New to investing... What to do with $200k HELOC?

Question

Hello BP Community!

First time poster here! My husband and I are both teachers living in southern Orange County, CA, and we want to jump into real estate investing. Since our area in California is very expensive, we are looking to invest in long-term buy and hold properties out of state. We are interested in SFRs, as well as small multi-families. We have been looking into some turnkey companies, and would be willing to go that route, but would be even more excited to build a team in an area and find properties ourselves.

I have been learning so much from the forums on BP! I feel like we still have SO much more to learn, but also don't want to get stuck in analysis paralysis, and are ready to get started!

We currently have about $500k in equity in our own home, and are in the process of taking out about $200k as a HELOC to start investing. My question is what would be the best use of that money? Our initial idea was to use some of it as down payment(s) on one or more properties, but we are a little lost on the best area to invest in this current market. We are looking to buy one or more properties in the $80-$100k range, but are open to spending more for the right property. We are hoping to maximize our cash flow so we can pay off any HELOC money we use, and repeat the process as soon as possible.

Any advice on best markets to get us started? Since we would be investing long-distance, we are hoping to find something that needs no/minimal work done, and would also like to find a property management company to manage it for us.

Also any advice on the the best way to use our HELOC and get started would be greatly appreciated! Thanks in advance!!

Peter Mckernan · Answer

Hey @Susan Snodgrass Nice! That is awesome to hear and yes in SoCal it is tough to find some deals that are lower priced, the ability that you have by taking the funds out of your house and using them towards some rentals is great! The best thing that you can do is use those funds for more than one home, put the smallest downpayment possible and keep it going till it's out then save for more. The other option is buy 1-3 rentals do the BRRRR method until you are able to buy multiple homes per year.

James Wise · Answer

Welcome aboard Susan. Most investors who come on here in your situation take a look at the "turnkey" markets. You've got my fav which is Cleveland. More info on Cleveland can be found here if you're curious about that area - The Ultimate Guide to Grading Cleveland Neighborhoods.

Outside of Cleveland there are a ton of other similar markets. Basically everyone is a homer. If they live / work in one of these markets they'll say it's the best, but they are all basically the same. Will all pretty much give you the same type of product.

• Cincinnati, Ohio
• Dayton, Ohio
• Toledo, Ohio
• Youngstown, Ohio
• Cincinnati, Ohio
• Memphis, Tennessee
• Saint Louis, Missouri
• Indianapolis, Indiana
• Detroit, Michigan
• Erie, Pennsylvania
• Louisville, Kentucky
• Milwaukee, Wisconsin
• Jackson, Mississippi

Whichever market you decide to buy in I always like to give new out of state investors the punch list you see below. Follow those tips and you'll probably do fine in any of the "turnkey" markets folks are on here talking about.

• Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
• Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
• Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
• Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
• Make sure your property manager is a licensed real estate brokerage.
• Google Clayton Morris and/or Morris Invest for a cautionary tale of what not to do when buying turnkey real estate
• Understand you can not eliminate all risk, only mitigate it. If you are risk averse, real estate, (especially out of state) is not for you.

Party Hard!

AJ Shepard · Answer

There is an exemption that is 506(b) which allows foe the investor to be a “sophisticated” investor and not required to be qualified as accredited. The caveat is that you can’t advertise the specific deal and there are limits on the number of people in the deal (35). They also need to be known to the sponsor, many syndicators are doing this by video conference to establish a relationship.

Paul Moore · Answer

Hi @Michael Penny. Good point. Technically, investors don’t have to be accredited to invest in syndications. The problem is that most of them, especially the many of the best ones, have slots that are limited to accredited investors plus a close network of people they know (up to 35) who are not accredited. You are certainly correct however.

Paul Moore · Answer

Hi @Susan Snodgrass congrats on getting a good start! If you are accredited I would recommend you find a great syndicator to invest in passively. That will often return better risk-adjusted returns and you don’t have to worry with the details.

Otherwise, I would consider using airdna.co to find the best market for gross revenue to purchase price ratio then do outsourced Airbnb and VRBO rentals.

I have a friend who had a goal to quit his job as a General Motors engineer. This would usually take many years, but he did it within 10 months by picking the best markets using tools like this. And now he’s got his real estate license and helps others find exactly the right house for them with cash flows up to 60% or more cash-on-cash using high leverage (he claims - I haven’t seen his financials). And people are apparently crushing it! Feel free to reach out to me if you want more info. Good Luck!

Max Gradowitz · Answer

Consider central California. There are small cities/towns inland above LA County that have solid rental markets where you can buy a small house in that price range.

Ronald Allen Barney · Answer

I would go with either no/minimal work to be done OR, if you can get in touch with a good reputable contractor for the work. Rehab properties tend to sink to the bottom of the MLS where the owner-occupiers pass them up because fewer and fewer people are handy these days or willing to self-rehab. The difference between the rehab and the ARV often makes it a good range to look for either flippers or buy and hold. I would do one, minor rehab via contractors, rent it, and keep the rest handy for emergency repairs. Make sure the due diligence shows you it will cash flow after rehab (which means getting rental comps of the turn-key equivalent properties in the area).

Nate Sanow · Answer

Personally, I would buy in cash, do a value ad remodel, refinance into permanent finance, and repeat, repeat, repeat. Yes that means OOS REI, probably in the Midwest, but the lessons would be invaluable. Being able to brrrr with that much liquidity without the heavy points and fees from a HML is to me invaluable. Best wishes.

Allen McGlashing · Answer

Lender called “Lower” is great I got 95% LTV for a HELOC.

Justin Phillips · Answer

@Susan Snodgrass Putting that "trapped equity" to work is a great start! I love Helocs because of the flexibility, and simple interest. Why only tap into $200k of equity? I'd recommend checking out a very specialized 1st position Heloc where you can set that credit line to 80% of the value of your home. This particular one is tied to a zero balance sweep checking account, so all of your deposits sweep directly to your outstanding balance, saving a ton of interest cost. It's a great way to snowball into more properties, and the best part is each additional property that's purchased of paid off using the line pays off faster than the last because of the added cashflow. Great strategy to grow quickly, without over exposing yourself to risk.
The cash offers you can make backed by Helocs will also be a great benefit, nothing talks like quick cash!
Turnkeys usually take a lot of the meat off the bone, especially in this market. I'd bide your time, and wait for a deal, in a market where you're able to make some connections and have confidence in your long distance strategy.

New to investing... What to do with $200k HELOC?

New to investing... What to do with $200k HELOC?

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