Up front I would like to say I am new to this forum and that over the last month or two I have read some really great advice. Any advice you can give me would be much appreciated.
I have been an outsider looking in trying to determine when to make the jump into being a cash flow focused investor. I have purchased a couple properties in the past over here in California and because of pure luck made good returns based on appreciation.
What I would like to do going forward is to purchase rental properties (single family / duplex / fourplex in Texas) using cash and or my HELOC. I would like to leverage my cash to make good purchases. I know finding a great deal is half the battle but lets assume I found a highly motivated seller, would the following scenario work:
I find a good rental property with a motivated seller that comps at $50,000. The seller needs the money quick and we settle on a cash purchasing price of $30,000.
Once purchased, I would like to refinance using a traditional 30 year mortgage and hopefully have some cash to work with. Assuming the house has an estimated value of $50,000 and I purchase it with my own money for $30,000, can I then get a mortgage at 80% LTV. If I understand this concept correctly this would mean that my mortgage would be for $40,000. So I would be able to pay off my HELOC and still have $10,000 in my pocket plus 20% equity in the property.
If the place cashed flowed a couple hundred dollars if I purchased it at $50,000 then it would really cash flow if I purchased it for $30,000. My transaction fees, fix up cost if any, and any other misc. cost would be applied to the $10,000 in my pocket.
I realize there are a lot of factors and expenses that come into play but does this in theory work or am I way off? Is getting a first mortgage on a property you have already paid off a big deal? My credit is very good and I have some capital to invest with. Thank you up front for any advice.
<<If the place cashed flowed a couple hundred dollars if I purchased it at $50,000 then it would really cash flow if I purchased it for $30,000. My transaction fees, fix up cost if any, and any other misc. cost would be applied to the $10,000 in my pocket>>
Remember, however, that you have leveraged the property – not for $30K but for $40K…you will be paying the note as if you bought for $40K…obviously, it should still cashflow but not as much as you’re predicting that it will. Also understand that, in the model that you are considering, once you own the property and refinance it, you will be doing a “cash-out refi” and the rates will be higher than a normal purchase…I usually pay about .5% premium for this (and my credit score starts with an “8”…).
This is basically the model that we use but we also do some rehab to raise the property’s value for the refi. Once we have fixed up, we get a rental contract to use to show an income stream and then present it to the lender. Works for us!
I agree, I made a mistake, I would have to base cash flow on my new loan at $40,000.
When you do a “cash-out refi” you pay a .5% premium on top of the .5-1% premium for rental properties, correct? So if I understand the breakdown it would be something like the following:
Prim-resident Interest rate 6.5% + .5-1% for rentals + .5% for “cash-out refi” = 7.5 to 8 %.
You mentioned showing the income stream to the lender in order to get the loan approval. Does that mean that just having it appraised won’t mean much to the bank? It sounds like they need documented hard proof, not just an appraisal (which can be over inflated).
loveRe – with a credit score in the 800s, I can get nearly 100% financing on investment properties from my lender. If the deal makes sense, they’ll fund it…and I don’t do deals that don’t make sense (at least I try not to…LOL!)
CFY – when you do a cash-out refi, the lender will order their own appraisal. Very few (if any) lenders will rely on an appraisal that the client brings to the table. Your appraisal means very little to the lender…but if you’ve already paid for one, put it in with the rest of the stuff…
When you say they don’t charge closing cost you mean BofA does not charge for the loan, correct? You would still have to pay Title and other misc. fees or does that not apply because I already paid these fees when I purchased the property with my HELOC?
Sorry Jake, my post might could be mistaken depending on what your doing. What I was saying is (in my situation) I buy houses and rent them. I had 1 house paid for (appraised 50k). BofA will give you a HELOC for 80% of appraisal value at no charge. You can then take out the 40k buy another property with, take out a HELOC on it, and continue on. BofA will only allow you 4 HELOC’s unfortunately.