Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
I am mulling over an idea and I would like to hear other's input. For those that don't know, my mother passed away in April and they had a small family trust. I just found out last week that they have an active HELOC on their residence. It just so happens that I am moving to that house in November, in Southern California. The HELOC is for $210,000 and they have only borrowed $12,000 on it. What intrigues me is that the Fixed Interest Rate on the HELOC is 3.99%.
So my question is, "Would you pull this out and invest it or leave it there for a reserve fund?" I know I can invest it and get some really good returns. Even a 10% Cap Rate puts some nice change in my pocket. But I could probably get 15 or 20%.
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
15y
Mike, I think this is more a personal decision than a business one. You are an experienced investor and I have no doubt that the most profitable thing for you to do would be to take the money and invest it in a better opportunity.
But you mention that 26 of your 30 properties are free and clear. That tells me that you are comfortable with investing in that manner and have become very successful doing it that way. I generally do not like to change a winning formula unless there is a clear need.
Good luck with this decision and do let us know what you decide!
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
This is really an asset allocation question for someone that understands your entire financial picture. The funds would likely be best-used as a reserve fund if you aren’t very liquid and have a lot of long-term debt. If this isn’t the case you likely won’t find lines that cheap anywhere right now and I think it would be foolish just to let the money sit there idly doing nothing.
You can make all-cash offers with no financing contingency with the line and later refinance the properties or do flips with it. That would be what I would look at doing if the line was mine and I didn’t need to deleverage my portfolio any.
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
15y
The title to the house is in my name as successor trustee. Plus, I have a PoA for my father, who still loves in the house. Another funny thing, the first trust deed on the house is at 5.875% but it is under 100K, paying off at over 1,200 a month of principal.
Flipper/Rehabber · ALLENTOWN, PA · Member since 2010 · 38 posts · 19 votes
15y
Pull that out as Bryan pointed out you can make all cash offers, and at 3.99% your better off investing it then just holding on to it. With 210k you can start a pretty nice portfolio on top of what you currently have.
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
15y
Here is something else I might consider. I might be able to get a new first trust deed for 3.75% to 4% and pull out maximum cash to invest. It will depend on the cost of the loan, but I have contacts that can get me pretty good deals. But I need an appraisal as I am not sure of the value of the house. It could be $500,000 or it could be $700,000.
Even though 26 out of 30 properties I have are free and clear, this one is an owner occupied and I could get a better loan. This property was free and clear 10 years ago, but my father pulled the money out to pay off 5 rental properties. So maybe it is time to pull money out to expand the trust!?!?
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
15y
Mike, I think this is more a personal decision than a business one. You are an experienced investor and I have no doubt that the most profitable thing for you to do would be to take the money and invest it in a better opportunity.
But you mention that 26 of your 30 properties are free and clear. That tells me that you are comfortable with investing in that manner and have become very successful doing it that way. I generally do not like to change a winning formula unless there is a clear need.
Good luck with this decision and do let us know what you decide!
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
15y
Mike, have you checked with the lender yet? I don't think that your POA authorizes you to create future debt by having an interest in the collateral, the loan was not made to you. It's not a checking account. Good luck with you decission, I'm sure you will qualify for similar financing....but fixed rat at 3.99%, how is that fixed and have a cap of 10%, is that what I read?....
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
15y
FE, I said I could achieve a cap rate of 10% on a NEW investment. Borrow at 3.99 and get 10 on an investment, that is free money.
Vikram, thank you for the vote of confidence. But even an experienced investor is wise to toss ideas around with other experienced investors. We can always miss something, be it good or bad.
It is correct that even with a PoA, I cannot incur debt on behalf of my father. But I already have out of necessity to finish up the 1031 that started when my mother was still alive. This trust has been made much more complicated by the timing of everything.
Real Estate Investor · Hartville, OH · Member since 2010 · 148 posts · 174 votes
15y
Originally posted by Mike M:
FE, I said I could achieve a cap rate of 10% on a NEW investment. Borrow at 3.99 and get 10 on an investment, that is free money.
Vikram, thank you for the vote of confidence. But even an experienced investor is wise to toss ideas around with other experienced investors. We can always miss something, be it good or bad.
It is correct that even with a PoA, I cannot incur debt on behalf of my father. But I already have out of necessity to finish up the 1031 that started when my mother was still alive. This trust has been made much more complicated by the timing of everything.
Personally I wouldn't pull a HELOC on a property I lived in or was planning to live in, but that's more of a personal preference than an investment strategy.
Investor · Westminster, CO · Member since 2009 · 1k+ posts · 1k+ votes
15y
Joe
I can understand the need for the security of a "paid for" home, but I have also seen what happens to retiree's who have no income. While a free and clear home adds some security, it does not take away Property Taxes, Insurance, Utilities, Groceries, Gas Money, Entertainment, Medicare Supplemental Insurance, and so many more things.
If a retiree incurs a $500 a month mortgage and gains $1,000 a month income, that is a huge help. My fathers SS check doesn't even cover his groceries and utilities. With the high heat in CA this past month, his Edison Bill is over $500.00. When he refinanced the last time, he gained a $1,600 a month payment and lost $3,100 a month of payments on five investments.
Instead of getting a "Reverse Mortgage", retiree's should just refinance and invest. They will make more money, get some tax benefits and grow their money.
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
15y
Originally posted by Mike M:
Instead of getting a "Reverse Mortgage", retiree's should just refinance and invest. They will make more money, get some tax benefits and grow their money.
Looks like you have just answered your original question, Mike. There's little doubt that you can invest the money at a much higher return that the cost of capital, so there was never any question as to the financially optimal decision. If you are comfortable with it, go for it.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
How about pulling the money out and investing in bonds that are easily traded on the open market? You can trade those in smaller chunks than you can with real estate if you need some liquidity. Part bonds and part real estate would be another option to be agnostic with respect to inflation expectations.
Real Estate Investor · Phoenix, AZ · Member since 2009 · 1k+ posts · 1k+ votes
15y
Bond prices are highly sensitive to interest rates and interest rates are highly sensitive to inflation. The only way a bond can be considered low-risk is if it is a very short term bond of high quality, in which case the yield difference will not be worth it.
Investor · Round Rock, TX · Member since 2010 · 8k+ posts · 4k+ votes
15y
Yeah…obviously bonds won’t fetch the yield you could get with RE investments either. Some short-duration bonds in part of the mini portfolio may be a good idea for liquidity needs though. This is a question for a financial advisor that can see your whole financial picture…which I am sure you don’t want to share on a message board.