I bought my first house in 2018 and fixed it up top to bottom. My fiance and I currently live in it and this past year took out a 40K HELOC to purchase our first rental home right down the street. We bought it for 200K and rent it for $1,400 a month. The rent covers both mortgage and HELOC payment. Did some small cosmetic stuff to add value. Our area is State College, PA extremely strong and good market because of the University around us. Where I'm having trouble is figuring out where I can get another downpayment to purchase another place. How long until I can leverage the rental? Sorry I'm just starting out and trying to figure out how to get more houses to build my real estate portfolio.
Omaha, NE · Member since 2020 · 611 posts · 665 votes
5y
Leverage is great, and you want to be careful about overleveraging. If you have most of your HELOC and savings invested in the primary house and the rental, you may want to build some equity and pay down the HELOC a bit before buying again.
The exception to the rule would be if you can find a house that you can buy in terrible condition, fix it up, and refinance your money out of. Some people are able to increase their portfolios by a dozen properties or more each year, just by focusing on this strategy. But it can't be done without buying rundown properties at extremely undermarket prices.
Also, you have to seek out private money. I know someone who bought his first rundown property, with a mix of personal and borrowed funds. He contracted 25k from a friend. Then on his most recent property, he borrowed 80k, 30k from one friend and 50k from another. Once the work is complete, he'll refinance the house and pay the private loans back. He can do that because the house he bought cost him 31k, but its ARV will be between 140k and 175k. Even leaving 20% in for equity, he'll most likely have a bit of leftover cash from doing this deal.
That's by far the fastest way to scale. Best of luck.
Thanks guys. The issue with State College is there are no run down or below market rehabs. I shouldn't say there are no, but the ones that are, you get them for 150-200K. My plan I think is to pay down the HELOC as quick as possible, then if we build something bigger for ourselves use the current house as our next rental. Love the investment group idea, need to educate myself more on that side of things because I know people with some money that are already in the game a little.
Rental Property Investor · Bellefonte, PA · Member since 2017 · 29 posts · 18 votes
5y
@Nicholas Colella using a HELOC or any LOC is a good idea (in my opinion). It's a great way to keep every dollar you have busy versus sitting in the bank. Put another way, a LOC gives you the ability to invest every dollar you have available, and then go into the red some. Because a LOC is revolving you then have the ability to throw every extra dollar you have available each month at paying it down rapidly, knowing that if some emergency arises you still have liquidity to pull from the LOC.
This is essentially what I do in combination with long term debt. Establish a safety net of cash to keep on hand at all times. Use long term debt for financing properties, use all cash above and beyond safety net to fund down payments and have a LOC to fund anything above and beyond what you have available for cash. If both cash availability and LOC availability are low, it's probably a sign that you're beginning to over extend and best approach is to just focus on getting the LOC paid back down.
Over time, as you aquire more properties the rate at which the LOC is able to be paid down, and cash built up will accelerate. Velocity of cash will begin to take over and your growth will begin to snowball.