Hey everyone I would like to introduce myself to this forum as this is my first post. My name is Ben and I have been lurking around here for a while. I really value the knowledge and experience that you seasoned investors have to offer to newbs like me.
Ok so here is my deal–
I am 18 years old and starting college in a week. I have been interested in real estate for quite some time, and have decided that it is the career path that I want to follow. I dont want to work for no stinking boss!! ;D Ok I dont exactly have 200k cash but about as close to it as you can get…I just set up a HELOC of 200k on my fathers house with him. He is all for my real estate investing career and wants to do anything in his power to help me out. I have been added to the title of the property so I am on the HELOC which should help build my credit (remember im 18). I have complete access to the credit line, for investment purposes. I realize that a lot of people start investing with nothing, so it would seem I have a pretty good head start as far as finances go. Ok so far so good
I am currently in the planning stages right now trying to read, absorb, and learn all books, articles, forums, and anything else REI related.
I am going to start attending the local REI club meetings regularly. I am thinking that I should go for a while to get a grasp of things and then try to find a mentor that I could possibly intern or work for. I am a motivated self achiever with high goals and want to learn from people who know their stuff first hand to try to maximize my knowledge and minimize my risk starting out.
My goal is to have three rehabs completed within a year and a half. I want to buy a lower priced property that I can buy and rehab for less than 160 so as to keep a safety margin in the HELOC. The real benefit to this being that I can use the HELOC instead of getting a mortgage, therefore saving me some closing costs and points, not to mention being able to say “I can pay you cash” while negotiating.
My question to you for you investors out there is ---- If you were in my situation, with the knowledge and experience you now have—what do you think I should do to put myself in the best possible place for success in this field.
Thanks everyone, I really all your opinions and advice you have to offer
Buy a duplex or something similiar for yourself. It will get you into your own property, help build your credit, and get you started towards long term wealth.
As far as using the whole HELOC, i think most people will ask you why? The general rule is to use OPM (other peoples money) Maybe your deal will profit 30k and will save you 5k in lender fees. So you pay cash for one deal and make 30k. or you do 2 deals using OPM and make 50k or 4 deals and make 100k. when you use all your csh for one deal, you loose the use of that money. Plus should something go wrong, its not your money
Judd is right. Real estate is not very special as an investment tool except for the ability to leverage it. You should always try to let the deal finance the deal. Buy it cheap enough that you can finance the property and rehab and put money in your pocket from the deal not you dad’s house.
If you live in a college town, you might want to purchase a multi dwelling and rent out the property to college students. Be careful on this one.
Disadvantage
Need good property managers or yourself.
Advantage
You get your rent is paid… don’t have to live in the dorm and you have a property that will allow you to cash flow? Build your credit and your equity. You live free.
Don’t put all your eggs in one basket. If Dad was approved fora $200K HELOC he can probably qualify for a mortgage on a rental property.
Don’t put all your eggs in one basket. Use the HELOC for back up cash. OPM is the name of the game. Leverage the cash.
I understand the advantage of OPM and leverage its just I want to build up some cash (l only have 5k in the bank) and experience before getting involved with the mortgage side of things. Maybe it is just because I dont fully understand the lending practices on investment properties and such but I do know that I just spend 10k in broker fees to buy the house that I just moved into. Granted it did cost 340k so that might have something to do with it but I am still in price shock. So of course I am a little weary of mortages right now.
I know that the HELOC will be tied up during the rehab process but I dont mind for the first few deals. It is just sitting there, I am in no rush to do multiple deals at once, and the advantages of reduced costs is appealing to me. Here is a post made my OhioInvestor a few years ago about HELOC to buy houses
"Lets say its a house that cost 50K, normally the bank will want 10-30% down plus closing costs and probably even escrows for repairs. then if you want to cash out and get your money back out of the house to move on and do more deals you have to pay all of the closing costs all over again for the property (another 3-4k). But if you used your line of equity then you do not have to awnser to any bank to close your deal ( you can often put on a purchase contract that your paying CASH with no delay and offer a quick closing in 2 weeks or less if the seller can get the paperwork done quick enough. This gives you a bigger bargining tool. Once the house is bought with your line of equity you then make your repairs and put in a tenant or lease option if that was your goal and seek a refi. To refi don’t go to a broker, go to a BANK. The same one you got your Line of Equity is great in fact.
When you refi your property after repairs are made you can cash your property out for more than you have invested into it to put CASH in your pocket. They will generally lend you 70-80% of your value. For example a house i purchased recently was 33k. I fixed it up 2500 in costs and put a tenant in it (it was intended to be a rental). I did this with my line of equity so i paid no absorbanent costs. I then went to bank one, told them i felt it was worth 75,000 after repairs. I made an overly dramatic letter regarding the quanity of repairs made to bring the house up to par and they did what is called a computerized appraisial. The value came close and i settled for a 72,000 value on the house with the bank (i always ask for a little more than i want). The bank gave me the terms of 7.5% for 20 years or 7.75% for 30 years (no documentation style loan). I chose the 20 year term and the costs for closing was only $125 dollars (no additional title costs needed and no apprasial fees on computer appraisials Everything is paid by the bank). They gave me 70% ltv so i walked out with a 50k cashiers check of which i payed off my 36000 worht of expenses to purchase the home and put 14k in my pocket to use for the next house and my line of equity is now free and clear and ready to reinvest again. Anyhow gotta leave, had a baby and he is keeping us busy… leave any questions if you have any sorry i was gone so long the baby is new "
Ok so basically he is saying that to buy the house costs you close to nothing (actually nothing at bank of america), and then if I wanted to keep it as a rental the bank would give me a 70% ltv no doc loan at an ok rate? And if i wanted to sell, after reviewing my house’s mortgage documents it looks like I would be responsible for title insurance (here in florida at least) , State Deed tax, and a few other miscellaneous costs?
Remember guys im still trying to absorb all the info I can. Any advice much appreciated. Also what do you guys think about getting a mentor and how to go about it. Thanks -Ben
Don’t burn your 200k just because you have it. Learn the business of real estate first so that it won’t even be a question of HOW to spend your money. Otherwise this money is a disadvantage to you that may potentially get you in trouble.
It sounds like the general consensus here is that I should fully learn how to do deals without any of my own money first. But here is my problem…I am 18 and just got my first credit card to build credit 3 months ago.
I dont want to use a HML because of the high costs. I suppose I could borrow from the HELOC for a down payment on a investment loan but I dont have a job/income to qualify for the loan. Could anyone elaborate on the process of getting an “investment loan” and how to go about it without having any income and strong credit (yet)? Assume I find a property at 70% ARV
you may still have to put down 20-30% but its better than putting down 100%.
Go to truecredit.com You can pull your credit report and get your credit scores from all 3 bureaus. Me and my wife subscribe to it monthly. At anytime, we can get a new report and updated scores. We have caught a couple of errors as well. These reports and inquiries do NOT count against you. First one is $30, then its $15 a month if you do it monthly
Point is you can provide this to brokers and lenders instead of them pulling your credit. Most will accept this to prequal you BUT WILL REQUIRE their own report before they fund. It helps when rate shopping. And the credit score they get from their reports always seems to be a tad higher than what truecredit shows.
Will your dad help you on the credit aspect.
And for being 18, you seemt to have your head in the right place. When I was 18, I was… well maybe on another board
My opinion, the only good advice so far is from Danny. No need to burn thru $200K just because you have access to it.
Okay, there was some other good advice. Use Other People’s Money (OPM). Seems though, that they forget that by using a HELOC, you are using other people’s money, the bank’s.
If you are planning on doing only one property at a time (and you should, until you actually really, really know what you’re doing), then using the Heloc is a good choice. The real problem with having easy access to cash is that you have easy access to cash. If you have to get a loan, then you basically will have someone else looking over your shoulder confirming that you have at least a decent deal, otherwise, they wouldn’t finance it. If all you have to do is cut a check, you have no backup on the “good deal.” What may happen is that you become a motivated buyer and start seeing “good deals” simply because you want a property. Having the ability to simply cut a check at that point is very bad for your REI career.
Best advice at this point, slow down and take plenty of time to learn about this business before simply jumping in with your cash. You may find that rehabbing may not be the best way to use your $200K.
I think using a HELOC to get the property for cash is ok, but then refi the property into a loan and get your cashback. You have to remember, closing cost is tax deductible for investors. Plus the cost of a loan will help with your taxes.
One of the 1st things you need to do is start 1 or 2 companies in your name. For you to take full advantage of a corp to do real estate, it needs to be at least 2yrs old so start now.
Now doing a rehab is not an easy task, of course no one on here knows your abilities to rehab a home or if your planning on contracting out the work. I do rehabs, but its all contracted. I do not even knock 1 nail into the wall or dig a hole in the ground. I have no desire to. Landlording, another thing you may not like. I personally use mgmt co to find tennants and take care of complaints. I just want to make money in REI, but really do not want to worry about the day to day problems associated with it. I like to partner up with others.
With 200K you may want to find someone seasoned in rehabs/flips/rentals and work some deals together. Maybe someone who needs some financial help with downpayments, carrying cost or rehab funds. You can split profits and make some decent money.
Also for credit building. You got your 1st card, and maybe your parents have some credit cards. If they have some with perfect tradeline histories, ask about being added as an authorized user, it will take a few months to show on your credit, but will boost your score alot. Once reported, you can be removed and it will still show on your report.
Remember OPM is leverage. Leverage is the key to financial freedom really. I have bought properties in the past because of the leverage I could get out of it. Current deal is a condo. Seller giving me 50K back outside of closing. I will use 20K to carry and flip for what I paid for it. I will then use the other 30K to buy 10 other condos all giving me back 35K per deal (do the math there) and I will only need about 10K per unit for holding cost and will lease option or rent most of them, and flip a few and still walk away with 20K+ per unit. In less than 3months, 1 deal can generate over 300K in my pocket. Then take some of that money and use it for rehabs like I want to…I make it an art leveraging properties for others…
--Yes he will cosign if needed, hes only 2 hours away but I would like to be able to do things on my own if possible
If you have to get a loan, then you basically will have someone else looking over your shoulder confirming that you have at least a decent deal, otherwise, they wouldn't finance it. If all you have to do is cut a check, you have no backup on the "good deal." What may happen is that you become a motivated buyer and start seeing "good deals" simply because you want a property. Having the ability to simply cut a check at that point is very bad for your REI career.
--I will perform the needed due diligence and only proceed with the deal if it looks like a winner. I am in no rush and I will wait for the right property to come along that the numbers work with.
You may find that rehabbing may not be the best way to use your $200K.
--Roger could you elaborate?
Now doing a rehab is not an easy task, of course no one on here knows your abilities to rehab a home or if your planning on contracting out the work.
--I was planning on doing most of the things myself and with the help of my 3 student tenants (hey now that I think of it I already am a landlord) living in my house for the first few rehabs. I like to think that I am somewhat handy when it comes to minor home improvement jobs. I have layed tile, installed fans, fixtures, toilets and other stuff like that before. If something that is out of my level of experience needs to be done I fully intend on contracting it out.
As far as using the HELOC to buy a property with, it sounds like it would be smart to refi it soon after the purchase to free up the HELOC. Could you guys explain what kinds of terms I would be looking at. I could get my dad to cosign if needed but if not, am I right that in my situation I would probably end up getting a 70-80% ltv no doc no prepayment penalty loan? If so what kind of closing costs are associated with that? In OhioInvestors post that I quoted in my last post he states that after buying a house with his HELOC he went back to the same bank and did a refi “The bank gave me the terms of 7.5% for 20 years or 7.75% for 30 years (no documentation style loan). I chose the 20 year term and the costs for closing was only $125 dollars (no additional title costs needed and no apprasial fees on computer appraisials Everything is paid by the bank).” Those rates might be a little low compared to today because it that post is 3 years old.
If thats true that would mean I could buy a property with the HELOC, then go right back to the bank and refi it at 70% ltv with very low closing costs?
I would like to say that your help is much appreciated, I cant get enough of this stuff! ;D
Ok, you lost me here. What do you mean by “seller giving me 50k back outside of closing” ? How can you get 30k to buy 10 other condos? And how will that get you 35k per year?
As far as refi the property. You can refi 1 day out but its tougher since there is no seasoning of the title yet. Banks look for that also, most banks want 1yr but its done all the time, just call some brokers and they will have a bank that can do it.
As far as low cost. Forget it. The cost to refi is really the same as a purhcase.
You still need title insurance (bank requires it), you have to pay all the doc stamps, you will have processing fees and broker fees, etc. Prepare to pay 3-5% to refi. Since your looking at a No DOC, maybe closer to 5 or 6% i think. Take the higher interest rate if your only going to hold shortterm over paying more points. YOu need to examine the figures. Sometimes a higher interest rate is better because of what your plan to do with the loan. You can figure out how much the total loan will cost with the lower payment for the amount of time you want compared to higher payment and lower cost to get the loan.
I am dealing with a motivated seller who wants out. I will secure my loan for 310K, he is paying my closing cost, etc. But we have another contract for 260K that is added to our contract that only the 2 of us will ever see. It stated he will bring a certified check along with proof of funds for $50,000 to the closing table for me. Its an outside transaction since some people like to use the “F” word on this business practice.
I will then most of that money and use it to buy 10 condos in the Tampa and Naples, FL area a private investor is selling where again we have a seperate contract. He will be bring $35K to the table for each condo. The 10 condos is being bought from a private investors that bought over 200 condo conervision units from a developer in 3 projects at one shot and he is flipping them. Of course I need incentives… Now for the 10units, I need to put down 3K per unit, so I will use 30K to buy the units and he is paying 3% closing cost plus my 3K down will really cover the rest.
It’s not like buying a car and your dad can just co-sign for you. Both people have to qualify in order to be on the note.
Honestly, a lot of what you are posting doesn’t jive.
“Maybe it is just because I dont fully understand the lending practices on investment properties and such but I do know that I just spend 10k in broker fees to buy the house that I just moved into. Granted it did cost 340k so that might have something to do with it but I am still in price shock. So of course I am a little weary of mortages right now.”
In my opinion you should focus on college and worry about REI later. Take some classes on Economics, Business, Finance and read these boards so your dad doesn’t get hung out to dry on a $200K HELOC.
Honestly, a lot of what you are posting doesn't jive.
--Allow me to elaborate...Yes I am 18 so I can see why could be skeptical of me owning a house. My grandparents set up an education fund for my college a few years ago with 75k in it. I took out 30k for downpayment/closing costs on a 340k house and have additional people living with me to help cover the mortgage. My parents are on the mortgage, were all on the title, and we all agreed the house is 100% mine.
In my opinion you should focus on college and worry about REI later. Take some classes on Economics, Business, Finance and read these boards so your dad doesn't get hung out to dry on a $200K HELOC
--Maybe you would do that but like I said I am a motivated self achiever with high goals and want to learn from first to try to maximize my knowledge and minimize my risk starting out. I will be focusing on college no doubt, but I see no reason to delay my learning.....I dont have a job and dont plan on getting one. In my mind learning the in's and out's of real estate is my job for now.
Thanks for the good info yrush. It looks like I will proceed and when the time is right buy a propterty with the HELOC. Depepending on my situation at the time, I will either rehab while it is on the HELOC, or refi. But in my situation where I am in no rush to do multiple houses right now it just doesnt make sense to me to refi and pay 5-6% in closing costs when im only going to hold the propterty for 2 months and be paying less than 1000 a month for carrying costs
Yes, I can elaborate. Rehabbing is only one aspect of REI and frankly, probably not your best choice simply because you are new and you are in college and rehabbing is a time intensive job, especially if you’re planning on doing work yourself (not recommended).
I’d recommend studying some more ways to make money in REI and then make a decision on what you want to do.
One example of something else that you could do with $200K is lend it to other, experienced investors. For example, someone needs $50K to buy a property, you could lend that money to them in a 1st position note. You might be paying 10% to borrow, but you can charge them 12-18% plus 2-5 points upfront. Pretty good return and very little actual work involved. In fact, if you get in with a reputable mortgage broker, they may perform all of the paperwork necessary.
And be cautious with yrush’s ‘help.’ The “F” word that he mentioned is FRAUD and what he does is fraud, plain and simple. The “some people” that he refers to is legally minded investors, all lenders, and the Federal Government.
Raj… I know many people consider it fraud, but its all based on intent and preception of the subject. But one thing I always wondered, if a real estate agent in Florida sells a preconstruction home in TX and does not have a license for that state, the builder will still pay them the same commission but call it a marketing fee. Its all the same. Depending on the loan product, there are many times its outlined on the HUD-1 with a payment being sent to an financial escrow company I control. So its documented, and then I can take it from there. Remember, if its on the HUD-1 and the bank okays it, then its fine.
But I didnt just pick up my habits, they were taught to me by many other investors I have meet over the years. Its all about intent…
But as RAJ mentioned, lending money is a great way to build up serious cash. You can be a private money lender for short term loans, say 6months. Charge 5-8points and 15-18% interest rate. You can easily turn 200K into millions while in college getting your degree in business and finance. I know one investor that did that. He bought home in beginning of boom in Calf. waited 2yrs and refi and got back over 500K, and became hardmoney lender for 3yrs and tured the 500K into over 5mill in 3yrs.
BS - go for it - the HELOC is a fine way to go. Study the deal, know the numbers and make it happen. No two investors operate the same way. When a method works well for a particular investor, they become very attached to it and swear there is no other way - some use HELOC others do not. Many highly sucessful investors have. You are thinking way ahead of your years, get the money and go make your dad proud.