What do I do next

Question

Hey, I recently bought my first rental property in Polk County it doesn’t cash flow enough for me to have a property manager so I would have to manage this myself for the time being, however in about 6 months I would want to get a HELOC on the property and use that as a down payment on maybe a multi family and then rinse and repeat, I was wondering if this sounds reasonable or would I have to do something else thank you so much

Nathan Gesner · Answer

Your equity is not a savings account from which you can withdraw for free. If you cash out equity in a property, you are "borrowing" that money from the lender. Upfront expenses and monthly payments must be considered when calculating the return on your investment.EXAMPLEYou cash out $100,000 of your equity and use this as a down payment on a $400,000 investment property. This creates two loan payments ($100,000 of equity and $300,000 on the new mortgage). Key Numbers Home Equity Loan Interest Rate: 6%Mortgage Interest Rate: 7%Rental Income: $3,000 per monthExpenses (management, taxes, insurance, maintenance): $800 per month Income and Expenses Monthly Rental Income: $3,000Monthly Expenses: $800Monthly Mortgage Payment: $2,000 Explanation The investor earns $3,000 in rent each month.They pay $2,000 on the investment property mortgage and $800 on other expenses.This leaves $200 profit each month or $2,400 per year.However, you have to pay $6,000 interest on the equity borrowed.This leaves you with an annual loss of $3,600. This example shows that while the rental property generates positive monthly income, the interest cost of borrowing the initial $100,000 results in an overall annual loss. The investor must consider whether the potential property value increase or other benefits outweigh this loss.

John Mason · Answer

Dealcheck free version will tell you your equity month by month and year by year

Deandre Brown · Answer

How much equity do you currently have in the property, and do you expect it to appreciate enough in the next six months to qualify for a HELOC? Also, be cautious when using a HELOC as a down payment on your next property. It's important to ensure that you can cover the HELOC payments from the income generated by the new property. Are you planning to purchase a value-add property, or are you looking for something turnkey? I would suggest considering an investment that could help you pay off the HELOC quickly, given the high interest rates typically associated with them. Just a few things to think about.

Dan H. · Answer

If you purchased at high LTV, in 6 months there is unlikely to be enough equity to be worth trying to extract equity. In the event that there is, the new purchase would be at or near 109% LTV between the heloc and the loan on the newly purchased RE. It would be virtually certain to be cash flow negative. It also seems likely that you would be under capitalized and a recipe for disaster.How to scale? 1) Smart, successful value adds that would allow you to extract sweat equity. 2) patience to save up the deposit via you income. RE can be a dangerous game if you are over leveraged.good luck

James Harryton · Answer

I just didn’t know how to do that research until today with the help of you guys, and also I have spoken to the lender I’m closing on the property with initially and he told me to wait about 6 months and we can start talking about HELOC from there

Michael Smythe · Answer

@James Harryton so, you have done zero research on what your rental will be worth in 6 months?Go to Zillow and find where they project values. How many lenders have you checked with about the requirements to get a HELOC on a rental property?Pointing you to the answers, but you need to do the work to get there:)

Nathan Gesner · Answer

I know it's not what people want to hear and it's not what the gurus tell you on YouTube, but you need to increase income, reduce expenses, save, and invest.You can learn about owner financing, then look for sellers willing to sell with terms that are better than a bank can provide. Check out this podcast: https://www.biggerpockets.com/blog/biggerpockets-podcast-554You can try partnering. Find someone who has money but no time or knowledge of how to invest. You do the work, they fund the deal, you split the proceeds.Read some books to learn about other ways to invest without a lot of money. However, these are advanced techniques that are rarely as easy as they sound, and they all come with additional risks.

John Mason · Answer

Joint ventures on STR or on flips would help you scale

James Harryton · Answer

Thank you so much for such a detailed response I completely understand how this could potentially be a problem. Do you have any advice for me on what to do next in order to scale with limited capital?

James Harryton · Answer

Ok thank you so much