Here is my situation. I was recently laid off. No jobs here in Tampa, FL for me. I have $23K in the bank ($110K in 401K and $12K in IRA). I have an 800 FICO, Wife has 803 FICO. Wife is employed in same job for 7 years. We are at about 35% debt to income if looking at just her salary. My son has mid-700 FICO and is employed. Will co-sign for a loan if we want.
I want to buy a home to fix up and rent. There are tons of Fannie Mae and bank-owned foreclosures in the Tampa Bay area. I would like to concentrate on those. I am not really interested in hunting down folks about to go into foreclosure and do all sorts of creative things. I certainly have the 15% - 20% down payment. I could probably buy a couple of homes at $50K each that would be worth $100K when fixed. And I do all the work myself. My only cost is supplies. But once I get 2 homes, my bank account is $0 with no money for a down payment.
So my question is this - can I get a HELOC on my investment property once I get it fixed up? What are the seasoning rules? What are the LTV rules? I have talked with several banks here and they have a 1 year seasoning and then only give about 70% LTV. My hope / plan would be to get a HELOC once a property is fixed up and use that HELOC to get a down payment for the next home.
Or essentially - what I am asking is this. What is the best way to buy a SFR for rental? Use a hard money lender and then refinance with a regular loan? Use my cash as a down payment and then get a HELOC once it is fixed up? I just have no clue which way to proceed.
Using a HELOC would be ideal, in my opinion. Closing costs are very low with a HELOC, and the payments are usually interest only. And if you make a payment equivalent to what an amortizing loan payment would be, the principal balance will be paid more quickly under interest-only financing.
Unfortunately, I am looking for the same information. I would like to hear from others that know of banks that allow HELOCs on rentals or that offer a cross-collateralized line of credit. I remember reading that Wells Fargo does investment property HELOCs, but I don’t know if that information is still accurate.
Would it be possible for you to borrow from your 401k? That may be ideal, at least at first.
I would advise you not to borrow from your 401k. There are penalties and taxes owed. Check out this link: http://www.cyberinvestmentguide.com/retirement/index.html
It has links on the page you can click on to see how much it will actually cost you to borrow from your 401k. If you had a Roth IRA, you could withdraw your contributions at any time without penalty.
I have never used hard money, but there are people on here who do that. I believe Andydallas uses hard money. I have only put money down and then used other rental income to fix up properties. I try not to refinance a higher amount once they’re fixed up. I just want them paid off.
Fortunately, penalties only occur with an early distribution. You can borrow up to half of your account, or 50k, whichever is smaller. But the money must be paid back within five years. If you are using the money to purchase a home (your personal residence) the loan length can be longer. The only real disadvantage is that you are paying the money back with after-tax dollars. As long as you pay the loan back on schedule, you will have no penalties and the tax consequence will be minimal. A distribution, on the other hand, is definitely not advisable.
If you use your 401(k) money you will not have pay taxes because it’s an investment. Essentially, your 401(k) will loan the money for investment purposes, not you. Go to trustetc.com (Equity Trust Company) that’s what they specialize in–using your 401(k) or IRA to invest in everything real estate, notes, real estate, tax deeds, etc. You will have to roll over your 401(k) into a self-directed IRA with them. This is where I send private investors who want to loan money to real estate investors.
As far as a line of credit on your property, banks vary with their seasoning. Some may go as low as 6 months. Then again, it’s not your primary residence, thus a lower LTV loan.
Another idea is for you to get other people involved. Either borrow all the money needed (acquisition + fix-up costs) or JV with him, or them. If you start a club then you’ll need to form an LLC (gets more sophisticated where the LLC loans the money out and pays investors). Personally, I wouldn’t use my own money but you can if you want to. You can use other private investor money (if the deal is good enough 65% LTV or less). Have them roll over their 401k into a self-directed IRA with Equity Trust Company (they’ll help you with all the necessary ppwk). Borrow their money, pay them a good rate of return, customary is 12% annual simple interest rate paid at the sale of the property (better than what CD’s pay or savings…) use their money, it’s secured by a hard asset, it’s insured (they’re the loss payee), collaterlized below market-value, they get a note, and deed of trust so they’re safe and it’s a secure investment secured by the subject property.
You mentioned you have some money, why not keep your money and when you find a smoking deal use other peoples money to do the project. That’s what i’m doing in albuquerque.
I’m not an attorney or cpa and any and all i’ve written here is for educational puprposes only , it is not advice or should be taken as such.
I just confirmed that Wells Fargo does HELOCs for primary, secondary, and non-owner-occupied homes, at 75%, 70%, and 60% LTV respectively. I asked if there was a limit to the number of rental property HELOCs, and she said no. Even if there is a limit, this is good news.
hard money simply gets you into a position to “refinance” the house/rehab after a short period based on the appraisal (since it a refinance) not what you paid,it cost money, but it conserves cash,I use the a lot
Using a self directed IRA requires you to follow many guidelines, and ALL money that is made goes back to the IRA,you can’t co-mingle your ira money and your own, and if your going to finance the property you buy with your self directed ira you must get a non-recourse loan (irs rules not the banks),make sure you know the limits of using a self directed ira,they are great, but if you break any rule your ira is in trouble