Using my home to fund my next deal...

[Izzy Smith]

Hey everyone!

Newer investor here looking to get some advice. I recently purchased my first home using FHA. It feels great to get in the game but now I need to think about the bigger picture.

My property is a 2 - unit in the suburbs of Chicago that is currently renting under market. I plan on forcing appreciation by making upgrades to the property and paying down the mortgage. My question for everyone is, generally speaking, how have you used your home to fund your next deal? Can you share you your stories of using helocs / cashout refis / etc. to fund your next real estate deal (or stories about the pitfalls in using this strategy)? 

Thanks so much everyone!

-Izzy

[John Warren]

@Izzy Smith first of all, congratulations for getting into the game. Once you get the bug there is no turning back. As you look to make your next move, remember that real estate is something of a get rich slow game. You need to add value to your current home to be able to pull out equity. I would NOT pay down the mortgage. I did that early on, and it was such a bad waste of money. 

Your home will appreciate and you will add value. What you do is look for ways to pull out equity by using a cash out refinance or a HELOC. The one bad thing that isn't talked about as much is that your current cash flow will go down when you do this. You are "borrowing" your future equity and cash flow a bit to leverage into deal number 2. That is ok as long as you are comfortable with the entire cash flow picture.

The other strategy is to sell and trade a property up when the time is right. This strategy is also valid as it allows you to fully unlock your equity. Sometimes this is the better route if your first deal won't cash flow enough with the increased debt on it. 

[Izzy Smith]

John, thank you so much this is helpful feedback!

-Izzy

[Jonathan Aversano]

Upgrades/rehab can help you increase your rents, but I don't see how paying down a mortgage will get your rents up to/above market. Makes no difference to prospective tenants. Would be a drain on your cash reserves, especially if you're locked in at a low rate with FHA.

[Tom S.]

@Izzy Smith How much equity do you have in your primary house? You mentioned you recently purchased with an FHA loan, which typically would be 3.5% down. Usually (not always) you'll need at least 20% equity to get some cash out. Certainly you can force appreciation through upgrades, but they generally have to be pretty substantial. You may want to talk to an agent or bank in advance to see if the upgrades will give you the desired appreciation.

As others mentioned, you'll also have to run the numbers to see if pulling that money out with the fees involved is worth it.

[Carlos Valencia]

Hello Izzy, 

Theres still  many things to consider before moving to your next property. You mentioned its a 2 unit property. Once you move out do you know if your rents will cover your current mortgage payment? If it does that will help you offset that monthly debt and help your debt to income ratio. If you just bought it it might be a little challenging to refi our do a heloc as there might not be much appreciation yet. For the heloc/refi you might have to wait a little longer to get more appreciation. Maybe not pay down the mortgage faster instead continue saving for your next property. Hope this helps.

@Albert Bui @Matthew Kwan

[Dave Skow]

@Izzy Smith- thanks and congrats on getting the duplex started 1) fyi -you really cant force appreciation as the future value of the property will likely be tied to the recent sales of like king duplexdes in your area .. improvements will help ...paying down the loan will help 2) Most house hackers that use a FHA loan to get the 1st property - will try to get the property refinanced into a conventional loan while they are still living in the property 3) by doing this - you can 1) free up the FHA loan to use again on proerty #2 if desired and 2) hopefully get better terms / lower payment / lower mtg ins on the new loan 4) In order to get a HELOC on the present duplex you will need to be living there and you would need to see the equity position be approx 20% or higher 5) when you get to the point of starting to consider buying - make sure you get pre approved before you begin looking aggressively - good luck

[Doug Smith]

This isn't advice as it is our personal story. I run a our mortgage company, but my wife has a degree in architectural interior design and she runs our real estate investment side. Besides being beautiful and brilliant (please someone share this post with her), she's flipped or built scores of properties, so she really knows her stuff. Like many other people during Covid, we decided to stay in our home and do a major renovation instead of having her build a new home. We've been in the house for over 20 years, so we had tons of equity and put a HELOC in place to finance the renovation. It's kind of reverse of what you're doing, but the idea is to use that almost like a reverse savings account where, when she sees profits from the sale of a flip/new home, she can put that into the HELOC and then draw it back out as needed for another project. I do realize that the rate might be higher than what I can do for her to finance a property, but the HELOC is already in place, so she doesn't have closing costs again on that money and it's super-flexible. Here again, that's not advice, but it's simply our story. I hope your story has a happy ending. Although you're from Chicago and I'm originally from near STL, I will still wish you luck. Go Cardinals.

[Corby Goade]

I got started using HELOCS and I still use them for almost every deal. They're the cheapest, most flexible and LEAST stressful form of funding. 

[Malcomb Stapel]

@Izzy Smith a strategy that we've used is to take HELOC funds and use them for the initial down payment on long term investment properties. We refund the HELOC through our flipping business. The profit from the flips goes towards paying back the HELOC. At that point you are essentially in the property for nothing, but have retained your equity position.

[Izzy Smith]

Everyone,

This is helpful thank you for the feedback! @Tom S., the appraisal came back at asking price, so $0. As I distill everyone's useful advice it seems to me that: 1) HELOCS can be a useful tool in adding to the portfolio over time; 2) There is no need to rush to pay down the mortgage; 3) Refinancing into a conventional when it makes sense will improve my position in the long term. 

Again, everyone thanks for being kind enough to give your advice and encouragement!

-Iskar

[Crystal Smith]

Quote from @Izzy Smith:

Hey everyone!

Newer investor here looking to get some advice. I recently purchased my first home using FHA. It feels great to get in the game but now I need to think about the bigger picture.

My property is a 2 - unit in the suburbs of Chicago that is currently renting under market. I plan on forcing appreciation by making upgrades to the property and paying down the mortgage. My question for everyone is, generally speaking, how have you used your home to fund your next deal? Can you share you your stories of using helocs / cashout refis / etc. to fund your next real estate deal (or stories about the pitfalls in using this strategy)? 

Thanks so much everyone!

-Izzy

It's been a long time but we used HELOC to fund down payments. No pitfalls. Just run the numbers to ensure the cash flow from the new purchase works.  Also we showed the cash from the HELOC as a loan to the LLC which purchased the property.

[Jonathan Klemm]

Hey @Izzy Smith - Welcome to the Chicago BP forums.

Congratulations on purchasing your first property! Plus using FHA...huge win!

I personally was able to pull off a BRRRR and then get a home equity line of credit up to 90% of Loan to value which was, in my opinion, the best place possible.

Do you have some ideas what and where you want to purchase?

[Jay Thomas]

Congrats on entering the real estate game! I would suggest, to fund your next deal, consider forcing appreciation through property upgrades and paying down the mortgages. You can also explore options such as HELOCs or cash-out refinancing. But, be cautious and evaluate the risks involved.