All Forum Posts by: Jim D.

Avoid procreating

To know if it will be a good deal, you need to first have your own criteria of what constitutes a good deal. What numbers are you aiming for? Then get the actual performance numbers from them, and see if it meets your criteria.

When I've rented an ADU out, I had no way of separating the usage, so I just made a conservative guess on what portion was theirs and set it as a fixed amount. Many landlords will tell you that making it fixed will cause them to run up the bill, but this never happened to me. If you are building from scratch, I bet you can purchase a gauge for each line that you could manually read usage from once a month.

I have several years of experience working in the solar industry and have solar on one of my rentals. My experience is that for most people, they'll be skeptical if you say, "The electric bill is $100 lower because of the solar panels, so therefore I'm charging $100 more in rent and your benefit is you get to know you're using clean energy". It's an unfamiliar technology to many people, so to help them understand you need to show them an actual power bill that's only $8, and really walk them through it.

If your solar is saving $100/month, I probably wouldn't expect to get that amount in increased rent, but I would expect you could get 50-80% of it. It's probably worth a look; solar can have a really strong ROI in CA since grid electric rates are so high. The tax benefits are even stronger for rentals than they are for owner occupied, because you'll get the federal tax credit, state tax credit, AND get to depreciate the system cost over 5 years. You should get a few quotes and run the numbers.

@Kevin Phu Lenders are using the property as collateral for the HELOC, just as they do with a first. So of course, they want to make sure that the property is worth more than the total amount of loans on it.

Mine was valued at $400k, so the bank was willing to go up to $320k in total loans. I owed $245k on the first mortgage, so they did a $75k HELOC for me.

Of course, they could choose to go higher than that, but it would be risky for them because if the home's value went down much at all, their collateral would disappear. If the home's value went down 15% to $340k and then I defaulted, it would cost them about 10% of the home's value to foreclose and sell, leaving $306k of proceeds. $245k of that would go to the first, and would only leave them $61k back on their loan. So even at 80% LTV they are fairly exposed to home values dropping.

It's always hard to sell and take a loss because you have to admit defeat. But in reality, the price you paid for the property is completely meaningless and irrelevant (except for tax purposes, which are minor in this case).

The only question that matters is: could your $300,000 earn you a better return in this property, or somewhere else?

I recently did a HELOC on one of my rentals through America First Credit Union. They will go to 80% LTV and the rate was 4.49% variable. Since the advent of Trump, every time I call this bank I hear the president's voice in my head emphatically pronouncing their name.

The folks I know who have done this haven't placed a formal lien; it was just done with a handshake and a promissory note that wasn't officially tied to any collateral. 

If your lender wants some more formal protection, then yes you'd need to offer them the 2nd lien, title to your car, or at a minimum free foot rubs for a year.

10% is a good place to ballpark it, though it will vary with the following variables:

--condition of the property (if roof, HVAC, plumbing, electrical are newer, then it will be much less)
--age of the building
--quality of tenants in the area and how hard they'll be on the house

One other things that will affect it is how high the rent is. A new refrigerator costs the same to replace on a unit that rents for $500/month as it does for a unit that rents for $1500/month. That makes for a drastic difference in the % you set aside. The lower your rents are, the higher % you need to set aside for fixed costs like that. I can get away with lower rent-to-price ratios in my $400k rentals because of this.

on your NJ property, how much is it worth, how much do you owe, and how much does it rent for?