Newbie Advice: How best to leverage a HELOC?

Question

Hi BP friends, been lurking here for awhile learning everything I can. I hope to buy my first rental (or an ambitious 2?) by end of year. So far I've read Real Estate Rookie, and am currently reading the BRRRR book, plus I've listened to dozens of podcasts and read dozens of awesome posts here.

Current situation:
a) Spouse and I own our residence out-right (fun pandemic bought low/sold high story).
b) Low on cash at the moment, but I have a $400k heloc getting ready to close soon (variable rate, interest only, 8% currently).
c) Long-term goal is to own Buy and Holds to pad our retirement and retire my spouse early.
d) I quit my job last year and have time and motivation to manage properties and portfolio. We have school aged kids and it doesn't make sense for me to get a 9-5 in terms of what I could make vs sacrifice. So I'm looking to get going and grow.
e) For my team: I've got the realtor and the lender, and have leads on CPA. But I don't know any contractors yet. I'd like to manage my own local properties (and plan to read books about this as well).
f) I don't like the idea of flipping. I have a friend who is willing to partner on a flip, but the tax experts tell me this is an accounting nightmare, not to mention 25% of whatever I make would disappear by way of taxes. Plus, I'm inexperienced and flipping sounds a) scary and b) not my long-term goal.
g) Property locally is $$$, so I hope to buy turnkey out of state once I save up more cash...

Here's my question:
...Meanwhile, I've got this fat HELOC. I would LOVE to BRRRR locally, but rents haven't caught up to interest rates, and also I'm concerned I won't be able to get out all my equity to pay off the Heloc once I refinance, especially if rates go even higher over the next year. I realize a big part of this is waiting and watching for a great deal, which I'm doing (using New Western) and will stay patient with. Any advice on finding a great property to BRRRR within a 2 hour drive of Georgetown TX? Or other ideas for what to do with my HELOC (that isn't flipping, but that could get me closer to my buy-and-hold goals)?

Thanks in advance!

Here's my question:...Meanwhile, I've got this fat HELOC. I would LOVE to BRRRR locally, but rents haven't caught up to interest rates, and also I'm concerned I won't be able to get out all my equity to pay off the Heloc once I refinance, especially if rates go even higher over the next year. I realize a big part of this is waiting and watching for a great deal, which I'm doing (using New Western) and will stay patient with. Any advice on finding a great property to BRRRR within a 2 hour drive of Georgetown TX? Or other ideas for what to do with my HELOC (that isn't flipping, but that could get me closer to my buy-and-hold goals)?Thanks in advance!

Nicholas L. · Answer

@Fran Pratt

no, of course not...  I just wanted to get my initial reactions to your post out.  if every penny you're spending is from a HELOC you're under additional pressure as you have to beat the interest rate you're paying on everything.  if you had said you had a bunch of cash that would be different.

my advice is always to stay local, pick a market, and learn it.  go to all the REIA meetings, network with all of the other investors, tour dozens of properties, reach out to 50 contractors, talk to agents and lenders and property managers.

here's what i posted in another thread re: BRRRR.

can i find a great deal where i can significantly increase the ARV via the rehab?

do i have a contractor that is both reliable and available to start reasonably after i close?

am i confident in the ARV increase i am going to get after i finish the rehab?

can i afford holding costs - interest payments on debt + utilities + insurance + anything else you need to pay for while the rehab is going and the property is vacant?

do i have my financing lined up for the refinance?

what happens if interest rates go up again?

can i achieve my target monthly rent?

i've done a few BRRRRs. they're tough.  happy to answer any add'l questions you have.

Kerry Baird · Answer

I ride my bike in my local neighborhoods and talk to people.  That has gotten me 2 tired-landlord, seller financed deals on the barrier island of Central Florida where such houses are in high demand.  I have rented them out on AirBnb, used the income to remodel the kitchens, and will sell or refinance.  Also have my kids helping me with the business and pay them for the work they do, which is a deduction to my business and is teaching them the value of working for themselves.

Look for code violations, tall grass, pre-foreclosures, tired landlords and probates.  Talk to the owners and ask if they will work with you.

Jaron Walling · Answer

@Fran Pratt I would 100% focus on building your team and buying something local. The property type is or strategy you follow is on you but I'd stay local. If your family has connections or local knowledge leverage every bit of it. Don't jump into a property without considering the exit strategies. You said you want to buy rentals. The majority of Austin, TX doesn't not cash-flow for rentals, but someone is buying, remodeling, and HOLDING rentals. Find those people or find an agent that does and get to work. It's not easy doing BRRRR (plan on trapping $$$) and flipping is challenging without rehab experience. There's probably a meetup you could attend to connect with more like minded investors.

Sam Yin · Answer

@Fran Pratt

First off, congrats on the motivation.  That's a step in the right direction.

Second, the size and speed of your investment depends on how 'fat' that HELOC is and at what terms.

It can be done and I just helped someone do it. My buddy has a son that wanted in on the commercial investment game. I had a small apt that I was willing to sponsor him into. He used his HELOC, which he had at 10% (CRAZY!!!) as the down payment. He had to adjust the down payment above 30% in order for his DTI to work. Long story short, he got a 7 unit for ZERO out of pocket and it cash flows. As time goes on, he will cash flow more and can trade up and make a few hundred Ks extra to pit into something bigger. Or he can just hold long term and keep growing the cash flow.

The numbers look like this: 7 units, all 1/1. Price was 900K. Monthly tents were $7903 and growing. 6/7 tenants are government subsidized with 10% built in rent increases. I was cash flowing over $50k/yr from that property,  which I purchased just under 2 years ago. Now I am 1031x the funds. My buddy's son just got into commercial REI and can grow bigger and faster than if he used it to get into SFRs.

It can be done. It does take some networking. It takes a good Lender as well. Keep searching, keep underwriting, dont give up.

Best of luck.

Fran Pratt · Answer

@Nicholas L.

lol...soooo....sit around and do nothing?

Jimmy Bostic · Answer

@Fran Pratt If you want something turnkey oos, I'd suggest finding an oos realtor and scavenge the market. It could also be advantageous to pick up the phone and cold call homeowners/investors in your area to find off-market deals. It's a grind and a numbers game but that is a way to be proactive during this time

Fran Pratt · Answer

@Nicholas L. Great reminders, thanks. I think it's the "can I achieve my target monthly rent" that concerns me most at this point. Everything else I either have under control, or feel confident I can get there soon. I'll keep plugging away, though. Best.

Fran Pratt · Answer

@Sam Yin inspiring stuff. I'll keep sniffing for a great deal. Thanks

Nicholas L. · Answer

@Fran Pratt

OK - there's a lot in your post.  A few thoughts.

Turnkey out of state takes a lot of cash.  Say you find a great, quality property with a purchase price of $200K.  You'll need $50K down + closing costs... and then that $55-60K sits in the property while you grind out a small amount of cash flow.  Say you clear $200 a month after all expenses.  On $55K... that's a 4.4% cash on cash return.  Not a lot to get excited about.

On the other hand, a local BRRRR would be really tough, but is a great way to keep your cash moving.  But... BRRRR too is especially difficult right now with higher interest rates, booked up contractors, expensive materials, and investor competition for both on and off market deals.

I don't know anything about Texas RE markets.  =)

Not trying to be negative, just give you some things to think about.

Newbie Advice: How best to leverage a HELOC?

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