Understanding the numbers of the deal - when using HELOC

15 Replies

This is a cash buy from a seller. He is motivated, and the numbers look good, but I can't get my head around the impact of using my HELOC. Also need to understand the Quit Claim deed. Purpose is rental for eventual refinance, then BRRRR. The particulars of this little 1/1, 500 sq ft. house:

Sell price: $3000 (no kidding) Structurally sound, not lived in for 15 years - he always planned on fixing it up and now he's 81 and must sell).  C neighborhood.

Repairs/holding costs: $17,500

All in:  $20,500

Rent comps: $445

CoC return: 10.7%

1% rule:  2.2%

Actual cash flow:  $183/mo

It's 100 years old, so I'm factoring into my expenses10% Capex, 10% ongoing maintenance. My 50% exp rule is at $223, and proforma at $240, so pretty close.

Instrument:  He wants to quit claim deed the property.

Using HELOC funds at 4.99%

1.  At face value, the deal looks good, except do I factor in the cost of the money I'm using?  If so, does this put me in negative cash flow?

2. If not, will I be able to refi after 6 mos, with the HELOC affecting my DTI ratio?

3.  If not, how do i unlock my capital to get to my next deal?

4.  Am I looking at this properly?  Should I be considering break even?  What are my options?

Any assistance would be greatly appreciated.  Thank you.

Dave,

1. You most definitely need to consider the cost of using your HELOC. But once you re-fi, you pay your HELOC back and either close the account or use it again. I love this example of making money work for us/you...

2. You should have your exit strategy figured out before you make the purchase.  

3. Will you be able to get a re-fi? If not, you'll just pay your HELOC back, but you can't use it again until you have it again :)

4.  Don't forget to include taxes and insurance in your analysis.

If you break even...I suppose you can take the appreciation. What is the market value after rehab? It really depends on your investment criteria. Decide where to draw the line in the sand. For me, I don't buy a SFR unless it will bring in $200/door. Multifamily...$100/door

Are you getting a refi to pay back the heloc quickly do to the heloc intrest payments not being tax deductible anymore?

Daniel, yes on the payback. No on the interest deduction, when used for investing. The way I understand the new tax law is that HELOC interest is only deductible when used to build on to, or make repairs to one's primary or secondary residence.

Terry, thank you.

My strategy is to hold and rent. ARV is approx 30K for this area. I did include taxes and insurance in my analysis.

I think my biggest concern is getting it refinanced. Not sure how tough it is, given I'll have the HELOC and my primary mortgage. It's my first deal, and I'm still trying to figure out the mechanics of it all. I don't know if my DTI at that point will prevent me from getting the refi. I want to be able to leverage so I can repeat the process.

If anyone who started out using a HELOC that has done multiple deals and leveraged up could share their experience and knowledge, that would be fantastic. Thank you.

I have been following your discussion, @Dave Smith , and I am interested in learning more, too. I have equity in a rental property that I want to access but I am not sure what my strategy is.

This is just a bump. 

@Daniel Brown  Yes, that's exactly what I'm doing...although quickly is a relative term to my banker. :)

@Daniel Brown  My banker did tell me once that it helps a great deal to have a W-2.  It's just more guarantee that his note will be paid.  

I'm only taking out what I put into the property.  For instance, my first deal was a house for $41,000.  I put 15k into the rehab.  It appraised for 99k, so I was well within that 80% window and I could have taken a loan for more than I did, but my goal is to pay it off asap, right.  So my loan was for 60K (51K +holding/closing/etc.).  I don't have a penny of my own in this!  The renter pays the note and I keep the excess.

But don't let anyone tell you it's not work!

T

Thank you for the direct replies. This my first time posting on the fourms. So it was exciting to see your messages.

 Given the responses on this thread I wanted to recap my own situation and make sure I understand.

I currently have 2 SFRs paid for that I want to access the equity from. It seems to me the most commen way to do this in the past was throught a HELOC at a max of 80% loan to equity. HOWEVER with the new tax law intrest paid on HELOCs is only deductable if the proceeds of the loan are used on your primary or secondary homes.

With this new law in place we, the investors, are now faced with the challenge of accessing our equity and still deducting the interest it costs us to do so. 

As I understand it, I would need to take an HELOC out on my SFRs. Purchase my next property and then refinance the new property. Now with the refinance proceeds I can pay back the HELOC and keep my debt in the form of a refinance on the new property which will allow deductions on the interest deductions.

Hi @Daniel Brown . It sounds like you have the general idea. From my understanding, and maybe @Terry Owens can confirm, is that you sort of need to work backwards. Basically you need to know the ARV of the new property, and calculate the percentage the bank will refinance. So if the new property's ARV is $100,000 and the bank will do a refinance of up to 75%, that means they'll give you a max of $75,000. Knowing that, you know that if you want zero of your own money in the deal, you can't spend more than $75,000 total. If you don't mind paying a bit of your own money out of pocket, then you could be a little less strict with the budget.

305-537-6252

@Daniel Brown .  Yeah, the new tax law doesn't allow that deduction anymore, but it can't stop us from still having cash flow.  

So, yes, I find it easier to get a good deal when I'm paying cash. That's the only reason for taking out the HELOC. You can find cheaper deals if you offer cash and close fast...before sellers have a chance to change their mind. But if you don't need the speed and the cash aspect, then there's no reason to take out the equity if your going to turn around and refi your new property with another mortgage. You may be able to convince your bank to give you a small construction loan with the mortgage to handle the rehab.

All situations are unique, just know your options, your banker and your numbers. ;)

So I'm wondering if folks are able to get a refi to get their cash back out. Are the banks looking at an investor with a primary mortgage, plus a HELOC, now asking for an additional loan?

If my cash is locked up, not as easy to get my next deal.  Anyone share their experience on this?  Thank you.

@Dave Smith

Regarding your most recent question about what a bank looks at when looking to refinance. Typically banks are most interested in debt to income ratio and how leveraged out you are. If you have properties that are cash flowing, banks will normally recognize the extra income after you have owned the rental investment for two years. Depending on the bank, some will account for the cash flow within the first year if you can prove to them the length of your lease with a tenant and how much cash flow is obtained each month. Working with small banks gives you an advantage because you can build a relationship with the people there and you will have the opportunity to show them the strategy and intent of your investments. Once they are comfortable with your systems and have proven to them that you are credible, they typically will not reject a request for additional loans. Hope that helps.

@Michael Pearce

Thank you, Michael! That is helpful. Good to hear from you: we met at the meetup. Your answer tells me that I will hit my DTI rather soon, with my existing mortgage, and the HELOC I'm waiting for approval on. Without seasoning, it seems it well be difficult to get the property refinanced. Any recommendations on small, local banks?

Thank you.

@Dave Smith

Great to connect again! I have worked with mutual savings and citizens national bank. Depending on where you invest, you can narrow down the small banks unique to that area. 

Finding a bank can be a lot of work up front. Once you are familiar with what banks typically ask for, I'd recommend making a folder of all the needed documents. I spent countless times trying to get everything together that gave me more trouble than it should have been. As you progress you will learn how to make systems that will save you time. Invest in the extra effort to get those things situated. It will help in the long run, deal after deal. Best of luck!

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