How to use home equity to invest

Question

Hi BP community,

I'm a pretty new investor (bought my first in 2013).

I have a question about using home equity to purchase more investment homes. I've read the entire thread (https://www.biggerpockets.com/forums/48/topics/130...) which was really informative. Thank you everyone.

So here's my situation. One of my investment properties appreciated from $95K to $140K. I put 20% down, so I potentially have $64K in equity.

I've heard a lot about refinancing, getting a second mortgage, or getting a HELOC to purchase a property. I'm looking at cash flowing property priced at around $50K and would like to put 20% down and conventional 30 year fixed rate financing to purchase the new property.  It has a 1.7% RV ratio, so it cashflows nicely.

Is this feasible? Advisable? Worth the headache? Too risky? Or a good strategy? How do I get started?

Thanks in advance for your answers!

Jason

Joe Villeneuve · Answer

My Comments:

First:

If you put in $15k - * Cash Flow would be $450/month----$5,400/year* You would be $9,600 BEHIND after the first year ($15,000 - $5,400), and it would take you almost 3 years to recover all you cash...you'd be behind for almost 3 years.

If you put in $20k - * Cash Flow would be $600/month----$7,200/year* You would be $12,800 BEHIND after the first year ($20,000 - $7,200), and it would take you almost 2 years to recover all you cash...you'd be behind for almost 2 years.

Are my numbers correct?  Am I making the right assumptions?  I'm trying to piece together the numbers you've given me.

Bill Gulley · Answer

Have no idea what Joe is getting at, except his system of getting his money back out.

You first issue with this property is trying to go to a 30 yr fixed, secondary market loan on a 50K purchase, better check because minimum loan amounts are 50K, many programs require 25% down for investors. The loan you're seeking may not happen.

I'd suggest you go to a higher priced property that cab be better financed.

You can borrow equity, refinance or obtain a second, but need to understand that a HELOC is short term money really, that line of credit or balance may be reduced or called due under all kinds of situations, including at the whim of a lender in some cases. It's not a good loan to burry into a rental property for the long run.

Some lenders may accept pledging your property as additional collateral for a purchase at a blended loan to value. However, this ties up both properties and you should have a release fee for each property under a blanket mortgage so you can sell one property without the full loan amount having to be paid off.

So, before you begin with your cash flow analysis, you have to use the right loan that is applicable to the property. Most likely you'll have a portfolio bank loan on a commercial basis at a higher rate. :)

Jason A. · Answer

@paul schuw

I think it is a good idea to use equity from another property if that is  your only course of action. Just make sure the terms are good and you  can cover the extra payment should you have an issue getting the other  one sold/rented. You don't want to lose both of them.

• thanks for that advice. good call

Jason A. · Answer

Thanks for your responses

@Joe Villeneuve

First.  What is the actual cash flow of the property with all the  equity you're looking to get access to?  Now, and after your payment  goes up (and cash flow down) when you refi/Heloc, etc...?

• The actual cashflow would be approximately $450/month with an initial investment of $15K. 
• My payment would go up by $150. I could pull out $35K in equity

SEcond.   Saying a property is cash flowing isn't saying much.  How much is it  cash flowing?  What is good cash flow for one investor, stinks for  another.  What is the actual cash flow (not 5 of something) in dollars?

• $450

Paul S. · Answer

@Jason Ahn  I think it is a good idea to use equity from another property if that is your only course of action. Just make sure the terms are good and you can cover the extra payment should you have an issue getting the other one sold/rented. You don't want to lose both of them.

Joe Villeneuve · Answer

First.  What is the actual cash flow of the property with all the equity you're looking to get access to?  Now, and after your payment goes up (and cash flow down) when you refi/Heloc, etc...?

SEcond.  Saying a property is cash flowing isn't saying much.  How much is it cash flowing?  What is good cash flow for one investor, stinks for another.  What is the actual cash flow (not 5 of something) in dollars?