HELOC and Turnkey Investing Advice

26 Replies

I'm a real estate investment newbie living in Los Angeles. I currently rent my primary residence to film crews which pretty much covers my mortgage. I've paid off about 50% of my home and have around $400k in equity. It would take me a year or two get the cash needed to invest so I wanted to see how everyone felt about using a HELOC for a downpayment/rehab costs on my first investment property?

I'm thinking about investing in the central valley of California mainly because my family has farmland outside of Bakersfield and commercial properties on the coast but I think my money would do better out of state.  My Dad is partnered in a business outside of Amarillo, TX that he flies out to often so that area is also an option.  Went to a land auction with him which was really interesting.

Also, how do people feel about turnkey investment companies?  Obviously you only get as much money as the work you're willing to put into a deal so I wouldn't be making as much as if I did the deal myself.  Maybe breaking even but building equity?  Is it just something to stay away from?  I mainly ask since I work a busy job, deal with hosting the filmings, and have a newborn.

Thanks, Allen

@Allan Tracy, Hi Allan, I've been doing research on HELOC recently. It is a variable rate and the average interest rate offered by banks are around 5.8%-6.25%. No closing cost and appraisal fee. Some banks like Chase charge $50 origination fee and $50 annual fee. HELOC is a good way to buy an investment property. Another option is to get a cash out refinance which has lower interest rate compared with HELOC. The difference is you have to start paying interest the moment you got the cash out and there is closing cost related to cash out refi. HELOC is an open ended loan and you don't have to pay any interest until you pull the cash out of the account. It is more like a credit card.

Turnkey properties are good options for people have full time job and no time to manage the property especially out of state properties. Just be careful to find a good turnkey provider. Connect with local agents, investors and property managers and ask for referrals. I'll pick a turnkey provider in the local market. I know a couple of RE companies in LA provides turnkey properties out of state but I don't trust them. 

I'm in Orange County. Also thinking about buying out of state properties and doing research on cash out refi and HELOC. Good luck on your investing.

Thanks Renee for the great info. I'm a Chase customer and was looking at doing my HELOC through them. On their website it says currently the rate is 5% but you can get a 0.25% reduction for having a Chase checking account, 0.12% off for having auto payments, and 0.25% off for withdrawing $30k at the time of closing.

I haven't looked into any turnkey companies yet but was watching an episode of Bigger Pockets where the guy was from SBD Housing out of Kansas City.  That's what got me interested in the idea.

Hey Allen. I would talk to an investor-friendly lender and compare the HELOC to just doing a straight cash-out refinance. Figure out the pros and cons to both as compared to the other and decide from there. But to your question, yes I think using the equity in your house to buy investment properties is perfect. The key is just to be sure the returns on whatever you invest in are higher than what you'll be paying in interest on a HELOC or cash-out refi. I can't speak to your other options, but I can speak to turnkeys as that's most of what I've bought. If you're going to have that much capital, you can also do 'turnkey light' or 'BRRRR+turnkey' where it combines the perks of the BRRRR model with the perks of the turnkey model (i.e. appreciation and higher cash flow from the BRRRR side and hands-off from the turnkey side). You have to really know what company you're working with because it's a lot riskier than standard turnkeys, but it's doable. The BRRRRkeys I work with right now have the highest cash flow of all the turnkeys I know and decent appreciation on the front-end. But even standard turnkeys are good if you're not wanting to dedicate a lot of time. And no, it's not just building equity, they are primarily cash-flow plays more than that.

@Allen Tracy I second @Ali Boone 's advice. Other BIG advantages of the BRRRR-key model is you can leverage other people's systems to build your portfolio (being a true business owner) AND recycle part (maybe all) of your capital. IMHO, using your HELOC to invest is now safer, because you aren't locking up that equity in another illiquid investment, rather using it as a true line of credit to accelerate growth. Then it's just a math function of how many projects you can do :)

I hadn't thought about that yet but a BRRRR-key sounds like a great idea. Thanks for the idea and info about HELOCs and turnkeys, I'm feeling more and more confident about jumping in.

Hi @Allen Tracy ,

You & I have a LOT in common! I used a heloc to buy my first rental/ investment property & my dad lives in Amarillo, TX & we bought & sold a 2 unit property there about 4 years ago. 
My 1st question would be do you plan on buying a flip or a buy & hold rental? Bc your answer will determine if a Heloc will work for you. 
If you’re considering a heloc to use for a flip, go for it, all day long. If you stick to a budget and time frame, you’ll hopefully pay off the heloc in the time it takes to purchase, rehab & sell your flip. 
On the other hand, if you’re using the heloc for a long term rental, you have to consider a few things. Will the heloc funds be used for the full purchase price or just the down payment & closing costs? If it’s the latter, you essentially have a 1st & 2nd mortgage on your rental & your rents better be pretty good to be able to cover the principal & interest on 2 loans as well as your rental expenses, repairs & vacancies. 
When I used a heloc to buy my 1st 4 plex, I had a very strict plan in place to pay off that heloc in 2.5 years. I chose to do a fixed rate rather than variable Bc I knew I would have that heloc payment for at least 2 years & didn’t want to worry about rate hikes. The property had a monthly gross cash flow (rents minus mortgage [principal, interest, prop tax & insurance]) of about $1200 & my plan was to put that entire $1200 a month toward paying down the heloc. I ended up selling my primary house a year after doing the heloc & thus paid off the heloc early & still made about 20k in profit. 
If you plan on using the heloc for a long term rental, I would recommend being highly disciplined & plan on not making a profit for as long as it takes you to pay it off. 
As for turn key, I have never used a TK Bc I do all the work and management on my properties myself & am also a control freak lol...but I’ve learned a TON & know what to look for in flips or rentals, what to avoid, what to spend money on & what not to, etc. It’s hard to learn those things using a TKP, esp on your 1st prop. Also, I’ve heard a lot of horror stories on BP about TKP, just do a search & youll find them. 
I would recommend sticking within a 2 hour radius, starting with a small multi unit, 2 to 4 units, & getting your hands dirty with repairs & prop management if possible. 

Good luck! 



@Allen Tracy

I used a HELOC on my primary as investment principal. I would not use a HELOC in your situation. At the time, I thought flexibility would be a key feature I needed, but frankly the money hasn't been in my hands enough to justify the added interest paid. It sounds like you will have the cash flow necessary to pay principal and interest on the added debt service so I strongly suggest you get a second or refi your first. You will have a higher monthly payment initially but you will be paying down the principal and won't be subject to having your line frozen or called if the economy turns down the road. If you are apprehensive about diving deep into real estate, then you might consider getting a second instead of cash out refinancing your first. That way you could bring the remaining principal back and pay it down outside of the existing mortgage if REI turns out not to be for you.

Good luck!

Hey @Amber Smith , I'm actually originally from Bakersfield (well Buttonwillow). My family has a farm in Buttonwillow but we also have some cattle out in Hereford, TX so I've flown in and out of Amarillo a few times. I've narrowed down my HELOC lenders to four places, just trying to pick one based on numbers, interest only or not, and fixed rate or not. Good to hear the fixed rate option worked for you.

I think the BRRRR method (flip and hold) would be the best use of my HELOC so it would either be a BRRRR+Turnkey (which I wouldn't make as much money on) or a BRRRR where I go out and build a team myself. I plan on paying all cash for a property, cash for the remodel, then refinancing to pull the majority (hopefully all) of the money I put into it back out to pay off the HELOC. I'm hoping for the process to take 3-6 months, then rinse and repeat multiple times after that.

I was originally looking at multi family properties in Bakersfield to invest in since I could go see them in person very easily but I think my money might go father over in Kansas City, Indianapolis, Memphis, Ohio, or Charlotte.  I also have a newborn at home and sometimes work long hours so a property management company would be a must for me.  

Do you do most of your investing in Bakersfield?

@Allen Tracy

I used US bank for my Heloc and they were great! 

I do all my investing in Bakersfield for flips & one of my rentals is here in Bakersfield & the other is in Taft (the 4plex I used the Heloc on).

I still would strongly vote for staying local (within 1-2 hours driving distance) for your 1st property. Investing out of state is not for the faint of heart...hell, even investing in the house next door can be a headache as well lol. Even if you may not see the same kind of returns locally as those being pitched by TKP out of state, the knowledge and experience you will gain is invaluable. Out of state can be great and theres tons of people making money at it, but my 2 cents would just be to get your feet wet with something local that you can see, feel and experience. Learn your lessons, take your punches and then go out of state with the knowledge and experience youve gained.

There is still money to be made here in Kern county if you know where and how to look. If you want any specifics on certain properties or numbers feel free to message me!

I've primarily done turnkeys for myself and I think they are a perfectly good investment. You should do better than break even with them. You should get one that has positive monthly cash flow and then whatever appreciation potential (not nearly as much as anything in CA, obviously). Sure, if you did the work you'd make more monetarily, but if you think about it-- a lot of that is compensation for the work you're doing. If you pay market value instead and someone else does everything, what's that worth to you? (rhetorical) For me, it's worth everything. I value my time and sanity way more than I do money, so it's worth it to me to pay a little more to not have to lift a finger. Personal preference though. 

Originally posted by @Remington Lyman :

@Allen Tracy What markets were you looking at in Ohio? There are a ton of multi family properties in Columbus, Ohio

Sorry for the late reply, picked up a cold over the last week.  I'm still very new to the Ohio market and don't know much about the area.  I've heard Cleveland and Toledo might be good areas but could be interested in Columbus as well.  I see you're a Realtor, property manager, and investor in that area so you must know the market very well there.

@Allen Tracy  I know a lot of people that do really well with turnkey properties. If you're looking to invest out of state, I would highly suggest Columbus, OH. This area is appreciating like crazy and also the cash flow is great. 

Originally posted by @Elaine Gee :

Keep in mind, interest from heloc for real estate investing is not deductible on your tax return. Should verify with your cpa.

 Yes it is

@Allen Tracy I would definitely exercise use of a HELOC for an investment opportunity so long as you aren't overextending yourself financially. I encourage those getting loans, exercising this option to not max out what they have. If you do this strategically, you will put yourself in a good spot.

As for the OOS investing, I third Columbus, Ohio. We are seeing major companies flood our market out here. Facebook and Google have made there way here. The recently acquired CoverMyMeds is a major contributor now and is putting up a major development in a path of progress area. We already house Nationwide (both the insurance company and Children's Hospital) who are spending in path of progress areas and are getting permission to purchase more and more in up and coming areas. Chase has over 1M+ SF out here, L Brands HQ, Big Lots HQ, Cardinal Health HQ, and the list goes on. Columbus is becoming a competitive market but we're seeing a lot of OOS investors make the move here because there is still opportunity in the multi-family market. 

Best of luck! It's a great time to jump in!

Originally posted by @Amber Smith :

@Allen Tracy

I used US bank for my Heloc and they were great! 

I do all my investing in Bakersfield for flips & one of my rentals is here in Bakersfield & the other is in Taft (the 4plex I used the Heloc on).

I still would strongly vote for staying local (within 1-2 hours driving distance) for your 1st property. Investing out of state is not for the faint of heart...hell, even investing in the house next door can be a headache as well lol. Even if you may not see the same kind of returns locally as those being pitched by TKP out of state, the knowledge and experience you will gain is invaluable. Out of state can be great and theres tons of people making money at it, but my 2 cents would just be to get your feet wet with something local that you can see, feel and experience. Learn your lessons, take your punches and then go out of state with the knowledge and experience youve gained.

There is still money to be made here in Kern county if you know where and how to look. If you want any specifics on certain properties or numbers feel free to message me!

Allen one thing that no one has mentioned here is too read the fine print on your heloc.. Helocs are NOT fixed in time loans.. they have call provisions that are unilateral.. IE lender can freeze them at their sole discretion and even call them.. this happened in mass in the GFC I bailed out a lot of flippers who were mid BRRRR and their heloc all of a sudden was frozen .. and you don't know it until you try to access it the letter comes about 30 days later..

So just go in with eyes wide open.. and make sure you always have a back up plan.. I am not saying or predicting that helocs are going to be an issue again.. but VERY FEW heloc borrowers read the fine print and even have a clue that this could happen.. they just think they have gotten a loan that is like their fixed term loan.. as long as you pay the payments the fixed term loan cant be called. 

I think in all honesty I coined the term turn key light LOL.. I have been funding those that do this for a few decades now in 15 plus markets. 

As Allie stated though picking the right company to do this with is paramount to your success  no one needs a replay of Clayton Morris debacle .

 

Originally posted by @Allen Tracy :
Originally posted by @Remington Lyman:

@Allen Tracy What markets were you looking at in Ohio? There are a ton of multi family properties in Columbus, Ohio

Sorry for the late reply, picked up a cold over the last week.  I'm still very new to the Ohio market and don't know much about the area.  I've heard Cleveland and Toledo might be good areas but could be interested in Columbus as well.  I see you're a Realtor, property manager, and investor in that area so you must know the market very well there.

Allen, depending on your price point Ohio is very different. The two big trends I'm seeing are investors still coming here to columbus to invest but a lot are looking at dayton as well because it's so close to cleveland and columbus MSA and still affordable. 

 

I help new investors do this exact thing every day. If you have a chunk in a HELOC, you have incredible leverage, it's the cheapest money out there. If you combine that with the BRRRR method, you can do very well in a relatively short amount of time.

As for turnkey investing- there are some different models out there. Personally, I don't love that most turnkey companies are selling you the property after the rehab- that's where you build equity that allows you to scale. Without that forced equity, you have to rely solely on cash flow, which can be dicey, especially in markets where you are renting to low income, section 8 tenants. The turnover, maintenance and capex and eat all of your cash flow in no time. 

Best of luck!

@Allen Tracy What do the numbers tell you? Have you considered worst case scenarios and being able to afford things if the market turns south? 

I'm only asking these things b/c we tend to look at the perfect scenarios and not so much the crappy ones if things don't go as planned. I've learned to give myself a 20% cushion on any rehabs/flips as an example because something stupid generally happens which ends up costing me more. 

Using a HELOC can work, but look at ALL of your options to use OPM to generate wealth. Do you have an agent, lawyer, and CPA you can pull together to run your ideas by so you know what things to avoid and where to be cautious? That may help in your decision making process.

Just a thought from the peanut gallery...

Originally posted by @Kyle Jones :

@Allen Tracy What do the numbers tell you? Have you considered worst case scenarios and being able to afford things if the market turns south? 

I'm only asking these things b/c we tend to look at the perfect scenarios and not so much the crappy ones if things don't go as planned. I've learned to give myself a 20% cushion on any rehabs/flips as an example because something stupid generally happens which ends up costing me more. 

Using a HELOC can work, but look at ALL of your options to use OPM to generate wealth. Do you have an agent, lawyer, and CPA you can pull together to run your ideas by so you know what things to avoid and where to be cautious? That may help in your decision making process.

Just a thought from the peanut gallery...

Good points to think about. My best friend's wife and her mother are both agents but not investor agents so hard to go by their word. I plan on asking my CPA about his thoughts on it but mainly works for large farms so I'll probably be looking for an REI CPA and lawyer soon. I need to build my entire team still but want to narrow down where my money will be coming from and the area I'd like to invest in before I build that team.

My hope is that if the property is cash flowing it won't matter if the market turns south as long as I can keep renters in the property.  I tend the inflate all the numbers when I run my calculations just to make sure there is tons of wiggle room.  Thanks for the 20% tip on rehab costs.

 

Originally posted by @Corby Goade :

I help new investors do this exact thing every day. If you have a chunk in a HELOC, you have incredible leverage, it's the cheapest money out there. If you combine that with the BRRRR method, you can do very well in a relatively short amount of time.

As for turnkey investing- there are some different models out there. Personally, I don't love that most turnkey companies are selling you the property after the rehab- that's where you build equity that allows you to scale. Without that forced equity, you have to rely solely on cash flow, which can be dicey, especially in markets where you are renting to low income, section 8 tenants. The turnover, maintenance and capex and eat all of your cash flow in no time. 

Best of luck!

Exactly, I was hoping to find a turnkey company that would find the property for me, I would buy it for cash pre-rehab, the turnkey company would provide a contractor and oversee the rehab, also provide a lender that would do the refinance, then the turnkey company would manage the property for me in the end or provide a management company. I guess it might be too much work for them with not as much profit as if they just sold it to me after the rehab? Most of the ones I've seen that are selling turnkey properties after the rehab are trying to sell them for market value. That pretty much eliminates the BRRRR part of the BRRRR+Turnkey model and makes it just a regular Turnkey property.