The answers to this question, I believe, seperates people more than almost any other.
I will do whatever is necessary to fulfill my word. If I buy a home that forces me to lose money on; then I will come to the table with the money I need - some how, even for an investment property, the 'banks' are not going to lose money working with me.
However I know some people who believe it is OK to say things went sour and not pay all of their creditors. These people would probably prefer to stay in the safety zone of keeping their personal home seperate from their investments.
So for my personal opinion; I will use whatever collateral I have available to finance my investments at the lowest possible rate.
Using an equity line from your personal home to buy properties for "all cash" is a good idea, because the quicker you can close, the better deal you can get generally speaking. However, maxing out that credit line without ever paying it back is a bad idea, and could possibly end up helping you to lose your home.
If you are going to use an equity line, use it to pay cash for your investments and then refi the investment property and pay off your credit line. When you do this, don't overleverage your investment either. Personally, I don't ever borrow more than 80% of true FMV (not some inflated appraisal figure). This way, you should always have a good cashflow and a safety net if prices ever fell, or you needed to sell a property quickly.
I can't purchase other properties out right(as in cash) with heloc amount. i TOOK 50K BRINGING LTV ON MY HOUSE UP TO 80% OOPS SORRY FOR CAPS. I put 50k down on a duplex, which was 20%. I have a condo which I also put 20% down on. I was thinking of bringing my heloc up to 100% ltv on my house to get another property but,I was wondering how everyone felt about that.
I have rentals on the side my primary income is a sales job were I make pretty decent money so I can handle months without rent. I don't run tight on money.
From what you've posted so far, I think that your buying method (or at least your financing method) is flawed. Putting down 20% and betting on appreciation of property is old school REI. Yes, it still can work, but you have to have lot's of cash for those downs.
I don't know if you're buying properties at discounted prices or not, but I do know that there are much better ways to finance them than w/ an 80% loan to purchase.
You can buy with a standard 80% loan, and then refinance, pulling your money back out. You can get an 80/20 loan, or you could possibly get a loan based on tax value or appraisal regardless of your purchase price. All these are better options than sinking 20% of your cash into every deal.
Example: Home value $100K, buy for $50K, borrow $75K. Now you get a check at closing for $25K (minus closing costs) to do fixup/holding costs/to put in your bank account. Sound better than forking over $$$?
I wouldn't leverage my personal home for any length of time. If you're going to have debt, put it on the properties that will be producing the income.
all of my rentals cash flow at betweeen 2-300 a month. I'm not buying for appreciation,I'm buying for positive cash flow if appreciation happens great. I'm only wondering if people will max out equity to buy properties. I think putting 20% down is a safe way for me. I think what your telling is max out the rentals with equity not my primary?
Most of the money is made through appreciation, not cash flow. Yes, you should look for cash flow (and plenty of it) but that is your safety net, not your major profit center.
Yes, many people have positive cash flow but most will tell you that it was not as much as planned, especially on small properties such as you have been purchasing. Expenses tend to be higher than anticipated and the first major repair (roof, water damage, etc.) will eat you alive at the low cash flow you indicated. Therefore, I assume you are in it for the appreciation. However, the high use of credit you described will make it difficult for you to withstand unexpected problems and therefore risk your ability to hold these properties for the appreciation.
What you have described, and the low monthly cash flow is very risky. A slight interuption in your cash flow will bury you, especially if you've maxed out your credit line.
I would not make the investments you described, I would run the other way unless I had 30k+ saved to cover unexpected expenses and the properties were appreciating at 9% or more per year. Otherwise the risk is too great for the low cash flow.
Best bet: sell now, pay down your loans and rethink how much free cash flow you will require to own a rental property. Then rethink your reserves needed to ensure you can withstand any unexpected problems.
The other posts have offered good advice as well, consider carefully what was said.
I decided to leave me personal residence at 80%ltv not sure if I should borrow money on the rentals both of them are sitting at 80%ltv as well. My area has been appreciating at 15-20% a year by the way. I just feel like 20%down on my rentals is dead money when I could buy more propertieds with it?
What I would reccomend is rethink your 20% down theory. If you have to put down 20% to cashflow, it's not a great cashflow property. You should be able to put down 0-5% and have it cashflow comfortably. I shoot for $150 a unit, some shoot for $100 a unit.
And as Bnorton asked, hopefully you are buying with some equity in it already, which, you should be able to yank some out with putting that 20% down.
We have bought under the same program of 20% down. We have also bought houses on credit cards. My wife and I both work and set out after buying 10 properties to pay down for a few years. We now are in the process of lower the interest rate's and pulling money out to pay some off and start buying more properties. We cash flow between 150 to 300 dollars, but a new roof, vacancies, damages and H/A takes away the cash flow in a hurry. Depreciation and Appreciation is where we come out ahead. We have heloc's, LOC's and many Credit cards to ride us thru the rough times. Keep in mind reserves are very important! Some say as much as 6 months worth of payments.
Asking if using your HELOC for investing is a good idea, is like asking if Microsoft stock is a good addition to a portfolio. To make financial decisions you must look at the person's complete financial picture.
An HELOC is a great tool for me. I use it as a revolving line of credit for my real estate. But for someone else the HELOC might be a bad idea if they are already over leveraged and in danger of not paying their debts.
Any line of credit that you have that is enough for you to use in order to make cash offers on properties (and thus, better deals) is a good idea, AS LONG AS you plan on paying it back. As Brenda said above, a short term loan only. After buying the property, refinance and pay off the line of credit, so that it is free for the next purchase or major problem.
The problem I think that many of us are having is the term "maxing out" the line. Usually that means that you are planning on using it to it's limits and then only paying the minimum payments. If so, then that is a bad idea, because you will be overleveraged.
I would never leverage an investment property beyond 80% of FMV. And that is true FMV, not an overblown appraisal. That 20% of "dead" money gives you a cushion. If there is a money crunch, then you are in a good position because you can "fire sale" the property below FMV and sell quickly without actually losing any funds to do so. It also covers you if the property were to depreciate at all during the holding period.
As far as your personal property/home goes, I'd personally shoot for having them paid off. If your home is debt free, you can still have an equity line on it for your deals, but little fear of it ever being taken from you because you overleveraged it.
Remember, in real estate the money is made when you buy. Not when you sell, or rent or whatever. If you're not buying them at discounts to begin with, you are starting behind the pack already.
Example: I'll buy a property with a FMV of $100K for $50K. Then, I can refinance that property for $80K. That gives me $30K in my pocket for fixup, repairs, debt paydown on other loans, vacations, golfing, etc. As long as the property will still cashflow (for me, a min of $200 pos) max it to 80%.
Here is a scenario I would like to share with all of you. I have a friend of mine that has a line of credit against his primary residence for $300k. Over the past 10 years, he has purchased properties for 65%-70% of market value cash using his credit line. He then rehabs the properties and refinances pulling out only his rehab cost. He puts a good loan on the property with a fixed interest rate. All of his deals have at least $300.00 a month positive cash flow.
What he does is takes the monthly positive cash flow and works on paying down one property at at time. At this time he has 37 properties, 10 of which are paid off. All of his positive cash flow monthly goes towards paying off one property at at time creating the 'snowball' effect. He could retire right now if he wanted to, however he loves the thrill of the chase buying and selling real-estate.
I think Roger gave the best advice. If you are going to do this, make sure you are getting a good deal, not paying full retail value. If you just did 2-3 houses a year, how many would you have in 10 years? At that time you could probably sell half and pay off the other half in the right market...
I appreciate all of the advice! My purchases are usually at about 85% of fmv. I put 20% down on the properties when I purchase so in reality I should have about 35% equity, I haven't touched any of these properties equity wise. I make about 150k a year so I can handle the down times, I also pay down my heloc on my property.
Well, you've gotten some pretty fair advise here, but I wanna throw in my 2 cents worth. I have based my buying strategy around cash flow. If I have to wait on appreciation to make money I am in real trouble. My exit strategy is to let the kids and grandkids sell them or keep them cause I'll be lookin down from above ( or lookin up from the heat). I have 30 units that I have put a total of $3500.00 cash out of pocket in. That being said, probably not one of my places would be in Better Homes and Gardens magazine. I live in good old rural midwestern America where the economy stinks, jobs are scarce and there is a lot of bad credit. I try to pay around 20k per unit for multi and 25k to 30k for SFR's. Ihave a small MH park with trailers in it that I wouldn't give you $500.00 per trailer for and I negotiated for over a year on it while other smarter investors passed on it. Well them lil critters are bringin in $225 to $325 per month, my other junker ones are bringing $350-$375 for a 2 BR and $400 for a 3 BR and my SFR's are rented at $450 each. I do very well with them, they are pretty highly leveraged... 80% of an appraisal I wouldn't pay for em. But, the upside is they are financed for 15 years fixed at 5.25% fixed and the MH park 10 years @ 5%, so when they are paid for it will be somewhere around 10k per month in todays money coming in w/ no mortgages... except, I forgot.... that's also about the time the kids will be thinkin Ivy League... Why can't they do like the Ol man and just buy cash flow. Bottom line is, I strongly disagree with buying for appreciation... That's just a lil ol gravy for me, but I have a feeling we are both right, just in different parts of the country with different strategies.
The answers to this question, I believe, seperates people more than almost any other.
I will do whatever is necessary to fulfill my word. If I buy a home that forces me to lose money on; then I will come to the table with the money I need - some how, even for an investment property, the 'banks' are not going to lose money working with me.
However I know some people who believe it is OK to say things went sour and not pay all of their creditors. These people would probably prefer to stay in the safety zone of keeping their personal home seperate from their investments.
So for my personal opinion; I will use whatever collateral I have available to finance my investments at the lowest possible rate.
Leveraging is good. Overleveraging is bad.
Using an equity line from your personal home to buy properties for "all cash" is a good idea, because the quicker you can close, the better deal you can get generally speaking. However, maxing out that credit line without ever paying it back is a bad idea, and could possibly end up helping you to lose your home.
If you are going to use an equity line, use it to pay cash for your investments and then refi the investment property and pay off your credit line. When you do this, don't overleverage your investment either. Personally, I don't ever borrow more than 80% of true FMV (not some inflated appraisal figure). This way, you should always have a good cashflow and a safety net if prices ever fell, or you needed to sell a property quickly.
Roger
I can't purchase other properties out right(as in cash) with heloc amount. i TOOK 50K BRINGING LTV ON MY HOUSE UP TO 80% OOPS SORRY FOR CAPS. I put 50k down on a duplex, which was 20%. I have a condo which I also put 20% down on. I was thinking of bringing my heloc up to 100% ltv on my house to get another property but,I was wondering how everyone felt about that.
If you get a couple of units that don't pay the same month, (Dec or Jan are common months for this) can you still make your payments?
If not you will be risking YOUR house so the question is are YOU comfortable with that?
I have rentals on the side my primary income is a sales job were I make pretty decent money so I can handle months without rent. I don't run tight on money.
From what you've posted so far, I think that your buying method (or at least your financing method) is flawed. Putting down 20% and betting on appreciation of property is old school REI. Yes, it still can work, but you have to have lot's of cash for those downs.
I don't know if you're buying properties at discounted prices or not, but I do know that there are much better ways to finance them than w/ an 80% loan to purchase.
You can buy with a standard 80% loan, and then refinance, pulling your money back out. You can get an 80/20 loan, or you could possibly get a loan based on tax value or appraisal regardless of your purchase price. All these are better options than sinking 20% of your cash into every deal.
Example: Home value $100K, buy for $50K, borrow $75K. Now you get a check at closing for $25K (minus closing costs) to do fixup/holding costs/to put in your bank account. Sound better than forking over $$$?
I wouldn't leverage my personal home for any length of time. If you're going to have debt, put it on the properties that will be producing the income.
Roger
for me it's to much risk. i will not use my home eq. to make a deal. but hey. that's me. do what "you" feel comfortable with...km
all of my rentals cash flow at betweeen 2-300 a month. I'm not buying for appreciation,I'm buying for positive cash flow if appreciation happens great. I'm only wondering if people will max out equity to buy properties. I think putting 20% down is a safe way for me. I think what your telling is max out the rentals with equity not my primary?
Hey,
To be frank, what difference does it make what other people do? If you are comfortable with it, then do it.
For me, I would NOT be comfortable using home equity line to buy rentals,but I would be okay buying a quick resale.
The biggest lie in real estate is cash flow.
Most of the money is made through appreciation, not cash flow. Yes, you should look for cash flow (and plenty of it) but that is your safety net, not your major profit center.
Yes, many people have positive cash flow but most will tell you that it was not as much as planned, especially on small properties such as you have been purchasing. Expenses tend to be higher than anticipated and the first major repair (roof, water damage, etc.) will eat you alive at the low cash flow you indicated. Therefore, I assume you are in it for the appreciation. However, the high use of credit you described will make it difficult for you to withstand unexpected problems and therefore risk your ability to hold these properties for the appreciation.
What you have described, and the low monthly cash flow is very risky. A slight interuption in your cash flow will bury you, especially if you've maxed out your credit line.
I would not make the investments you described, I would run the other way unless I had 30k+ saved to cover unexpected expenses and the properties were appreciating at 9% or more per year. Otherwise the risk is too great for the low cash flow.
Best bet: sell now, pay down your loans and rethink how much free cash flow you will require to own a rental property. Then rethink your reserves needed to ensure you can withstand any unexpected problems.
The other posts have offered good advice as well, consider carefully what was said.
I decided to leave me personal residence at 80%ltv not sure if I should borrow money on the rentals both of them are sitting at 80%ltv as well. My area has been appreciating at 15-20% a year by the way. I just feel like 20%down on my rentals is dead money when I could buy more propertieds with it?
I think you made a wise decision. Now about your comment about 20% being dead money. What percentage are you paying based on FMV?
What I would reccomend is rethink your 20% down theory. If you have to put down 20% to cashflow, it's not a great cashflow property. You should be able to put down 0-5% and have it cashflow comfortably. I shoot for $150 a unit, some shoot for $100 a unit.
And as Bnorton asked, hopefully you are buying with some equity in it already, which, you should be able to yank some out with putting that 20% down.
GL
Ray Higdon
We have bought under the same program of 20% down. We have also bought houses on credit cards. My wife and I both work and set out after buying 10 properties to pay down for a few years. We now are in the process of lower the interest rate's and pulling money out to pay some off and start buying more properties. We cash flow between 150 to 300 dollars, but a new roof, vacancies, damages and H/A takes away the cash flow in a hurry. Depreciation and Appreciation is where we come out ahead. We have heloc's, LOC's and many Credit cards to ride us thru the rough times. Keep in mind reserves are very important! Some say as much as 6 months worth of payments.
Asking if using your HELOC for investing is a good idea, is like asking if Microsoft stock is a good addition to a portfolio. To make financial decisions you must look at the person's complete financial picture.
An HELOC is a great tool for me. I use it as a revolving line of credit for my real estate. But for someone else the HELOC might be a bad idea if they are already over leveraged and in danger of not paying their debts.
Any line of credit that you have that is enough for you to use in order to make cash offers on properties (and thus, better deals) is a good idea, AS LONG AS you plan on paying it back. As Brenda said above, a short term loan only. After buying the property, refinance and pay off the line of credit, so that it is free for the next purchase or major problem.
The problem I think that many of us are having is the term "maxing out" the line. Usually that means that you are planning on using it to it's limits and then only paying the minimum payments. If so, then that is a bad idea, because you will be overleveraged.
I would never leverage an investment property beyond 80% of FMV. And that is true FMV, not an overblown appraisal. That 20% of "dead" money gives you a cushion. If there is a money crunch, then you are in a good position because you can "fire sale" the property below FMV and sell quickly without actually losing any funds to do so. It also covers you if the property were to depreciate at all during the holding period.
As far as your personal property/home goes, I'd personally shoot for having them paid off. If your home is debt free, you can still have an equity line on it for your deals, but little fear of it ever being taken from you because you overleveraged it.
Remember, in real estate the money is made when you buy. Not when you sell, or rent or whatever. If you're not buying them at discounts to begin with, you are starting behind the pack already.
Example: I'll buy a property with a FMV of $100K for $50K. Then, I can refinance that property for $80K. That gives me $30K in my pocket for fixup, repairs, debt paydown on other loans, vacations, golfing, etc. As long as the property will still cashflow (for me, a min of $200 pos) max it to 80%.
Roger
Here is a scenario I would like to share with all of you. I have a friend of mine that has a line of credit against his primary residence for $300k. Over the past 10 years, he has purchased properties for 65%-70% of market value cash using his credit line. He then rehabs the properties and refinances pulling out only his rehab cost. He puts a good loan on the property with a fixed interest rate. All of his deals have at least $300.00 a month positive cash flow.
What he does is takes the monthly positive cash flow and works on paying down one property at at time. At this time he has 37 properties, 10 of which are paid off. All of his positive cash flow monthly goes towards paying off one property at at time creating the 'snowball' effect. He could retire right now if he wanted to, however he loves the thrill of the chase buying and selling real-estate.
I think Roger gave the best advice. If you are going to do this, make sure you are getting a good deal, not paying full retail value. If you just did 2-3 houses a year, how many would you have in 10 years? At that time you could probably sell half and pay off the other half in the right market...
Best Regards,
Jeff Adam
[addsig]
I appreciate all of the advice! My purchases are usually at about 85% of fmv. I put 20% down on the properties when I purchase so in reality I should have about 35% equity, I haven't touched any of these properties equity wise. I make about 150k a year so I can handle the down times, I also pay down my heloc on my property.
So you are buying pretty houses with no rehab needed?
the duplex was just finished the condo is 10 years old. The duplex I got a great deal on and the condo was a widow who wanted out.
Well, you've gotten some pretty fair advise here, but I wanna throw in my 2 cents worth. I have based my buying strategy around cash flow. If I have to wait on appreciation to make money I am in real trouble. My exit strategy is to let the kids and grandkids sell them or keep them cause I'll be lookin down from above ( or lookin up from the heat). I have 30 units that I have put a total of $3500.00 cash out of pocket in. That being said, probably not one of my places would be in Better Homes and Gardens magazine. I live in good old rural midwestern America where the economy stinks, jobs are scarce and there is a lot of bad credit. I try to pay around 20k per unit for multi and 25k to 30k for SFR's. Ihave a small MH park with trailers in it that I wouldn't give you $500.00 per trailer for and I negotiated for over a year on it while other smarter investors passed on it. Well them lil critters are bringin in $225 to $325 per month, my other junker ones are bringing $350-$375 for a 2 BR and $400 for a 3 BR and my SFR's are rented at $450 each. I do very well with them, they are pretty highly leveraged... 80% of an appraisal I wouldn't pay for em. But, the upside is they are financed for 15 years fixed at 5.25% fixed and the MH park 10 years @ 5%, so when they are paid for it will be somewhere around 10k per month in todays money coming in w/ no mortgages... except, I forgot.... that's also about the time the kids will be thinkin Ivy League... Why can't they do like the Ol man and just buy cash flow. Bottom line is, I strongly disagree with buying for appreciation... That's just a lil ol gravy for me, but I have a feeling we are both right, just in different parts of the country with different strategies.
Good Luck,
Shawn(OH)