Dearest BP Community - I come to you again for advice and a crazy check, so thank you ahead of time.
Here's my situation/question:
I own my primary residence in Fort Worth, Texas. It is worth 210k and I owe 162k, therefore I have about 23% equity in the property. For out of state folks who are not familiar with Texas HELOC rules, we have a regulation where your CLTV on your home cannot exceed 80%, meaning that today if I wanted to take out a HELOC on my home, I would only be given access to 3% of the equity (a disappointing $6000-ish).
I currently have around 50k liquid ready to deploy into real estate investments.
I'm looking for local Dallas/Fort Worth BRRRR opportunities as well as buying cheaper high yield turn-key deals in cash (50k-70k out of state houses yielding 12-15% in Indianapolis, Memphis, Pittsburgh, Detroit, etc)
Here's what I'm considering: what if I apply my 50k of cash towards the principal of my home, immediately reducing the balance of my primary mortgage down to 112k. I would then have around 46% equity in my home. Since the 80% CLTV Texas HELOC rule is in place, I could then have access to a $56k HELOC (210k value *.8 = 168k minus 112k balance = 56k). By taking a quick look at rates available for HELOCs in Texas, I could expect a variable interest rate around 4.25%.
I'm thinking this could be an advantageous move, because of the HELOC being a revolving line of credit. So if I were to use the entire 56k towards the purchase of a distressed property to BRRRR, I could recycle that cash to use it again as I pay it back (I pay back 5k, I can immediately use that 5k). Of course the disadvantage of this is that I'm paying 4.25% or so (it is a variable rate as apparently all HELOCs are) to be able to do this. The plan would be to basically use my HELOC as my new checking account, sending all of my direct deposits and income to this account (as explained in all of the 'pay off your mortgage in 5 years' videos).
OR - I keep my 50k in my accounts, and I use the pure cash to acquire a cheap distressed property to BRRRR. The advantage here is that since it's my own cash, my interest rate is 0%, BUT I have to wait until I sell or refinance (lets say 6-7 months down the line) before I can get at that cash again to use it/recycle it.
Part of me feels like I should just keep the cash and make smart BRRRR deals with it, and that I'd be sort of handcuffing myself and penalizing myself by directing it towards my mortgage/HELOC. The other part of me feels like it may be worth it because of the fact that I'd be able to access that cash again immediately as I pay it back, not having to wait for the refinance/sell day 6/7 months down the line.
Your thoughts? Has anyone else gone down this thought path? What am I not thinking about?
Last question: what if say 1 year from now, I move out of this primary residence and turn it into a rental. Can I continue to use the HELOC? Would it be due back immediately? Does any of this change if I do/don't deed the property to my LLC and keep as rental?
Thank you so much as always for your thoughtful responses.
@David Schulwitz I don't know your market but I do know Indianapolis very well. All of the other 4 markets that you mentioned are affordable, high cash flow markets however, I think Indianapolis is much stronger than the others due to strong job growth, population growth and diverse industry and economy. I would set my price criteria higher however. Anything under $60K in Indy is going to be in rough areas that don't perform well. That's just a fact. I wouldn't recommend going below a C class neighborhood and even then I'd be looking for something between a C and B. I know Indy well and would be happy to talk to you about the market if you'd like.
Assuming you have a low <3.5% rate on your primary, I wouldn't pay down that debt.
Use your cash to do an outside flip, be patient and prepare for the second one in 6 months. If you have a day job, that seems like plenty of activity until you have more cash for repeated projects. YMMV, my $0.02
Keep your $50k. Call Bank of Texas to apply for a HELOC (no affiliation but have experience with them) and when the appraiser calls to schedule the appraisal tell him/her you think it's worth $230k. Appraisals for HELOC's are subject to much less scrutiny than a traditional mortgage and they WANT to loan money. Cost for credit line = $0 until you use it.
Thank you all, and @Mark Buskuhl that sounds like outstanding advice - thank you!
@Mark Buskuhl makes a good point on the cost of credit, a HELOC is very in-expensive to secure the credit upfront versus what I learned about the BRRRR method is two things 1) typically can't go over a 75% LTV on a cash out refinance and the origination fees are infinitely steeper than a HELOC and can end up in the $1000s. With that said you need to make a significant improvement on the property for the BRRRR otherwise the cost of getting that equity back out can put it well over 10% (and you are just taking it out to invest in a 7 cap), which means its cheaper to not refinance in the end and leave the equity in the rental.
You can typically lock a rate with a HELOC after you a balance on it you can "freeze" that balance at a rate. So if you knew you had a $50k HELOC, used a lot of it, you could freeze $25k of it at todays rate to avoid the time risk of the rate going up.
Message me if you want to chat more, I have done a BRRRRR, HELOC, Cash out refinance, traditional refinance all in the last 18 months.
Thank you @Erik Perks - good stuff
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