legal or not?

Question

hello all! my question is as follows.....I bought a rental property 8 years ago and it is paid off.  I pulled a line of credit from it to purchase another property.  That property is technicaly paid for in cash and I have the title.  can I pull another line of credit from that property to buy another one and so on down the line?  my goal is to buy two properties per year for ten years.  how else could I do this?

Matt Devincenzo · Answer

It doesn't sound like anything illegal. The LOC for each property is for that specific property so it's not like you've hidden a loan from them in order to finance another one. The new property is paid for in cash and the other is leveraged and they can see how much leverage when they underwrite your ability to pay so there should be no issue there.

Ali Boone · Answer

Oh, don't you worry.... lenders will let you know pretty fast whether you can do it or not! They tend not to hold back on ever saying "no" it seems like. Haha. But you should be fine. No legal problems I know of. But if there are, the lenders will tell you.

Jason Atkins · Answer

John I couldn't have said it better myself thank you so much

Jon Holdman · Answer

You bought property #1 for cash.

Then you took out a LOC using #1 as collateral

Now you bought #2 with the money from the LOC on #1.

Now you repeat that and buy #3 using money from an LOC on #2.

Nothing at all wrong with that.  LOCs tend to have shorter amortization periods but as long as you can deal with the payments, no problem here.  You will be in trouble if you assume "cash flow = rent - your payment (on the LOC that funded the deal) - taxes - insurance" as new investors often do.  But if you're realsitic about he cash flow and can make all the payments, fine.

Now, say you default on the LOC on #1.  The bank will foreclose and take property #1.  That's then end of the story.   #2 isn't encumbered by the LOC on #1.

Now, if the bank has the ability to go after other assets, they could try.  If I was the lender I'd go after #3 in my example.  Its free and clear.  #2 (or all the intermediate ones in your example of 10) are encumbered.

Now, the real problem is that LOCs can be called.  Interest rates can change. It may make sense to use them to buy in cash, which makes for better offers.  But then you should do a cash out refi into a longer term fixed rate mortgage, not an LOC.

I think @Matt Devincenzo said pretty much the same thing.

Matt Devincenzo · Answer

@Jason Atkins nothing you have presented is wrong or illegal. You over thought it and @Joe Gore has mistaken your intentions.

What you propose is completely legal you have 1 paid for rental and you open a LOC to get money out to purchase another. The bank does not in any way care what that money is spent on nor can they in any way dictate that other than to refuse to give you the LOC in the first place. If you want to go out and buy a matching numbers '69 camaro and drive it off a cliff the next day, you can. As long as you keep making that LOC payment you'll be fine.

If you are able to buy another home and another home.....there is nothing wrong with the strategy. Your mistake in this is that if you defaulted on the 1st then all the others would also default in a "domino effect" and "the bank would be screwed". The LOC is for that 1 property and only that one. If for some reason you couldn't make the payment on the first one that would not necessarily mean that you would be defaulting or even delinquent on the others. Each loan is individual and unique and would be treated as such. So if for some reason you could only afford 9 out of 10 payments this month you would have 9 current loans and 1 delinquent and that would be the only one that could be effected.

Also the bank does have several options. First on a LOC they will likely have lent at a low enough LTV that they can foreclose and be made whole. If for some reason they could not be made whole they can pursue a deficiency judgement and then have the ability to attach liens to property and garnish wages ect to recover losses.

So yes it's a viable strategy. Like has been mentioned ensure you aren't over extended and understand all the interest rates and adjustments if any. Also this strategy will likely work better using 30 year fixed conventional cashout refinances for the first 4 loans (Fannie/Freddie guidelines) since they will carry the lowest interest rates and lowest payments to maximize your ability to pay and keep your DTI manageable. This strategy has been discussed a lot here on BP so use the search in the top right to find some more discussion on all of this.

Jason Atkins · Answer

Stephen your correct I do plan on using the rent to pay the loc. I would have ten loc open at once

Stephen Underhill · Answer

@Jason Atkins I am assuming you are taking out maximum length for the terms of the LOC, then using the rented units to pay for the subsequent payments, that should be fine, but as @Joe Gore stated, if you arent intending on paying anything that would have sever consequences. I feel like what you meant was not spending money out of pocket for your purchases, instead using the equity you established. Either way you are spending the money, just maybe not out of what you are making from your job

my thoughts (i dont know much about heloc, but i believe you can only pull a percentage of your equity out in such a loan, right?) if thats the case, this will have an exponential effect on how much you have for the next deal, and thus limit how many deals you can fund this way.

also, if i understand correctly, HELOC is an adjustable rate loan, correct?  i would strongly urge you to factor this into your calculations. if purchasing one home, that would be relaitvely easy, but if you leverage 10 houses on an adjustable rate, it seems to me like asking for trouble as we have seen rates already go up 1.5% in the last year, make sure you prepare for as many contengecies and you can think of, and those you cant.

Account Closed · Answer

So you want to buy 10 homes with a line of credit, and you say you don't want to spend any money. So that being said then you have no intentions on paying the bank back on the line of credit. I think they call that fraud.

Jason Atkins · Answer

no I am not looking forward to it. I'm just looking at it from a banks point of view. It's like I'm hiding a mortgage. I'm trying to come up with a way to buy ten houses in 5 years and spend no money. Creative ideas are what I'm looking for

Account Closed · Answer

By your post, you are looking forward to screwing the bank correct me if I am wrong?

legal or not?

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