Deal 2, 3, & 4, in El Paso, TX

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Deal 2, 3, & 4, in El Paso, TX

Sharika L.
El Paso, TX · Member since 2016 · 20 posts · 7 votes

If you read my background my husband and I started seriously looking into investing back in March, and since then things have taken off. I'm overly excited & nervous about the entire process, but after listening to the first 102 podcast I thought I should write about my experience:

#Deal 1: Owner financed 5 unit buy and hold, 100% occupied

#Deal 2: Duplex (I thought it was a foreclosure due to outdated zillow and proceeded with knocking on the door only to find out the owner was indeed selling). Renters moved out in June and I proceeded to find contractors to upgrade the entire 1920's stone building. Currently being rehabbed with plans to "house hack" and rent out our current house.  We got a commercial loan, expecting a construction loan to be implemented once we got to that part, but low and behold things happen and now we are funding the rehab 100%.

#Deal 3: Put an offer on a 7 unit buy and hold, and was told a cash-buyer put in an offer as well. I told the agent to call me if it doesn't work out, because I was sticking to my numbers. Agent called the next day and we got it for exactly what we wanted to pay for it. Commercial loan again with the same bank as #2, but he went on vacation and we need to close this Friday (I think he was uncomfortable with the fact we use or HELOC & PLOC as bank accounts due to the very low interest from Bank of Hawaii and Hawaii State Fed). So went to 2 different hard money lenders who are ping-ponging some decent rates, but both are very interested in the property. Like I often hear, "good deals will find money". Hopefully all goes well and the place will be ours on Friday. 6/7 units are currently rented.

#Deal 4: I have been dying to do a fix and flip to get the experience and start building that portfolio as well as make some cash to pay our HELOC, since we have been putting in 20-30% down on our properties. I put in another offer to a HUD home I had placed a bid on a month before and didn't win. Well I won this time around. Currently in the paper phase, waiting on the seller to accept the contract. I originally went to the hard money lender for this deal since we have depleted our liquid cash for now, and again they were interested with 11% and no down payment or prepayment penalties.

The plan is once the contractor starts the rehab on the HUD if the inspection doesn't come back to crazy, than we will start the process for looking for another fix and flip.

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Jason Chambers
El Paso, TX · Member since 2016 · 71 posts · 22 votes
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@Royce Talbo@Royce Talbo

If I remember correctly, it cost us about $1500 to get into the HELOC. It was really affordable and you make it back right away. If you have any other questions, please don't hesitate to ask. By no means am I an expert but I'm always willing to share what has worked for us.

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  • Jason Chambers
    El Paso, TX · Member since 2016 · 71 posts · 22 votes
    10y

    @Royce Talbo what you described about your in laws is another strategy that can be used. We've done it in the past as well with a personal line of credit (PELOC) from Hawaii State FCU. We did that until we had enough equity in the home to move up to a HELOC. So yes, there are banks out there that will give you a line of credit for as high as 90% of the total appraised value of your home. We did ours with Bank of Hawaii. The larger main land banks do it as well and I've seen the highest LTV's at credit unions. And no, we didn't take out more equity than we had in the house. The home appraised at $710,000. We owed $530,000. At 85% LTV, BofH gave us a HELOC worth $600,000 which we used to pay off the mortgage and making BofH the new lien holder. The mortgage no longer exists. Our monthly mortgage used to be $3200 a month, of which $1800 went to amortized interest. Now our minimum, interest only payment on our HELOC is $770 a month. And remember, we charge our tenants $3650 a month all of which goes into the HELOC in addition to cash flow from our other properties and our W2 incomes. Our HELOC is 1.75% simple interest, meaning interest is calculated daily on the remaining balance only. Cheap! Even if you used the strategy your in laws did, you would still pay way less in interest overall because you are dramatically reducing the number of months you're paying on the mortgage every time you take a big chunk out of the principle. We just took it a step further by flipping the entire compound interest mortgage into a simple interest HELOC.

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  • Royce Talbo
    Investor · Kaneohe, HI · Member since 2012 · 218 posts · 104 votes
    10y

    @Jason Chambers this is good to know.  Since BOH is now the only lien holder, can you keep doing this with other intro rates?  Say after the 2 year intro rate of 1.75% expires, can you go to another bank and do the same with a low intro rate, after that expires go on to the next and keep doing this cycle?

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  • Jason Chambers
    El Paso, TX · Member since 2016 · 71 posts · 22 votes
    10y

    @Royce Talbo Yes, that's exactly our plan. At 21 months we'll go back to BofH and ask to be locked in at the same or similar low rate. If they don't agree to it then we go somewhere else and do it all over again.

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  • Roy Skaggs
    Honolulu, HI · Member since 2016 · 16 posts · 4 votes
    10y

    Wow, this is great and thanks to Royce for continuing to ask and to you, Jason for continuing to explain. Like Royce, it wasn't fully clicking for me regarding you guys getting the full amount of the appraised value. I didn't realize you could do that. I will definitely look into this for my primary in Waikiki and possibly my rental property on Kauai. I already bank with BoH. My only concern is by doing this do I tie up any credit/loan value (maybe not wording it right) from me buying a 3rd property as I am looking for one now? Well a 2nd concern would be having to do it over again in 2 years, are there quite a few fees to be paid for doing these HELOC's?

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  • Royce Talbo
    Investor · Kaneohe, HI · Member since 2012 · 218 posts · 104 votes
    10y

    @Jason Chambers that is good news, thanks for all your help man!

    @Roy Skaggs I was thinking about the fees too, but I'm sure it couldn't be more than a refi and with my calculations for $500k at my current mortgage rate vs the 1.75% HELOC rate I would save about $25,500 in 2 years paying the same amount. If I want to go the same route to put all my paycheck in and use it as a checking account, then it would be a lot more savings, so I think the fees would justify the risk. In 2 years if there is no good HELOC rate or if mortgage rates goes up to 5.15%, I can always refi and my monthly payments would be the same as I am paying now because of the lower principle with higher rate. If it goes above that, then I took the gamble and lost. I guess it all depends on your risk you are willing to take.

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  • Elijah F.
    Investor · Kaneohe, HI · Member since 2015 · 91 posts · 36 votes
    10y
    Originally posted by @Jason Chambers:

    @Elijah F. compound interest is a basic component of an amortized mortgage. Interest is calculated on a monthly basis and the amortization is set in a way that the interest is paid at a much higher rate than the principle during the beginning of the life of the amortization. What you are describing above is the way compound interest works with savings. Simple interest on the other hand is calculated daily based on the remaining balance. I mentioned before that in real numbers a 3-4% interest rate mortgage actually ends up costing you around 80% interest by the time you pay it off (you pay for your house almost 2 times over even at the best mortgage rate). We literally went from a $3200 a month mortgage payment to a $770 monthly, interest only payment on our HELOC. Same house, same remaining principle but significantly cheaper at 1.75% simple interest. Almost $1800 of the $3200 a month mortgage went toward interest. We still charge the tenants $3650. As you can see, our ability to affect principle has grown significantly.

    While I think it's great that you found a strategy that works for you, your explanation of the interest savings of a simple interest mortgage (in this case a HELOC) versus an amortized mortgage is incorrect. I have included a link to a clear explanation of the difference here. Over the course of the lifetime of the mortgage, you end up paying MORE interest in the simple interest mortgage because of leap years. Try comparing the cumulative interest of an interest only mortgage to an amortized mortgage and you will see that they are basically equal.

    In both cases, simple interest and amortized, you end up paying, in interest, almost the cost of the house because of the 30 year payoff. A HELOC can provide benefits to an investor but saving money in interest is not one of them.

    In you case, your lower monthly payment is a result of a lower introductory interest rate plus interest only payments.

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  • Jason Chambers
    El Paso, TX · Member since 2016 · 71 posts · 22 votes
    10y

    @Royce Talbo@Royce Talbo

    If I remember correctly, it cost us about $1500 to get into the HELOC. It was really affordable and you make it back right away. If you have any other questions, please don't hesitate to ask. By no means am I an expert but I'm always willing to share what has worked for us.

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  • Jason Chambers
    El Paso, TX · Member since 2016 · 71 posts · 22 votes
    10y

    @Roy Skaggs BoH is very familiar with this strategy. I know of a few people that use this strategy with BoH and I initially got the idea from another investor on Oahu. It's a win win for them to offer these kinds of deals because a lot of mortgages are held by main land banks. Switching over to a HELOC keeps money on the island and saves the consumer a lot of money. Just my 2 cents.

    There is a lot of competition between the major banks in Hawaii. I'm not looking forward to doing it over again in a couple years but I get the impression that the healthy competition among the banks works in our favor.  BoH doesn't want either of us to go to another bank, much less a mainland bank. I suspect as long as interest rates stay they way they've been we'll be able to continue to enjoy low rates on this kind of financing.

    You mentioned credit/loan value. That can be a concern if your numbers aren't right. But so long as you have enough equity in your home, an income that can support a HELOC, and decent credit it shouldn't be much of a problem. It's all in the numbers. @Royce Talbo mentioned using a smaller more traditional HELOC to pay down mortgages. That's something that we did using a personal line of credit (PELOC). We used that to pay down enough of our mortgage to have enough equity to qualify for a 85% LTV HELOC. We did it the same way as we handle our current HELOC. We payed a big chunk out of the mortgage and paid off our car with our PELOC, deposited all our income into the PELOC using it as a checking account, and then we had enough equity in the home to qualify for a large HELOC. And depositing all our income in the PELOC paid it off in less than 4 months.

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  • Jason Chambers
    El Paso, TX · Member since 2016 · 71 posts · 22 votes
    10y

    @Elijah F. I think where I missed you is that the key component to all of this is time. Compound interest is calculated on a monthly basis and amortized in such a way that it is paid at the beginning of the life of the mortgage. Simple interest is calculated daily based on the remaining balance. Either one of those forms of interest is irrelevant when thinking in terms of time. Yes, over a long period of time the difference between the two can be negligible if you are making minimum payments. The key to what we do is 1. the mortgage is eliminated, 2. what we pay in simple interest is much cheaper allowing us to affect much more principle every month for the same payment, 3. and the biggest money saver is the fact that having the ability to pay down principle much faster dramatically reduces the amount of time to pay off the debt. 5-7 years of simple interest vs 30 years of compound. It's all about time. Much less time having to pay and a lower interest rate means exponentially less money paid in interest. Simple vs compound interest isn't even in the same ball park when it comes to time. In my case, it saves us more than $300,000 in interest payments and 23-25 years less time stuck in a mortgage.

    There are other ways to do this same thing (double payments, paying down large chunks of principle using smaller lines of credit, etc) this is just the quickest most direct means to eliminate as much interest as possible.

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  • Martin S.
    Brooklyn, NY · Member since 2014 · 174 posts · 23 votes
    10y

    The only reason you are lowering your interest payments is because of the lower interest rate. If the rates were the same, a 30 year mortgage vs a heloc, the interest payment would be exactly the same. Of course you could pay more on a 30 year mortgage and that would cut the amortization schedule, if you double a 30 year mortgage payment, it will be paid off in less than 10 years.

    So once again, your interest payment is only less because you got a lower rate. But of course you paid a fee for it, but in your case over 2 years you would save around 20k in interest. After that who knows what will happen, the rate will go to 4.5% but you are not even sure of that because it is variable.

    The whole purpose of the fixed 30 year mortgage for investors is because the rates are FIXED, and the payment is the same throughout the mortgage. So, no need to run and cry when rates shoot up. Also, your cashflow is pretty much set for the life of the mortgage, actually rents always go up, unless the neighborhood goes to crap, so you know exactly what you are getting.

    You had a mortgage at a pretty good rate, now that you paid it off, when your 1.75% intro rate expires, you will need to try to refinance that money again. You took a risk, you are betting that interest rates will remain low and that you will still be able to refinance at that time. The bank is betting that rates will go up and you wont be able to refinance, you will find out who won the bet in 2 years when your intro rate expires...

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