash flow of 1K a month. It's very little money but it is still cash flow. In the long run, your home build equity. On the plus side, you know how to do home repairs. So your maintenance cost is low. Think about it, if you sell your house, what can you buy with that money? 300K? I am 100% sure you are not going to buy another investment property for that price in your area. If you do buy it at that price, the house probably going to need some TLC which will cost what? 50K again. THAT WILL TURN YOU MORE RED THAN YOU ARE NOW. Don't listen to people on this forum. I literally made this account to comment on this.

    Your method is safe and slow. I like your method. Keep it up. Unlike the people here that are telling to to sell your assets to invest your funds in a more risky play.

    0Reply
  • Axel MeierhoeferPro Member
    Rental Property Investor · Escondido, CA · Member since 2017 · 684 posts · 550 votes
    6y

    @Andy Chan The minimum you could do is to let people know that you are a Dave Ramsey fan who does not believe in leverage. Just trashing other people's advice without an explanation is turning BP into the same bad syndrome that has inflicted Facebook. Let's be better than that, please.

    1Reply
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