Should I use the equity in my primary for a rental???
Member since 2019 · 187 posts · 74 votes
Should I use the equity in my primary for a rental???
Most Popular Reply
@NIcholas Hamel, yes!!!!! We started out 13 years ago with the $60k in home equity. Using only the equity and continuously Brrrring and redeploying it my wife and I built a little empire. 13 years later we have 91 units with a market value of 10million…. Again, all started with our home equity.
50 Replies
- Investor · Leander, TX · Member since 2016 · 299 posts · 402 votes5y
Not if you are close to having your mortgage paid off.
- Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes5y
Originally posted by @Carlos M.:
it’s our entire portfolio silly. We have stuff selling for $200-$250 per door in our backyard. Lancaster PA. When we started the cap rate was 10-12. Over the years it has compressed down to 7 for a building need lots of work. I know someone who is looking at an 8 unit for $700k and they are going to gut it! We have renovated stuff selling for a 4 cap. A 3 unit just sold for $900k here. It cracks me up that instead of trying to net work and connect to ask questions on my market and get more details and ideas , you just simply deny the possibility. I have nothing to gain from my reply. I don’t sell any courses I’m just here to help motivate people with MY reality. Clearly it’s not your reality. But I assure it’s possible and my reality . I do how ever give back and mentor people for free. I currently mentor 7 people. As a matter of fact I have one kid who is 26 years old and has 8 units. He is crushing it. What he saw was us crushing it. He asked , can you help me get started and we did. He never asked me to prove it to him. Side note , If you were closer to me I would invite you my next business mixer we are hosting on our yacht. Cheers, best of luck in your investment career.
Got it. I misunderstood. I only count equity, and cash flow, the amount I would have in my hands after selling the asset, minus sales costs, minus taxes. As in, "how much did I make for my efforts". I don't worry about combined ARV values. It's just a different way of looking at things I guess.
Curious thing is, if you started 13 years ago that would make it 2008 when everything crashed for a few years.
How'd you manage to survive such a dramatic down turn from 2008 to 2012 when banks weren't lending and everybody else claims they were losing their shirts? ;-)
Good to see that you prospered nonetheless.
When I started I did a refi on my home and pulled some equity out for downpayments. I was advised at the time to get all the loans at one time so that they would all be approved. I bought 9 out of state SFRs at one time (all but 2 brand new). It worked out at the start until many of the insur and taxes started going up due to a boom. I was from Ca and didn't realize those two expenses could really escalate with severe weather and higher values and they were eating up the margins I left. I had a great job at the time and was able to handle anything that came up but then a crash occurred and there were so many properties on the market that the rents also crashed. The reassessments were not happening as fast as when the properties were going up (taxes) and insur stayed high. I got rid of a few at that time and unfortunately due to a medical issue in the family, I sold 2 others. I am happy I did buy houses when I did dispite all that but should've really started with less and not worried about loans being approved which is definitely secondary to being able to hold the houses. The 3 I have are all worth a lot more and all going great with those. I wish I held on to some of the others but, oh well! With another property I bought through borrowing from a family member 100%, I was able to sell it and trade it to some newer properties with better cash flow and can live off the income of all my rentals now. So, yes, I would advise getting either a loan against your primary if rates are better for you or HELOC if those #s work for you. Real Estate was the best investment I ever made and I have much freed up time to do the things I have always wanted to do when I was working so hard all the time.
@Mike Hern ,
My fault. I didn’t explain myself either and just rattled off. So we did start at the bottom of the market. It was super hard to finance a multi family at that time. The plus side was there was plenty of inventory. When we first started I would put on my suit and make a package containing all my financials , a little story about my wife and I as well as the property details. I would stop in unannounced to at least 10 local banks and ask to see the commercial lending department. I would simply introduce myself, give them my elevator pitch and the package and keep moving. I would only hear back from 2-3 lenders but typically only one would be willing to do the deal. That’s how we secured financing for our first 3-4 deals. It got was easier after that. Now it’s to the point where one or two lenders per year may reach out asking yo finance a deal for us. That feels amazing!! As far as pour deals. We only purchased small multi family deals… 3-5 units for the first 4 years or so. Then they got a tad bigger. 6 u it’s , 8 units , then 11 units , then a 15 unit and our last was a 25 unit portfolio. We bought the building. renovated while paying cash for the Reno’s. ( I did the work myself) and did a cash out refi to get our initial equity and rehab monies back. That was key to keep growing. To this day we have never sold one of our properties. So it’s the combination of sweat equity, a little bit of luck , and a wild market they have our portfolio the value that it has today… I would encourage any and everyone to purchase small to medium multi family properties, roll up their sleeves and get to sweating that equity out!! It has changed our life so dramatically!!
- Real Estate Agent · New York City · Member since 2020 · 819 posts · 641 votes5y
It is a matter of how well you can deploy capital and how cheaply you can borrow it at.
If home equity is your lowest cost of capital, then go for it.
However, the ability to make decisions quickly might be worth a bit more.
- Investor · Cleveland, OH · Member since 2019 · 64 posts · 29 votes5y
@NIcholas Hamel
All day
Originally posted by @Jay Hinrichs:
Originally posted by @Account Closed:
Depends. How stable is your job? If the rental income is zero for a year can you afford to pay the mortgage and not lose your house? Do you want to put the roof over your head at risk for a few hundred bucks a month in cash flow?
I am with you 100% on this one Anish.. downside risk has to be considered so really depends on what and where you guy.
Buy cheapo C/D class then no way in my mind.. buy something very nice upscale with very little chance of tenant and market drama then maybe..
There was a post a few years back that got like 100 Atta boys from the BP audience with no concept of the risk the folks were taking.
W 2 folks nice run up in equity in LA.. pull 80 or 90% heloc and then admittedly buy 8 D class homes in Memphis.. so I get on and well like you I was the contrarian in the thread but I ended up with I think 50 up votes by the time we talked it through and you suss out the uber risk these folks took.. they never did post again.
I remember that thread. The dude became a rock-star because he laid out the steps he took to acquire 10+ doors. But after a few clarifying questions, you basically pointed out that he simply pulled equity from prime real estate in LA (his home) and used it to acquire Class D homes in the Midwest. OK, I guess that works for some, but certainly not me. But then again, I'm the kind of guy that prefers buying Midwest TK's without financing.
- Real Estate Agent · Huntsville, AL · Member since 2015 · 60 posts · 17 votes5y
@NIcholas Hamel
100%! I used a HELOC on my last 2 BRRRR's and just rinse & repeat. As others have stated - make sure things are stable with income. Last thing you want to do is lose the roof over your head. Best of luck to you my friend
- Member since 2019 · 187 posts · 74 votes5y
@Jay Hinrichs
Awesome advise. I have a stable job with the federal government so i wasnt to worried
- Member since 2019 · 187 posts · 74 votes5y
@Carlos Medina
Wow thats pretty impressive carlos. I appreciate the replies
- Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes5y
Originally posted by @Steve O.:
@Anish Tolia why would you invest in zero cash flow?
My point was that what if for reasons such as say....a pandemic, that you are unable to collect rent for a year. And then you lose your job. If you cant pay back the HELOC, you put your house at risk. I personally would never risk my personal residence for any investment. But then again, I am different from most "refi till you die" high leverage investors on BP. But I also happily retired at age 52 and dont owe any money to anyone and am totally happy with life!
- New to Real Estate · DALLAS TX · Member since 2021 · 24 posts · 10 votes5y
@NIcholas Hamel
I'm in the same situation here. My primary home has some equity I can use to BRRr but don't know where you start. Any local mentors or distance ? Thank you all for you wonderful comments. Trust I can get in touch with @Carlos Medina
- 5yBrian MillerPro MemberReal Estate Agent · St. Louis, MO · Member since 2019 · 58 posts · 45 votes
Go the HELOC route but don't over leverage if you're doing it on your primary residence. Always leave equity in your home, and don't fall victim to what so many people did leading up to the 2008 crash. I went this route and purchased 2 duplexes with $60k of HELOC money, and now those properties are worth $130k more than what I paid for them. Not a bad return. You want to make sure that the property will cash flow with the HELOC payment, and talk to your CPA to see if you can deduct the HELOC interest on your taxes. I am able to since I am a full time RE agent/professional, and the money was used to buy rental properties. The HELOC cost about $300 for an appraisal vs roughly $2k for a refi.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
I rented to a guy a few years ago who had used a home equity loan to buy two rentals. He ended up loosing both rentals and his primary to foreclosure. I am not saying don't do it, but understand the risks. Nobody who lost everything in real estate is on BP to tell their story. All you will hear on these forums is "go for it" but in the end if it goes bad, you are the only one who suffers.
- 5yJonathan PavkovBusiness MemberColumbus, OH · Member since 2021 · 201 posts · 166 votes
Originally posted by @Joe Splitrock:
I rented to a guy a few years ago who had used a home equity loan to buy two rentals. He ended up loosing both rentals and his primary to foreclosure. I am not saying don't do it, but understand the risks. Nobody who lost everything in real estate is on BP to tell their story. All you will hear on these forums is "go for it" but in the end if it goes bad, you are the only one who suffers.
Why did he lose the rentals and his primary home? Was he under water and unable to rent out?
- 5yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joe Splitrock:
I rented to a guy a few years ago who had used a home equity loan to buy two rentals. He ended up loosing both rentals and his primary to foreclosure. I am not saying don't do it, but understand the risks. Nobody who lost everything in real estate is on BP to tell their story. All you will hear on these forums is "go for it" but in the end if it goes bad, you are the only one who suffers.
I lived this in 08 to 2011 when investors that leveraged up were dropping like flies.. lots of families were ruined.. Along with those that did not realize that HELOC's are not fixed term loans.. they can be frozen and called unilaterally by the bank.. READ THE FINE PRINT which no one does.. and they are shocked when they have them called or cant access them mid project.. Not saying this will happen right now very unlikely but if we start to see credit tightening those loans are the first to be affected.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Jonathan Pavkov:
Originally posted by @Joe Splitrock:
I rented to a guy a few years ago who had used a home equity loan to buy two rentals. He ended up loosing both rentals and his primary to foreclosure. I am not saying don't do it, but understand the risks. Nobody who lost everything in real estate is on BP to tell their story. All you will hear on these forums is "go for it" but in the end if it goes bad, you are the only one who suffers.
Why did he lose the rentals and his primary home? Was he under water and unable to rent out?
He was in Michigan and worked for a tooling company that supported the auto industry. Both of his renter lost their jobs and stopped paying. He lost his job. The tenants moved out, but he couldn't rerent. One property was trashed and needed thousands in repairs. He decided to walk away from it all. No landlord would rent to him and his family due to foreclosure and bankruptcy pending. He eventually ended up paying a full years rent in cash to get a landlord to accept him. I rented to him a couple years after that. By that time he had a good job and two years rental history.
I am sure people will say, "yes but my market is better than Michigan" and it may be. Just remember that no market is immune to economic or natural disaster that could send your business in a tail spin. If you have cash reserves, you can ride through the storm. If you are heavily leveraged, you better make sure nothing goes wrong.
- Investor · Phoenix, AZ · Member since 2015 · 346 posts · 170 votes5y
@NIcholas Hamel
Yes it’s a good idea.
Make sure you’re not over leveraged on your primary residence though.
- Real Estate Agent · Louisville, KY · Member since 2017 · 1k+ posts · 1k+ votes5y
For a BRRRR or flip perhaps, but need to keep paying the heloc back so it is always available.
- 5yJonathan PavkovBusiness MemberColumbus, OH · Member since 2021 · 201 posts · 166 votes
Originally posted by @Joe Splitrock:
Originally posted by @Jonathan Pavkov:
Originally posted by @Joe Splitrock:
I rented to a guy a few years ago who had used a home equity loan to buy two rentals. He ended up loosing both rentals and his primary to foreclosure. I am not saying don't do it, but understand the risks. Nobody who lost everything in real estate is on BP to tell their story. All you will hear on these forums is "go for it" but in the end if it goes bad, you are the only one who suffers.
Why did he lose the rentals and his primary home? Was he under water and unable to rent out?
He was in Michigan and worked for a tooling company that supported the auto industry. Both of his renter lost their jobs and stopped paying. He lost his job. The tenants moved out, but he couldn't rerent. One property was trashed and needed thousands in repairs. He decided to walk away from it all. No landlord would rent to him and his family due to foreclosure and bankruptcy pending. He eventually ended up paying a full years rent in cash to get a landlord to accept him. I rented to him a couple years after that. By that time he had a good job and two years rental history.
I am sure people will say, "yes but my market is better than Michigan" and it may be. Just remember that no market is immune to economic or natural disaster that could send your business in a tail spin. If you have cash reserves, you can ride through the storm. If you are heavily leveraged, you better make sure nothing goes wrong.
Got it - Seems like the biggest issue there was lack of cash reserves, not understanding the risk of owning a rental, and not being employed. Cash flow and cash reserves are necessary to mitigate this risk.
- Lender · Gardena, CA · Member since 2021 · 10 posts · 3 votes5y
@JD Martin yes however refinance isn’t your only option. A heloc is another option and less expensive. In the line of credit, if you don’t use it, you won’t be paying Interest and it’s always readily available to you. Any questions please feel free to reach out
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes5y
Originally posted by @Jonathan Pavkov:
Originally posted by @Joe Splitrock:
Originally posted by @Jonathan Pavkov:
Originally posted by @Joe Splitrock:
I rented to a guy a few years ago who had used a home equity loan to buy two rentals. He ended up loosing both rentals and his primary to foreclosure. I am not saying don't do it, but understand the risks. Nobody who lost everything in real estate is on BP to tell their story. All you will hear on these forums is "go for it" but in the end if it goes bad, you are the only one who suffers.
Why did he lose the rentals and his primary home? Was he under water and unable to rent out?
He was in Michigan and worked for a tooling company that supported the auto industry. Both of his renter lost their jobs and stopped paying. He lost his job. The tenants moved out, but he couldn't rerent. One property was trashed and needed thousands in repairs. He decided to walk away from it all. No landlord would rent to him and his family due to foreclosure and bankruptcy pending. He eventually ended up paying a full years rent in cash to get a landlord to accept him. I rented to him a couple years after that. By that time he had a good job and two years rental history.
I am sure people will say, "yes but my market is better than Michigan" and it may be. Just remember that no market is immune to economic or natural disaster that could send your business in a tail spin. If you have cash reserves, you can ride through the storm. If you are heavily leveraged, you better make sure nothing goes wrong.
Got it - Seems like the biggest issue there was lack of cash reserves, not understanding the risk of owning a rental, and not being employed. Cash flow and cash reserves are necessary to mitigate this risk.
One mistake people make is they think cash flow is guaranteed. Another mistake people make is thinking a line of credit is the same as cash. During the housing crash many banks took away lines of credit, so people thought they had access to money that wasn't there. Opening new lines of credit was hard for people, even those with jobs and good credit. Impossible for anyone who lost their job. Nobody expects to lose their job until they do. During the great recession people showed up in the morning to a notice on the door saying the business is closed. We are not in that spot today, but the economy cycles.
- Rental Property Investor · Kansas City, KS · Member since 2019 · 73 posts · 39 votes5y
@NIcholas Hamel
We used a HELOC against our primary to purchase our first rental! It was a cheap and easy option to get the down payment - However, a couple things we ran into:
- while the interest rate was low AT FIRST, most become variable after the promotional period (if one at all). So you’ll be subject to prime rate.
- have a good repayment plan in place. We found an okay deal, but not great. It cash flowed, but the extra monthly HELOC payment (entire 25% down payment) really ate into the cash flow and at the time we really didn't know how we were going to pay it off (it had 15 year amortized payments). So either find a good enough deal that you're going to be happy with the cash flow after the extra payment OR plan on doing a rehab and refi eventually to pay it off.
That second point is definitely due to our inexperience and being excited to pull the trigger. “We’ll just figure that part out once we get it rented out!” We did... but looking back, we should’ve come up with a plan beforehand.
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