Need help determining my best financing option

14 Replies

All,

I am diving in the pool of real estate investing. I believe I have several options and would like advice on picking the best one. To help with the decision here is a little about my current situation. My wife and I both work professionally and have good secure jobs. Like many we have a fair amount of money in 401K, Roth, and traditional IRA. We have owned our current house for about 7 years and have somewhere between $150K-$200K equity in that. We have 4 kids, 1 in college, 1 junior, 1 6th grade, and 1 4th grade. The 2 youngest are boys and would like to teach them the building process. I should also say I have remodeled many homes over the years and even general contracted an upscale new one (my most successful endeavor). I have personal friends in real estate and building so have good connections there, and know the city code pretty well from my remodels. Finally, my goal is buy and hold but may do some flips up front to get the machine oiled. This should paint a good picture of where I'm at, now to my questions.

I don't have 20% down today to start my venture, it will probably take me until March to achieve that naturally. I would like to get started more quickly on my first deal. Here are some options I could think of in the order I feel may be best. Also if you are from Sioux Falls area, can you provide the best banking institutions to work with.

  1. Should I open a HELOC on primary residence, enough to buy and rehab a property?
  2. Should I look at borrowing against my retirement?
  3. Should I do a cash out refinance on primary residence, enough to buy and rehab a property (I'm worried about tax implications here)?
  4. Should I look for investing partner, family, friends, etc. (not crazy about doing this)?
  5. Should I look at hard money or spend time on creative financing (don't like the risk and expense on a first deal)?
  6. Should I wait and save the money needed for the 20% down (don't like waiting, winter may produce some good deals)?
  7. Probably hundreds more ideas, please guide me ....

All help and guidance is greatly appreciated.  :)

This post has been removed.

@Michael Anderson , it's funny your story almost exactly matches mine...I'm writing this response on my lunch break of my software job, but am also looking to get more involved in REI without completely giving up the security of my day job. I too am a handy-man, short on cash, with kids that I'd also like to get trained up in the business. I also have some equity in a couple other properties. As far as I know, there are no tax implications on either HELOC or cash-out refi since both are working with borrowed money. If rates are lower than when you purchased 7 years ago (and I would guess they are), you might be better off with the cash-out refi. I just completed one of those on my house and kept my payment exactly the same while walking away with just under $10k at closing...for me, I'm working on debt reduction...sounds like you are closer to making things happen! All the best in your endeavors!

@Michael Anderson  I don't know if you saw my previous post before it was removed for "deal making" but I'll try and help out again.  I manage a financial institution in town and I'm a buy and hold investor.  If you want to PM me, I can give you names of lenders that I and other investors have had good luck with.  I'm happy to connect with other investors in town like yourself.

Here's how I would prioritize what you have listed: 1, 3, 4, 2, 5, 6.

I would save up 20-25% down and try and buy way under what an appraisal should be after a light rehab.  A conventional mortgage lender will be cheaper otherwise you can try commercial.

@Michael Anderson As far as tax implications, I would suggest working with a CPA on how to minimize your tax implications.

I work in commercial lending in Sioux Falls and I have a customer that uses a HELOC on their primary residence to buy properties, fix them up, and then refinance them to get their cash out again and repeat. (BRRRR strategy) If you don't want to wait I would suggest you start with that approach, but make sure keep your lender in the loop on what you want to do. Don't want to be stuck with all your equity in one house and no lender to refinance. PM me if you want to get together and discuss some lending options

Congrats on Diving in! Feel free to join us the local REIC to talk shop as we'd love to have you with us! PM for details on that if you're interested. That being said, I personally like option 6 as it's financed fully by you without any sort of issues though i get the winter deal issue. Winter tends to pull prices in our area down a little. The HELOC is also a good option. Especially when you'll have the money immediately and can pay off the HELOC by March with your own money. It's kind of a best of both worlds option IMO.

Hi Michael, 

Welcome to Real Estate Investing Mecca here at BP!

I think what you have listed is a good comprehensive list of the traditional ways of financing a purchase like this. If it were me, I would look mostly into option 1 and 3. Option 1 will give you the flexibility of a low monthly payment as well as significantly less fee's than option 3 in respect to getting the initial money. Option 3 would be more expensive to obtain, but at a significantly lower interest rate than 1. **Here comes my disclaimer**, I'm not a CPA, but I do believe if you borrow the money against your primary residence, that money would be tax deductible whether it was a HELOC or a cash out.

Short of putting up real estate as collateral, and depending on your retirement account balances, there are ways to hold retirement money in a self directed IRA that you may be able to use for the financing. I don't have any particular company recommendations, but Google should come up with a number of options.

Best,

I'm in a similar situation, however who knows how secure jobs really are. I went with options 1, 2, and considered 3. I did a HELOC, instead of Cash Out, as I just refinanced a little over a year ago, and the rates are similar now, as to what they were then. Look for a bank that will give you as high of LTV, as you can get, or want. All banks are not equal on this topic.

I borrowed against my 401K, but will probably put all of that back, because the repayment schedule has began, and I have done nothing with the money yet.  We have tried, but not acquired any of the properties we were interested in yet (mostly from being out bid).  

We want to Flip, but also Buy and Hold at some point.  My question for those that are doing Buy & Holds, are what type of interest rates are you getting on your Cash Out refinancing of Rental Properties?  

@Christopher B. , the rates I have been seeing in this area for cash out on 1-4 family investment properties is, in my opinion really aggressive. Around 4.25% - 4.5% for 75% LTV with a 10 year fixed term, payments amortizing over 25 years. I would also be curious to see what others are getting. Is anyone financing secondary market?

If interested in a self-directed IRA, Horizon Trust is a great company to check into.

All,
I appreciate all the guidance and advice offered. I wanted to provide an update on how I'm doing on my goal. I have been carefully studying and progressing on my property investing journey. I am just crossing the threshold now from wanting to having property. 

First let me know tell you my approach. I ended up setting up a HELOC and then working with a lender on pre-approval for consumer and commercial lending products. With my financial history I was able to structure financing where the HELOC can be used for down payment on new loans. I also aligned myself with a real estate agent and worked with him to setup a regular feed from the MLS showing properties matching my interests. I spent many many hours on Zillow finding possible deals and refining some spreadsheet tools that I will use for analyzing deals quickly. I spent time researching rent prices vs. property location and configuration.

I have purchase agreements signed for 2 duplex units (4 doors) that I will be closing on in the next 30 days. Having progressed to this point I now have some new questions for all or you.

  1. Can you recommend good insurance companies for investment property.
  2. Can you provide strong rental agreement templates and examples.
  3. Can you recommend electronic payment companies for renters to pay through.
  4. Can you recommend property management software packages.

As always I greatly appreciate the help!

@Michael Anderson

  1. Can you recommend good insurance companies for investment property. >> This is regional, although there are a few big national guys that will jump into this thread. Depends on which market you're in.
  2. Can you provide strong rental agreement templates and examples.
    >> I outsourced this function to my PM, someone else will answer this
  3. Can you recommend electronic payment companies for renters to pay through
  4. Can you recommend property management software packages.

    >> Looks like you need some help with *SOFTWARE* I've taken detailed notes from many threads and spent a ton of time compiling this. This should help you and people will jump in and chime in as well. Enjoy:
    Podio – “We use Podio for both lead management and project management. Podio is very customizable so it serves as the "central hub" or "interface" and creates the relationships between items. We then use Google Spreadsheets to track the numbers and then attach the spreadsheets to the Podio project page via soft link. All of our books are kept in Quickbooks.” James Bowie
    “Podio is great, but lots of maintenance/developing. “ Jonathan Ulyatt

    Pros: “Podio Lite is free up to 5 employee seats, up to 5 external teams”, used by over 400,000 for collaboration, mentioned several times on BP
    Cons: Need to build projects from scratch, not designed for real estate, CRM that you have to “code” to yourself (according to Lloyd Stanton)
    “In my experience there aren't a lot of CRM's that do everything. I had the same issues with other CRM's and I am an Authorized Partner for Podio too. The problem with Podio is you need a lot of integrations to make it do what you need it to do but then you are managing all of these other services/accounts and this eats up your time. “ Tim Herndon
    Cost:
    Podio Teams ($9 per employee/month, 20% off annual subscription): unlimited number of employee seats; unlimited number of external teams; Podio apps and core features.
    Podio Business (by quote): unlimited number of employee seats (discounts for larger teams); unlimited number of external teams; Podio apps and core features; access right and control; personalized training and support.
    Evernote: Is a document repository.
    “The best tool we use is Evernote to track progress. Every time work gets done the pictures get put into Evernote and it gets attached to Podio.” James Bowie
    “The key to Evernote is to commit to it and jump in with both feet. It’s pretty rotten if you’re just using it for a few isolated tasks, because absolutely, it doesn’t do any one thing perfectly and it’s not as fast as other apps.
    It really starts to show its brilliance once you start using it as your default bookmark/webclip app, notetaker, recipe box, repository of all your reference material, and so on. It’s great to have ALL the information you need indexed and searchable across every single platform you have.” Whitson Gordon (non BP Member)
    Pros: Basic is free with 60 MB of new uploads per month and sync across 2 devices
    Cons:Not designed for real estate
    Cost: $34.99 for Plus with 1 GB of new uploads per month with synch across all devices
    $69.99 for Premium with 10 GB of new uploads per month with synch across all devices and more features
    Trello - A Trello board is basically a web page containing lists laid out horizontally on the page so you can get a bird's eye view of your project. Items within the lists, called cards, can be dragged and dropped onto other lists or reordered within lists.
    “is a great free tool, although its hard to see/plan for dependencies.” Melissa Kilbourne
    Pros: Easy to learn
    Cons:Not designed for real estate
    Cost: Trello offers three paid options: Trello Gold $5 per month, or $45 per year, Trello Business Class $12.50 per team member per month, or $119.99 per team member per year, and Trello Enterprise. They’re ways to build on to the free Trello experience—Trello Gold offers a way for individual users to take their Trello use to the next level, Trello Business Class (contact for quote) is intended for multi-user teams to have more fine-grained control over who can access their boards, and Trello Enterprise allows for concierge support as well as additional security features important for large-scale enterprise teams.
    gantter.com “ easy to use Gantt chart (free). Cloud based and Google drive integration, so sharing and collaboration rock. Great for scheduling projections with dependencies. I agree with @JustinCase 'The most important thing with building a integrated schedule is defining a true critical path with tasks relationships to know the true finish date and how it is impacted.’ ” ~Alisha Zwirtz
    Pros: There’s a free version
    Cons:Not designed for real estate
    Cost: Personal is 4.95 a month, 9.95 per user / month for team
    rehabvaluator.com “A great one that a friend of mine showed to me is the rehab valuator calculator by Daniil Kleyman. He has a rehab valuator Lite that you can download as a free demo. Not to mention that he has numerous tutorials on his website. Don't take my word for it- check out his website at rehabvaluator.com.” John E.
    Pros: free lite version
    Cons:not software, but spreadsheets
    Cost: $29/month or $197 / year
    Xactimate - Replacement cost estimating software for property claims. Tools needed to create professional and accurate estimates, as well as to view and manage all estimating and communication-related activities. “We use one program that can be expensive and we use it on insurance rehabs. I dont know any insurance adjuster not using it in our area. Even though its geared towards the insurance industry its still dealing with rehab/replacement costs. I would not say that it should be used as a be all end all. Nothing can substitute a hard estimate based upon historical numbers. Xactimate (I have no affiliation and I wish there was a cheaper competitior).” Steve H.
    Pros: Used by insurance adjusters
    Cons:Expensive and tailored for insurance industry
    Cost: Webpage for cost is down.
    Freedomsoft – CRM software used for lead generation
    “My subscription still works, not sure if they (Preston & Co) have made any major updates in the past 2 years. They do have some cool features like using IFTTT that will pull in leads from CL right into the program. Also lets you setup buyer and seller capture pages....some cool stuff.” Derrick Watkins
    Pros: 14 day free trial, geared towards real estate, MLS integration
    Cons: Expensive and not much information about itCost: Needs confirmation, their company hides the cost from their website: “$97, $197, or $297/mo” from online review
    Buildertrend – Cloud system designed for builders, remodelers, and contractors for real estate
    “If you mean critical path method, then yes. Schedule items can be linked to each other (start to finish, start to start) creating a visible critical path, including a generated Gantt chart.”
    Pros: 30-day money back guarantee for first month, real estate centric
    Cons: Expensive and additional costs for more projectsCost: Starting at $99/month for one project but additional fees for more project
    JIRA – offers flexible issue and project tracking with best-in-class agile tooling for software teams
    “JIRA has a huge marketplace which allows you to really scope what type of project management system you want to build” Jared Beauchamp
    Pros: Proven in software development
    Cons:Not designed for real estateCost: Starting $10 for 1-10 users, $75 for 11-15 users, $150 for 16-25 users, $300 for 26-50 users
    Primavera – Used by commercial builders for project management.
    “I am a PM at a commercial construction firm and use software such as Primavera and Prolog. However, I honestly find myself constantly going back to Excel and Word. There isn't much you can't do with these two, besides complex scheduling and costing, and they are easy to format to your needs and preferences.” Tony Williams
    Prolog – Construction software mentioned several times.
    Pros: Mentioned on BP
    Cons: Expensive, no one on BP users
    Cost: Website hides costs. Online review “Prolog is relatively easy to deploy, and the cost for a small company to implement the system would be in the range of $10,000 for three concurrent licenses and another $10,000-15,000 for implementation and basic configuration”
    Landlord Maxx - Aaron Saarela said, “We just started Landlord Maxx which was 199.00 one time fee. I like it. It has a lot of great features. I was going to go with Quickbooks, or Saje like my accountant recommended but they don't make an option for mac. We had to do something to convert it? and so we chose landlord max which works for windows or apple.
    PropertyRadar for DFD, the developer Sean OToole said:1. Use our mobile app and our Explore feature to visually see owner occupancy, equity, foreclosures, etc for every house around you while you are driving for dollars. Makes it much easier to spot opportunities that you'd miss with just looking at the properties alone.
    2. When you see a property you are interested in, just click on it in Explore to see all the details - owner name, whether or not it is owner occupied, equity, etc, no need for One Note, and no need to lookup later.
    3. While you are looking at the property, add it to a List, and take at least one photo - the photo is useful both for remembering the property and for use in marketing to the owner. You can save the photo with the property in PR so it easy to find later.
    4. Use our mail merge feature, or one of our direct mail partners to send direct mail to everyone on the List you created in step 3. We'll do the scrub for you. Another advantage of using Lists, is that unlike One Note, we'll continue to update the property, owners name, address, etc automatically so your List is never out of date.
    5. Use our owner search feature to find the owner on Facebook, LinkedIn, etc and friend them. One of my favorites is sending out of town landlords pictures of their house, especially if a tenant is trashing it, and asking if they knew what was going on and if I can do anything to help.
    Lots more possibilities, but that's the most efficient path to DFD that we've found.
    Property Management / Accounting
    Quickbooks pro “I'd love to use quickbooks pro but they won't allow me to import expense data, nor allow subdivision of income/expenses as I would like.” ~Brandon Schlichter
    “We have been using quickbooks for 12 years. I can tell you what profit I made on each rental, new home construction, rehab, flip. What the money was spent on. A detail P & L per property. It is all you need.” Arlan Potter
    Pros: commonly used accounting software
    Cons:2.5 star rating on AmazonCost: QuickBooks Pro 2017 web download 189.99
    Buildium – Property management software
    “The current software I use is Buildium.com, the software is one of the more inexpensive softwares to get for your management systems at $40.00 a month up to 200 units and then the price bumps to $200.00 a month. This software has some hidden fees in ACH transfers, which are charged to the property manager for every ACH transfer a total of $.50 and could be more depending on the days it takes to transfer. If you have a lot of properties this can add up quickly!” Peter Mckernan

    “I have been using buildium for 2 months now managing 14 units. It's great for costs, budgets and the money management. It allows all units or properties to stay separate or combine by owner. The online rent collection has saved me a ton of time and effort.” Blake Garcia

    “I used Buildium and it's a great software for starting out. It just doesn't make sense to pay around $50 a month to manage two units. It wouldn't cost too much more to hire a property manager and they would do all the work for you.
    There are services available for screening that won't cost you a dime or require any effort on your part. Free online payment options are available or you could have the tenant set up direct deposit into your account for free. All of these options take less time than it would to set up Buildium, they don't require upkeep, and they won't cost you anything.” Nathan G


    Pros: mentioned often on BP so commonly used
    Cons: Hidden fees that add up
    Cost: Starting at $45 / month, additional fees for features like ePay, tenant screening, 1099 eFiling
    Appfolio - Software used for property management
    “The next software that is pretty expensive is out of the gate is Appfolio.com, which charges $200.00 fee. This service does not take any money for ACH transfers and the software does charge an extra amount for building a website for your company (this is optional).” Peter Mckernan

    “I have to say, they have a lot of cool things, but their accounting system is awful. That alone was a deal breaker. They told me that I would have to manually enter every single charge I do on the credit card for the business manually. If you use quickbooks and download the transactions from your bank, you know how much time that saves you every month. They also force you into working in their molds and expect you to adapt to their software. Most of the time are small compromises, but still annoyances.” Rafael Floresta
    “My PM uses Appfolio (which seems, on here, to have it's share of fans and detractors) so it's easier and quicker for me to login and review rent collections, expenses, invoices, etc. I can't speak to maintenance management or anything else like that but now that I've had a PM with a cloud solution that has an owner portal, I don't think I'd want to go back. At the very least it would save you and your partner time with owners who are similar to me calling you up with questions that they could get the answers to online.” Andrew Johnson

    “I use Appfolio out of santa barbara, ca its definitely not free and my property mgmt company passes those costs down to me which I think is around 50-60 bucks a month based on number of units under the service.
    I am able to see all reports from rent rolls, cash flow statements / trailing 12 month cash flow, tenant ledgers, maintenance requests, dialog between tenants and mgmt staff, resolutions to maintenance requests, move in pictures, move out pictures, or video, and many more features.
    What I like is that it allows the vendors to be in a dialog/text/chat box so they are prepared (vendor) prior to job assignment with lockbox codes, scope of work and pictures before they even go to the site so we dont waste time figuring things out and run up a huge $$$ bill for lack of efficiency.” Albert Bui

    Pros: mentioned often on BP
    Cons: accounting module is very weak, expensive for small operations
    Cost: $1 per unit, per month plus an onboarding fee (equal to two months of service). Note that there is a $200 minimum monthly fee. App Folio offers a 15 day free trial.
    “Rent Manager has a pretty solid maintenance feature. I can create workorders and assign them individually to specific vendors or handymen. Those guys can then view their individual workorder lists from their mobile devices. When they have completed each workorder they can close them out and add comments detailing their scope of work. I am able to add/remove/edit/reassign workorders anytime.
    All closed workorders are saved and can be cross referenced by tenant, property, or unit at any time from anywhere. Very handy.” – Ryan Murdock

    TenantCloud “I do all of that with TenantCloud and have closed my paid account with AF. I only have 22 properties (all homes), but it works great. I do applications, listings to zillow and others, website, payments, accounting, maintenance, reports and its all free. I am still waiting for the got ya as they are free, but they claim they will always be free for up to 75 units. At SXSW I saw one of their people and they said they will have the ability to get bids on jobs like cleaning, painting and such soon - I assume this is how they make money. “ Ben Travis
    Pros: they are new and offer free operations for landlords and tenants
    Cons: new company, not mentioned on BP much
    Cost: “We get paid by service providers - like insurance companies, plumbing companies, screening companies, A/C and heating, moving companies..... oh you get the idea. TenantCloud is free, but if you decided to use any of the service providers products then you can buy in TenantCloud, which only makes life even more convenient.”
    Payment Systems
    https://www.biggerpockets.com/forums/52/topics/451743-online-rent-collection-without-partial-payments
    Problem with Cozy:
    Alex Reiz said:
    We have been using Cozy for our rental properties in regards to rent collection. Initially, their system was great and would not allow a Tenant to make partial payments; it would only allow a Tenant to pay all or none of the Rent, which was great and was one of the reasons we started using their service. However recently they have changed their system which now allows Tenants to make partial payments, which we do not like at all. There is no option on the receiving side in order to only allow only full payments, we find this to be a waiting nightmare if an eviction ever came up. We are especially unhappy with the service now, considering that was one of their highly touted features when they first started offering it.
    Does anyone know of any other online payment service which only allows for full payments or at least allows the Landlord to chose between full and partial payments?
    ERentPayment
    Clay Owens said: I just set up ERentPayment last week and they give you an option to accept partial payments or not.
    “I am playing around with tenant cloud. I like erentpayment and the fees are cheap.” Jim Adrian
    Drew Bonnor said, “rentecdirect.com. This software is so affordable and has features like: automatic payments from your tenants bank account, tenant screening, publishing vacancies to sites such as realtor, zillow, Craigslist, etc., and keeps individual spreadsheets for each of your properties. Give it a look!”

    Unitdash – “Unitdash is a free to use property management platform for landlords and property managers. We pride ourselves on our users being able to sign up and hit the ground running. There is no required setup or setup fees. We have all of the features you expect and many nice to haves like custom online rental applications, in-app text messaging, integrated postal mail services and more.
    Our online tenant portal allows your tenants to pay rent online and submit maintenance requests for free.” According to Anthony Ascuitto who seems to be associated with it

@Michael Anderson i have a similar situation. I have a property and i was also debating on getting a HELOC or cash out refinance. I think i will go for the HELOC option. Since you already went through the HELOC process, did you have to appraise the property yourself, meaning hiring a person to appraise it, or that is something the bank/lender takes care of?

You may wish to consider a Roll Over to Business Start-up. This allows you to divert some of your Traditional IRA monies into REI. Overview -

1. you open a C-Corp

2. C-Corp opens a 401K

3. You become an employee of C-Corp

4. You Rollover some or all of your Traditional IRA into the new 401K

5. You direct the 401K to buy stock in new C-Corp

6. C-Corp has funds for REI

Obviously, there are rules, it is the IRS afterall, but for me tapping some IRA money was better than a HELOC.

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