Using Home Equity Loans to by multi-Families????????????????

Question

I bought my first home this past year, a single family, which I got for about 60k below what it was appraised for.  I recently took out a 60k H.E.L. @ 8.13% and used 20k to pay off bills.

Now, I would like to by a 2 or 3 family home.  Should I try to buy a house, using 30k of the HEL, which would be around 20% down???  And will it save me from having to get pmi????  And avoid having to live in the property???? I would like to get properties while continuing to live in my own residence.

And if this is a good idea, can I do this once a year, taking the equity out of each house and putting it as a down payment on another?????

Will I continually get approved for mortgages and Home equity loans like this?????

My goal is to accumulate properties and hold for the long term.

Any feedback will be helpful.  Thanks

Jeffrey Johnson · Answer

Would you use a line of credit on a house that is not a primary?  I have one rental now that is free and clear other than a HELOC of 20k to pay off all credit cards and other debt.

Seems to me that in to build a nest egg to get a good down on a house will take a while.  I am not rich by any means and after all my bills are paid I am not left with much.  It would take years to get 20K in cash to put down towards a home.

Michael Shadow · Answer

We're used our HELOC to buy our first property and do some repairs but we are not going to use more than 40% of it (we're around 32% right now and over halfway done with the repairs) and once our repairs are done we are planning on doing a cash-out refi and paying off the HELOC, hopefully getting some cash in the bank and starting the process all over again.   We however are not using our HELOC for anything else.  My goal is to keep our house and all our investment properties together at a LTV ratio of about 80%.  Once we get more experienced we may up our leverage a little.  We also live in a relatively steady appreciation area.

The HELOC will also eat into your cashflow.  We ran the numbers to make sure we would still have some cashflow even with the HELOC  when we're done rehabbing because it's at a higher interest rate than you can get with your regular mortgage.  Which is why we want to do a cashout-refi to help maximize our cashflow once we're finished.

Account Closed · Answer

Jimmy,

Your model cam work fine if and only if appreciation happens. Some folks live in markets where appreciation is not a given and in some years prices go down.

Run the same example and assume that price drop by 5% a year for 2-3 years. Now look at the numbers and where you stand.

You really have to prepare for things turning out different than you expect. Maybe appreciation will happen and you build the total value of the portfolio. Just have a Plan B and a Plan C in case things turn out differently.

All Cash uses a model that is considered conservative but rather well tuned for a market that has not seen significant appreciation in years. In many ways he is manufacturing his appreciation if you stretch the terms a bit.

Your model is thin. A bad patch and you could lose the whole portfolio. Hence you are effectively betting the farm. Some win big while others crash and burn. Before making such a bet it would be best to look at other options.

A casino is set up so the odds favor the house. That is how you want to run your business. Speed bumps do happen. Plan for them or have a large enough cushion so you can ride them out. Many times motivated sellers are investors who hit one too many speed bumps so they get forced out before they win.

John Corey

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I just wanted to say I'm very interested in this answer as well and so I hope you get some more responses.  Good luck.

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But if I am putting like 25k to 30k on a house, does it matter if it doesn't appreciate that much??? Since I would have the 25k as equity that I put down?

For example,  I get a house for 160k, and I put 30k down from a H.E.L.  Which would give me a mortgage of 130k.

Then the following year, say the house only goes up 5k.  I then take 30k out as a H.E.L. and put it on another home that cost 160k(now that mortgage is 130k) and I repeat this every year.

If I have say 15-20k in the bank just in case of vacanies or other expenses, why doesn't this make sense????

Isn't home equity interest tax deductible????

And isn't this similar to doing an 80/20 loan????

Frank Adams · Answer

IMO borrowing against your equity is a very bad idea. You would be putting your HOME at risk if the investment property doesn't work out as planned!

You are debt free other than your house, I'd work on building a nest egg to acquire the other property. That will also give you more time in your house to evaluate the "true" costs of home ownership, things break and need replacing all the time.

Getting the equity out of a house every year makes the assumption that you'll be getting great appreciation in the coming years. That's not something that you can count on.

all cash

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Anybody????

I'm new here, I dont know if this has been discussed or not

Someone help a nice young lady out