All Forum Posts by: Arlen Chou

@Michael Willis you have been given some good advice from @J. Martin. I use my HELOC as my personal "bridge loan". Like J has said there is a 10 year period of access. After that point it gets a little more complicated. There are things you can do to extend that time. As an example, I was 1 year through on my current HELOC, but I just applied for more credit. I had to pay for an another appraisal on my house and some other fees, but it was "small money" compared to the increased access of funds and what I did with those funds. Additionally, because they gave it to me it re-started the clock. Assuming I have additional equity in my primary residence, I will probably do this again in a few years just to rest the clock again.

Simply put my strategy is two fold: first to look like a cash buyer, and second to give myself time to find good permanent loans. Once my building is purchased, I can start re-positioning/stabilizing the building. I don't have to worry about money for the rehab or construction, because I already have access to my HELOC. Once everything is completed, I will get a stand alone loan product for that particular building. Those funds received will be used to pay down the HELOC, essentially "reloading the gun" for my next target acquisition.

As for the pay down, the HELOC is interest only. However, I pay down the amount as fast or as slow as my finances will allow. No need to pay interest on money that I don't need right away. However, if I do have an unexpected financial need I can just write a check from the HELOC and access those funds immediately.

This quick access is where the danger resides. Because you have checks available, it feels like its your money... you have to keep in mind that it is not. I think this is where many people got burned during the down turn. They used the HELOC to buy cars, boats and vacations.

@Michael Willis it is a great way to go if you are disciplined enough to keep your spending under control. If you go crazy, you can ruin your life, so be careful. I have purchased 11 doors in Oakland using a HELOC off of my primary residence and will continue to use this strategy into the near future.

@Roshan K. you should be able to pay it down when ever you want just like a giant credit card.  I have never come across one with a prepayment penalty.

@Caleathia Bowman I hate to be the guy to throw cold water on your dreams, but I really think you need to slow down and think this out before quitting your job.  I am not sure if you were being facetious about your comment to @Matt K. about having money to start, but you definitely need a "war chest" if you are going to drop the W2 and plunge into REI. Without a good amount of cash AND a W2, it will be very hard for you to get a loan.

Do you have specific REI strategy that you are considering? There are so many ways to make money, it is important that you get focused: buy and hold, fix and flip, local vs remote, etc. If you have a job, don't cut that loose before you get your planning done first. I know that there are people who have gone the "jump all in" route and made it, but I am 100% sure those people are the exception. You are not making a career change, you are starting a business... The American small business landscape is strewn with carcasses of dead and dying small businesses that were started by people who did not plan before moving forward. Take the time to create a "business plan" before you make a drastic change in your income stream. It does not need to be a fancy 30 page power point, just something simple to outline your goals and how you plan to achieve them.

I don't make these comments lightly.  I say this with the experience of opening several small business in CA, Texas, Mexico and the Philippines. Plan before you jump...

@Richard Raghoo rent control has its downside, but it does have its upside.  Its hard to see the silver lining, but there is one.  I invest in the San Francisco Bay Area, more specifically Mountain View and Oakland.  There is a very strong push in the area for RC.  What people do not understand is that it artificially shields existing tenants at the expense of future tenants.  Basically tenants become less fluid, therefore rental supply goes down and when units open up market rents are way higher.

You need to understand the RC ordinances in your city: do you have the ability to pass improvement cost to your tenants, what is the rental increase cap per year, what are the "just cause" rules, etc.  There are ways to increase cash flow, you just have to follow the defined rules.

In the end it is sad because the personal relationships landlords use to have with tenants is now dictated by rules.  Basically RC creates an atmosphere where landlords can no longer give any leeway to tenants.  You have to follow the rules extremely closely for everything and document everything. The landlords that don't increase yearly will find themselves in a bind years from now when they try to sell or refinance.

@Roshan K. just curious why you are looking for a "fixed rate" HELOC. Most people are using the HELOC almost like a bridge loan until their projects are done or they can get a long term fixed rate. Therefore, the period of time the interest is placed on the credit used is relatively short. If you look at the variable rate HELOC products there are many that are prime MINUS 1% or even better...  As an example the HELOC that I have right now is at 2.74%.  I spoke to somebody last night who is closer to 2.2%.  I would argue that it would take many Fed increases for a sub 3% variable rate HELOC to go over the prime +1% of the fixed rate products.  Just something to consider...

@Peter Kim first of all I would suggest you find a new agent. He should be willing to fight for the lowest price possible, not trying to convince you to go higher. Can you do a fast close? Can your agent get you in front of the seller so you can find out his true motivation to sell? I am in a completely different market, but I was able to negotiate $100k off of each of my last 2 deals in the hot SF Bay Area market. The point is finding what the seller needs and providing a solution. Often times it is not just being close to the asking price that will win you a deal. As a side note, both of my deals were on MLS at one point or another. It is possible to get a price 10% below asking, but you need to find the sellers "problem" and solve it for them. Good luck, -Arlen

@Account Closed I realize that works out great for you, but your comparing "apples to oranges" in terms of markets and the effects of taxation on investors.  What are your property taxes on your unit and how does it change from year to year?  In California we have prop 13 which limits the effect of property taxes over time.  Additionally, California has high state income tax vs Texas not having one.  If you had to pay Texas property taxes and California state income taxes would your numbers be as good?  How about adding in the headaches of property management and cap ex on 32 units vs 1?

The subject property is in California and it is inferred that the owner is also.  If a California investor were to take their money out of their home state and put it into a high property tax state, AND pay income tax in CA, that investor would be shooting himself twice.

I would argue that smart people will make tax consideration as well as time/resource management key parts of a well rounded wealth accumulation strategy.

@Mike Re I don't think it is the actual $ per sqft number that I would be concerned with in this area.  It is finding a good GC who will think it is worth while to take you as a client.  I think if you did all the GC work yourself you might be able to get in at your target number.  But then you will also have architectural costs on top of that.  ALL of the guys I personally know are running multiple multi-million dollar projects and have multiple projects waiting in the wings.

If I were personally doing it, I would look for something that is prefabricated and get them to help you as much as possible.  They should provide you with all of the drawings that you need and I assume they will make revisions per city requirements.  I would then find my own foundation, electrical and plumbing guys.  To save on final costs, I would probably do the interior finish work myself.  But I only say this is what I would do because I personally like the planning and organizing.  I also know that I am a pain in the a*$ when it comes to finish quality, and I would end up with a long "punch list" for the GC which equals time and headaches. 

@Amit M. All of the construction I have seen in Los Altos has been scrape and build, with a trend in full basements for either entertainment rooms or massive garages. Everybody in this area is maxing out their square footage for their own use and I don't see people really wanting or needing a "tenant" for extra cash in the mid-pen area. Going into Los Altos Hills, its a different story. They are not called ADU's up there, they call them "pool houses" or guest houses... hahaha. Much of the recent construction that I have seen up in the hills has some type of stand alone building. However, the "guest houses" that I know of are either used as offices or are actually used for extended family or friends.

@Mike Re the ADU is definitely something that can be done and an interesting strategy. However, I think your construction budget is low. You are penciling approx $240/sqft, does that include you doing some of the work or providing materials? By no means do I know everybody in construction in the area, but everybody that I know is way to busy and working on projects that have much higher profits for them to pick something up in this price range. More clearly, it might be really hard for you to find somebody that will do a $150K job. Even if you do find somebody, be prepared to be at the bottom of the totem pole in terms of project priority. They will undoubtedly use your job as "fill work". This translates to the potential of delays and frustration on your part.

I think that if you were to do much of the GC work yourself,  you would have a stronger chance of getting done at this budget point.  That does not mean that you need to swing the hammer, but if you cut the project down to smaller pieces and do all of the coordinating you should have a better chance of controlling time lines with the subs.  As this is on your primary residence, you should be able to pull of the permits you need from city without any problems.