Hi everyone. I’ve soaked up a lot of information regarding rental properties/cashflow/equity and more over the past few months to the point where I’m comfortable evaluating properties. In fact, I even put an offer in on a triplex recently.
Now I’m trying to figure out the financing side of the business. I’m 25 years old, and have about $30K to start with. In the market I’m in, that’s enough for a downpayment on one triplex. I’m trying to plan out the next ten years of what will hopefully be a successful rental real estate venture. My question is, after acquiring the first rental property, will it be easy to use the equity in that property(whether it be a cashout-refi or a HELOC) for a downpayment on a mortgage for a 2nd property? If this is possible, can you just keep repeating this process to build your property portfolio? Or am I just thinking too big and not clearly enough?
First, I’m going to assume your working with a local bank for my advice I’m about to give you. Let’s assume you pay 80k for your triplex and it’s worth 100k. Many new investors make the mistake of thinking that they can use the 20k of equity to buy another property but that isn’t the case. The reason is that your bank will probably only loan you 80% of the value of your property for the second which would be 60k and obviously that’s less that the 80k you paid for it. What’s this mean? Buy at a huge discount or raise rents to increase the value of your property and have it reappraised.
Second, don’t get stuck thinking that your only access your equity is done so by a refi or HELOC. Let’s say you have 20k of good equity you want to use as down on another property. You can simply ask the bank to cross-collateralize that equity and they will do that instead of pulling cash out and having to pay the fees associated with that transaction.
So, yes it is absolutely possible to keep rolling your equity into new properties, that’s how many people do ‘it’. No, it won’t be easy because you will have to find the right properties to purchase that will allow you access to that equity. Lastly, in my opinion you can never think too big! Good luck.
Where do you want to be in 10 yrs.? You can use the equity in one property to purchase another. But you have to remember that you need to have the cashfow in the property to cover the increased mortgage pmt. You HAVE to make sure you buy it under Market value. I’d say at least 80% of MV. If you’re too close to the MV when you buy, you won’t be able to get cash out in a yr. or so to buy another property. Don’t forget money for reserves, maint., etc… Are properties going up or down in your area? That makes a difference. You can look into properties needed some work and build sweat equity. Good luck.
I like the idea of cross collateralizing, I just heard that on my Carlton Sheets course. Will they use 100% of the available equity or is there a certain % that they use? It seems like it’s a lot less hassle to do it that way. I’ll definitely be looking into that.
jbaldwin - cross-collateralization is something that I’ve heard of but admittedly do not know enough about. I thought that with the state that the real estate market is in now, cross-collateralizing would be nearly extinct. but if it is still possible as you say it is, thank you for bringing it to my attention!
will it be easy to use the equity in that property(whether it be a cashout-refi or a HELOC) for a downpayment on a mortgage for a 2nd property? If this is possible, can you just keep repeating this process to build your property portfolio? Or am I just thinking too big and not clearly enough?
Yes, you can certainly try to buy a property, pull out the equity, and then buy another. After you’ve done that several times, you will have a bunch of losers and be forced out of business. The bottom line is that even in a very good rental market, properties will not cash flow when the mortgage is much over 70% of the market value. So, each time you pull that equity out, you’re turning that property into a loser.
Now, if you work very hard and find a property at a HUGE discount (let’s say 50%), then you might be able to refinance the difference between the 50% and 70% and still have the original property cash flow.
This is a nice philosophical discussion, but what we really need to anwer this question are the numbers associated with the property you are thinking about buying and refinancing. The numbers will tell the tale!
Here's another point to consider:
HELOC = Home Equity Line of Credit
Unless you're living in one of the units, it ain't your home!
Just because it ain't your home doesn't mean that you can't get a HELOC on it.
I like the idea of cross collateralizing, I just heard that on my Carlton Sheets course. Will they use 100% of the available equity or is there a certain % that they use? It seems like it's a lot less hassle to do it that way. I'll definitely be looking into that.
Typically they will lend up to 80% of the value of the property. So if you bought a place for 80k and it appraised for 100k you would be "loaned up". If you bought that same property for 50k you would only be at 50% LTV so you would have 30% or 30k available to cross collateralize. This is local bank stuff, secondary market doesn't do cross collateralization of properties as far as I know.
jbaldwin - cross-collateralization is something that I've heard of but admittedly do not know enough about. I thought that with the state that the real estate market is in now, cross-collateralizing would be nearly extinct. but if it is still possible as you say it is, thank you for bringing it to my attention!
As long as a bank is only at 80% LTV they feel pretty comfortable with the deal. Now, I will say that I am in a pretty strong market with a major university, 2 hospitals, multiple federal buildings, a number of fortune 500 companies, etc. So lenders in my area are still cutting checks, maybe you’re in an area that has had alot of bad news and bankers aren’t doing this. But if the deal is good there should be no problem. Good luck.
Jbaldwin- it would be a conventional 30 yr mortgage, so it would be $998 monthly. $1250-998= 252 or $84/unit. a lot closer to $100 than you estimated, but not quite enough I guess.
Lets tweak the numbers alittle more to see if a deal.
Purchase price $150K - downpayment $30K
Loan = 120K at 7% for 30yrs (PI) = 799 a month
taxes = 1500 a yr (do not know tax rate so avg) 125 a month
Ins = 1200 yr (again an avg) 100 a month
10% for repairs 250 a month
10% for vacancies(some use 15%) 250 a month
Water/trash/sewer/gas (some landlords pay this 100 a month
Lawn care 75 a month
Total 1700 a month
These are basic expenses so with $2500 a month rental income you have a PCF of $800 a month or $400 per unit plus $130K equity. Of course using some of the equity will change cashflow and you still need to add for marketing the unit and any if unit is vacant on purchase you will take a hit immediately.
Jbaldwin- it would be a conventional 30 yr mortgage, so it would be $998 monthly. $1250-998= 252 or $84/unit. a lot closer to $100 than you estimated, but not quite enough I guess.
So, if you can get this at a little better price, this could be a very nice deal!
This also is a good example of why you couldn’t buy it and then pull out the equity. Pulling out the equity would destroy the cash flow and although you would then have two rentals, the first one would be a loser.
Cross collateralizing may have worked in the past, but the lending world is very different now. Don’t assume that you can borrow out any equity in this lending climate. Also remember that the more mortgages you carry on your personal credit, the worse your chances are for financing the next deal.
In addition to doing your numbers, you NEED to do a business plan. This was done years ago, before the recent boom, when running a real estate investing business required business savvy and the corresponding financial documentation. Now that you are upon your first deal, do it right and get a business plan, complete with financial statements under your belt for the first year.
Your lenders will be kinder to you and you won’t get over-leveraged like a lot of people who are now “walking” away and so forth.
Cross collateralizing may have worked in the past, but the lending world is very different now. Don't assume that you can borrow out any equity in this lending climate.
I have heard a lot of talk about how different the lending world is now. In fact, when I bought 11 more rentals in January, I was a little nervous about going to the bank for the money (even though I’ve borrowed money for dozens of other rentals in the past with no problem). To my surprise, there was absolutely no change in the lending by my bank (a small local bank). Everything was business as usual and even though this was a little bit of a complex deal (with 2 sellers; 2 entities; and 1 refi), the deal closed in about 30 days with absolutely no problems.
I think the tightened lending standards are more fiction than reality. Of course, I don’t borrow 110% of the value with a no-doc “liars” loan that has a gimmick introductory rate that will reset in a year to an interest rate that borders on extortion.
Look at it this way, if the banks don’t loan money to someone, they’ll be out of business. If they can’t loan money to me, who can they loan money to?
About the same time I did my loan, another investor in my REIA bought a large 4 bedroom house and got cash back at closing on the deal that she used to rehab the house. Business as usual!
I think the tightened lending standards are more fiction than reality. Of course, I don't borrow 110% of the value with a no-doc "liars" loan that has a gimmick introductory rate that will reset in a year to an interest rate that borders on extortion.
Look at it this way, if the banks don’t loan money to someone, they’ll be out of business. If they can’t loan money to me, who can they loan money to?
About the same time I did my loan, another investor in my REIA bought a large 4 bedroom house and got cash back at closing on the deal that she used to rehab the house. Business as usual!
Mike
Yes I agree 100% I currently have several loans with my local bank, two in the past few months alone.
Mike, YOU have a PROVEN track record and you only buy property that is on sale.
Guy’s like you will see NO difference in your abililty to obtain capital. But this kid, just starting out, trying to roll as much as he can into the best deals he can, IS going to face some harsh realities once he gets going.
3 Years ago I could get ANYONE who could fog a mirror financed for a home mortgage. THOSE DAYS ARE LONG GONE!!! Best thing that ever happened LONG TERM.
My advice to JayHa would be to find yourself a single family home that you can buy for 40cents on the dollar and FLIP it. I HATE that WORD because it implies some moron running around Home Depot arguing with his wife over what color to paint a bathroom. I DON’T FLIP HOUSES…I BUY and SELL HOMES.
Get out there…find a REALLY good deal on a STARTER HOME. This is the benefit to you…
Your going to learn a TON about what stuff costs, how to fix it, or who to hire if YOU can’t
You’ll look at a LOT of crap before you find that DIAMOND. This is GOOD. When you find it YOU WON’T HAVE ANY DOUBT>
Show me another way for you to NET $40-$70K in 5 months???
Do this ONE TIME and it becomes a RESOURCE you can go back to time and time again to BUILD your cash position. As Mike correctly pointed out, you don’t want to be pulling equity out of these rentals everytime you want to buy another.
By learning to buy low and sell a LITTLE higher you create a cash machine.
In my opinion rehabbing is THE best way to start in real estate. It teaches you how to manage a project, how TO BUY CHEAP, how to manage MONEY, what SELLS and WHY it sells.
Start off with the rehabs. Your bank book isn’t big enough to do what you want with the rental stuff YET!! But it will be in good time.
Business as usual where I am also. 80% LTV, the 20% can come from cash, seller note, or personal equity. A good deal is a good deal. The people having trouble getting financing are the people who are taking the banks bad deals. Stated income BS is pretty much gone and that’s how it should be. Would we as investors loan our personal cash to someone who ‘stated’ their income? I seriously doubt that! Once all this fizzles out the business will go back to the people who know what they’re doing and the people who don’t will be phased out. My two cents.