Accessing my equity

18 Replies

Hello everyone!

Disclaimer: I listened to every podcast on my daily 7 mile round trip bike commute to my jobs before pulling the trigger to purchase a house / investment property. AND I did read the "recent" forum discussions and tried finding more information on the blog before posting this. However if I missed the answer somewhere on the site please link to it and I will save us all some time and read that! :) Thank you in advance for your help!

My story:
My wife and I are expecting our first live baby in November (we lost a daughter at 37 weeks pregnant last December) and until then I'm working 2 jobs that keep me busy 7 days a week. The money is nice but I'm really looking forward to being a dad!

Thanks to Zillow.com and Homesearch.com we found a Jacksonville, FL, 1'800 sq ft, 3/1.5, on .3 acres, with pool foreclosure for auction and won the bid for 30k including all fees and closing costs. I pieced together the cash needed for the deal through an interest only loan from a friend (15k at 7% interest only for 2 years, with option to renegotiate at the end or pay off in full) and a personal loan from my bank (15k at 17% fully amortized over 3 years). The house is completely mine free and clear. It is not collateral for my existing financing package. The total cost to me per month is $587 which is $150 less than I currently pay in rent on a 2/1 apartment. We closed on this house on 8/5/14 and will be moving into it this coming weekend.

My question:
How and when can I get access to the equity I purchased in this house? By my very conservative estimate the house should appraise for at least 80k today and possibly for as much as 150k once updated as planned. I understand there is a "seasoning" period of 12 months from the date I purchased it. Is there any way for me to get a HELOC or equivalent sooner than that? I plan to use the funds to acquire more pieces of my real estate empire and would really like to start sooner than later.

Thank you for at least making it to the end of the post! I would be honored to get your thoughts on the deal and greatly appreciate any help on accessing my equity!

@George Carnicle  Congratulations on your purchase!

You shouldn't have to wait 12 months for seasoning if you want to only get a mortgage as a fraction of your purchase price (loan to purchase, or LTP). But that wouldn't likely make sense for a $30K purchase. You want a loan to value, or LTV, mortgage.

To get this from a bank you will need to tell them you've rehabbed the place.  Some banks may want documentation.  Others may be fine with you having just painted it and won't ask details.  So if you have done a paint and carpet or more, I'd start calling around.

Alternately, you might want to find either a hard money lender or, like your friend, a private investor.  I would think you could do better than 17% even with hard money.  They won't care what you paid.  They care what the house is worth.

@Larry T.  Thanks for the read and comment!

I am definitely looking for a LTV type product. I've been leaning towards trying to get a HELOC because of it's "there when you need it" availability.

As far as rehabbing goes,
I will have painted the entire interior by the end of this week. The kitchen will be brought to present day from it's current mid 80's style right after that. I plan on replacing the dual AC units which are still working 23 years after installation before the end of the year. I am also getting quotes to install a metal roof, which will replace the shingle roof it currently has. 

Sounds like I will need to get that done before going to see what the bank will give me. I'll also pursue the hard money lender route as well to see what's out there. Do you have any advice on where to start and what to look for?

@George Carnicle  I've only used hard money once.  I'd start by networking with other investors or checking our Resources - Hard Money Lenders from the menu of this website.

Honestly, if you are doing all that and do not need the money urgently, I'd just wait until you are done, get a HELOC or refi mortgage, pay back your friend and personal bank loan and you will still put a chunk into your savings account and might be ready to pick up another investment property.

Your numbers don't really make sense. $15K at 17% fully amortized over 3 years is $836/mo on its own, yet you say the total monthly is only $587. Something's not adding up (pun only "sort of" intended).

I'd think you'd be able to beat that handily with a mortgage secured by the property, no matter how terrible your credit is... Hell, I'd write something better than that and I'm not even in the HML business.

George,

I am quite surprised a bank gave you a loan for 15k @ 17%. I am banker and I have to say that is crazy. Interest rates are still very low. Even if you have horrible credit, you should still be able to get something around 10-12% from a bank. As far as the HELOC goes, most banks will want a 6 month seasoning. However, there are some that will do after 3 months. The majority of banks will do a heloc on a secondary property for 70% LTV. You should EASILY be able to walk into any bank a get a heloc for 50k. I would recommend doing a heloc vs a refi simply to save on closing cost, but there are other factors you should consider as well.

Do the math for your best approach.  I am reading between lines and assuming a fix and flip is not in your plan.  The interest on both loans is running you around $300 a month, which is not a big deal especially when total loan payments is similar to current rent, you should be able to sustain this indefinitely.  Getting a loan a few months sooner with poorer terms (i.e., less total amount, shorter term, higher interest)  will only save you $900 in interest at best (equity line or mortgage you will have closing costs probably larger than this).  If you think you can crank through most of the rehab in a few months I would wait and work toward one 30 year fixed loan.  

Do as much of the rehab as you can in 2-3months.  Document everything (before / after pictures).  Then start talking to local banks to see about a primary mortgage.  In my opinion you cannot be successful real estate investor without living below your means, which means you should have at least a couple hundred a month from your personal income to put toward investing (especially if you are now paying $150 less a month for rent).  In the mean time put any spare money toward paying down the 17% loan, You will want to get out from under the 17% loan as fast as you can.  You might consider a credit card with no interest no payments for X months and put all your expenses (including rehab costs) so that you can put all spare income toward the 17% loan.  Although this can be dangerous without a plan since credit cards can crank up into the 20% range after the free period, this approach only helps for a few months.  

Once you are mostly done with rehab start interviewing local banks and find one to work with.  Ask them questions you are asking here about seasoning etc.  Show pictures, etc.  I think for your long term success, get through this rehab, get a traditional mortgage for 50-100k, pay off loans you have and use rest for your next investment.  It it takes you 6 months to get a 30 yr fixed it will much better for you in the long run (in my opinion).  

@Jim Sokoloff  Thanks for the read!

The personal loan is actually for 14k at 17.25% with a 37 month term. My monthly payment on that piece is $499.17. I reran the numbers and they added up.

I'm glad you questioned it, cause I never actually checked to make sure what the bank told me was true. Will add double checking financial obligations to my to do list in the future!

@Christian Bors  Thanks for the read!

I'm with you! However my 687 credit score isn't super stellar and the fact that I financed a new car in June probably didn't help either. I really needed that missing 15k of the total amount and was out of options short of liquidating my 401k, other investments, draining my savings account and maxing out my credit card. I was pretty happy to get it as quickly and "easily" as I did.

Good to know about the less than 12 month seasoning potentials! I'll keep rehabbing away and see where we get in 3+ months and start reaching out to the banks then. 

What other factor should I take into consideration? Variable interest rate on the HELOC?

I wanted to do the same thing. The banker told me that they would give a loan for 80% LTV based what I paid for the house. After 12 months, get an appraisal and your value should be increased with the improvements, thus 80% LTV would be more.

@Patrick McGowen  Thanks for the read!

I'm definitely more buy and hold inclined. Great catch! The current payment structure is definitely something I can do indefinitely.

My wife is currently taking daily progress pictures for Facebook so I've got that covered quite well. It's fun watching her take ownership of this house as it comes together.

I agree with you on living below your means. I would take it one step further and say that everyone should do that not just real estate investors. America would be a different and much better place for it, in my opinion. I'm currently saving / investing about 25% of my take home pay and working toward pushing that closer to 50% Mr. Money Mustache style.

Great suggestion on the 0% credit card option! I have done that successfully before for various other purchases. I'll definitely look into that. Thanks for the reminder! The 17% loan is definitely my first priority.

Thank you for the long term advice! I feel like I've done a great deal and want to move on to the next one. I'll work on slowing down, enjoying this win and move on to the next step once it's time. For now there is definitely a lot of work I can do to improve this house! 

@Anthony Dooley  Thanks for the read!

Where are you at in your time table? Have you made it to 12 months yet? Have you tried anything else to get to your "purchased" equity faster?

No, I went another direction, but if I needed to get a HELOC now, it would be easier now that the rehab is complete and 12 months has passed.

@George Carnicle  As far as a heloc goes, there won't be any closing cost and you usually get a free appraisal. Most heloc are set at a variable. What I am seeing is about 3.25-4.25 depending on ltv and credit score. Now there is always an option to lock a heloc in at a fix rate. Depending on the length you are looking for, there are lock in rates at 3.99 for 10years. If you are looking for 25 years it will be around 5.8.  You should definitely call several banks. Some will offer you much higher rates then I am quoting but if you look hard enough, you will be able to find a good deal. 

The most important thing for you right now is to get rid of that 17% rate. You should call several local banks and I'm sure someone will be able to beat that rate!  Be careful with the credit cards. If you are sure you will be able to close that balance in 12months , it's a good idea. However, most cc companies will jack up the interest to 20-30% after that intro rate.

Originally posted by @George Carnicle:

@Jim Sokoloff Thanks for the read!

The personal loan is actually for 14k at 17.25% with a 37 month term. My monthly payment on that piece is $499.17. I reran the numbers and they added up.

I'm glad you questioned it, cause I never actually checked to make sure what the bank told me was true. Will add double checking financial obligations to my to do list in the future!

Darn it. I was using the Bankrate amortization calculator wrong. I just assumed it was updating on every cell, but it only updates when you hit calculate, so I was full of it. 

If I use the calculator correctly, your figures above are correct/more than close enough. Sorry about that...

George,

Congrats on the property! Sounds like you have a really good setup for your next investment step. What part of Jax did you find it in? I used to live there (I was Navy stationed in Kings Bay), and my partner and I are considering Jacksonville as a spot to invest.

@George Carnicle

Congrats on the house purchase.  Something you said caught my attention"

".......short of liquidating my 401k...."

You have a 401k? Federal law allows you to borrow from your 401k to the tune of $50,000 or 1/2 its value, whichever is less. The details vary based on your account custodian, but you can borrow at about 4.25% (give or take) fixed and amortized over 5 years. I don't know what you have in your 401k, but if you have $60k you could borrow $30k from it and pay off your high interest loans. At 4.25% your monthly payment is $555 and you are paying YOURSELF back. A loan from your 401k also does not show up on your credit report or affect your DTI.

@Danny Simard  Thanks for the read and thank you for serving our country!

The house is located in Murray Hill.

I can highly recommend investing in Jacksonville. Shad Khan is adding so much value economically and is actively looking to do more as opportunities arise. The geographic location of Jacksonville is about as good as it can get too. I'm excited to see what the next 3-5 years will bring us here. (Please take this opinion with caution and do your own due diligence since this is my first "investment" and my primary residence to boot. :))

@Jeff Pollack  Thanks for the read!

Great catch on the 401k! My current employers uses Fidelity as their custodian and we have the ability to use 401k loans. Great creative finance recommendation! Unfortunately I don't have that kind of money in my 401k yet. However I am using a 401k loan to do rehab work and will continue to save my way towards being able to finance larger acquisitions in the future.

Thanks for the tip!

Join the Largest Real Estate Investing Community

Basic membership is free, forever.

By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.