My name is Lisa, and i just ran across this forum …
My husband is a spec builder, I a realtor. We own several parcels of land totalling around 600k in value free & clear, and have a $100k first on our residence, which is probably worth around $950k and is in a tourist destination (sedona AZ). We both have excellent credit scores in the 750 range. Basically, we build a home then sell it around every 2-3 yrs, and I do not bring in a ton of income as a realtor especially the past yr.
That said - here goes the scenario - recently we tried to get a HELOC on our home with current LTV ratio of really close to 10% and were turned down because we are both self-employed and not making a ton of money right now … we made over $200k in capital gains last year which they would not consider income.
We wanted to take out a HELOC so that if we saw a good opportunity to buy property at a good value that we could take advantage of that. We could REFI the first and take out an additional $300k equity but that feels risky with $2500 flying out the window each month while we are trying to locate a property. With the right down we could have a “positive” cash flow on a rental or two, but with vacancies etc and other potential issues are not sure if we should embark on this biz or not … but would love some feedback from you out there on this as we feel we could locate some good buys in this market with potential of good CG in 3-5 yrs.
We thought of taking out the 400k loan at 5.62 % then putting the 300k into 4 six month and 2 3 month CDs earning appx. 4.5%. We also have a guest house on the property that will be ready to rent in a few months.
In RE school they stress “leveraging” yet we do not have steady ongoing income monthly and are fairly conservative yet wanting to invest and grow our ‘nest eggs’ …
Any comments on whether you think using our equity in this way is a good bet? (assuming we find good investments to begin with)
I generally don’t ever recommend that anyone put their residence at risk (as a HELOC would do) to do investments. You wouldn’t borrow against your home to invest in the stock market; neither should you borrow against it to invest in real estate.
revised to add: a lot of people do. I just don’t recommend it.
With that credit you can get a conventional SIVA loan; Stated Income/Verified Assets.
You will have to prove 2 years of self employment and verify assets. You have a ton of equity on your investment properties so the LTV will be relatively low and that will make it easier to get approved. The lower the LTV the lower the risk to the bank. This is a fairly easy scenario to get done.
The property values are dropping like stones thanx to the subprime mess and hasen’t bottomed out yet. Most of the sub-prime loans were written with the first adjustment period in 2008. Leveraging your property now, and I’m sure you can get the money, may end up costing you more in the long run.
I know some Texas lenders who are now offering asset-based lending. I’m not sure I’d take out a line of credit except to use to acquire land and properties via cash so you can finance later.
Other investors also use their home equity lines to partner on deals at 10-12%.
Asset based lending is a definite possibility. I just dont know if it is offered on NOO properties. You could qualify for a conventional SISA loan upto 90% LTV.
If there are some good deals on rental properties near you, you could borrow against your home for the down payment on an apartment block. Then you would be able to add a percentage of the rental income to your own income and this could help you qualify.
I borrowed against my house to buy two apartment buildings and the bank was more than happy to do it since the buildings offered positive cash flow.
When you are borrowing from your home equity to use for a down payment on multi-family properties you are in effect getting 100% CLTV financing. The interest rate between the two loans can’t have a very large spread meaning the rates are similar. How does this effect your cash flow? Are you buying at a large discount? Or are you buying and rehabbing?
If you use your home equity loan to put a down payment on an apartment building, and your rate is 5 something, wouldn’t that be profitable given the property is cash flow positive above 5%?
Specific example: $700k Primary Residence, Home Equity Loan - $200k left. Going to refi anyway, why not take an extra $100k or 2, for a downpayment on an nice multifamily that is cash flowing and then earn appreciation in a few years when I sell it.
I agree with Mark Wagner, don’t use your home equity to purchase investment property. If you have a home equity line of credit, keep it available for a real emergency need.
The problem with using an equity loan on your home to purchase investment property is really a risk management problem.
If you purchase an investment property with traditional financing, then the property itself is at risk of loss in the face of a financial disaster. What if the investment property quits generating income? A once-in-five-hundred year flood or a major crime wave in neighborhood could give you a property with a high vacancy rate. What if market rents drop and your property is marginal or becomes a negative cash flow property? What if property values drop so dramatically that you are upside down on your mortgage and the lender calls your loan due? If for whatever reason(s) you can’t keep the property profitable, you can sell it to limit your loss. In the worst case, you lose the property to foreclosure.
Finance the investment property purchase with a lien on your primary residence, and now that same financial disaster not only puts your investment property at risk of loss to foreclosure, but your primary residence as well.
If you don’t have enough money saved to make a cash downpayment to purchase an investment property, better to keep saving than to use your primary residence as a bank.
I would only use a line of credit on my home if I had a solid plan to refinance as quickly as possible, or for absolute emergencies. You need to be very confident in your ability to plan out deals.
Get a new 1st position loan at a low rate for maximum flexibility, my home is financed at 5.25% interest for 30 years
Liquidity allows you to make deals others cannot and with less dependancy of an institutional lendor to approve of the deal. Tell them what you want after you close the deal
Your house provides the best interest rate, I have commercial paid off to eliminate insurance restrictions, higher interest, etc/
The emotional security is costing one money, flexibility, and terms.
Intrinsically it makes no difference where loan is placed however it may be wise to work toward a portfolio of highly leveraged property and paid off property.
To much equity in house eliminates write offs if you plan on investing heavily. Risk is associated with the deal - not emotion
Most investors only use a LOC to acquire the property, but finance as much as possible. You may also decide to partner on deals with other investors as long as you’re not in them longterm and it’s worth the risk.
The old “leveraging” strategy for RE investing has basically been debunked as “not a good way to go” given the recent collapse of credit and the related issues. I would also echo the other posters on the dangers of leveraging your primary home to speculate.
If you could determine ROI or at least a solid rentability of your investment property prior to risking your home’s equity, then you are at least 5 steps ahead of the speculators from 2006 and 2007. I appreciate the motivation to get in now, especially in the AZ and southwest regions as the deals available here are OUTSTANDING!
The other suggestion I have is for you to stop using your personal credit to buy investments. If you can muster 30% down, form an LLC or a corporation and get a separate tax ID number. 70% LTV can get you into a commercial loan at reasonable rates and you won’t need to extend your personal guarantee or use your social security number for the loans. Wells Fargo offers a non-recourse comm loan for 70% LTV. But, please shop around as WF’s interest rate is kind of steep at the moment (11% for non-established corps less than 1 year old).