Paid off rental property....now what?

Question

I bought my 1st deal (single fam home) in 05 and it's now paid off free and clear...however, i only did one flip since then and decided i'd throw my money away buying a furniture store right before the housing bust in late 07.... filed for bankruptcy in 09 and since then had my tail between my legs. I've been grinding away working my 9 to 5 and one thing is I've never had to claim 100% of my income because i work on tips. So anyway, I was able to keep the rental property and now it's paid off. but due to my income on my w2 and my bankruptcy histore (9 yrs ago) I'm having a hard time getting financing as that always comes up. My credit is low 700's and i'm ready to get back in the game. My rental brings $850/mo and i have a cash reserve of $50k from building restoring cars.

If i cannot get financing that makes sense, should I try to find a single fam home to buy cash for 40-50k and use the cash flow from both properties to build up and buy another and so on and so forth?

Would I be able to get a heloc on my 1st property and use the equity in it to buy a second rental??

What would you do in my situation?? Thanks for your help.

If i cannot get financing that makes sense, should I try to find a single fam home to buy cash for 40-50k and use the cash flow from both properties to build up and buy another and so on and so forth?

Would I be able to get a heloc on my 1st property and use the equity in it to buy a second rental??

What would you do in my situation??  Thanks for your help.

Clinton Davis · Answer

Thanks for the reply Thomas....one thing I do enjoy about the equity is that means there is no balance on the loan...so the rent cash flow is nice...but you're right...I can't really grow.  So like I was saying above...in another reply, if I cant be approved for a heloc I will just pay cash for my next property and use both properties cash flow to build up for another and so on and so forth...i did some simple math and it will take approx 5 properties to start to be able to build enough cash flow to where I could buy 1 property per year in cash (free and clear)(properties ranging from 40 to 50k)...but that would take me about 5 to 6 years to get to that point and all the cards falling in the right order too....but we'll see what happens.  Thank you again.

Clinton Davis · Answer

Thanks Alex for the advice....yeah, i would like to do a conventional mortgage on another property just so i wont have to be fully invested with all my cash reserves...but if that's what i gotta do to grow, then i'll do it.  I figure it will take approx 3 yrs to build up my reserves again with 2 properties paid off and cash flowing.  Rents will be around $800-900/month.....

I will ask my bank about a heloc and requirements maybe tmrw....thanks again.

Clinton Davis · Answer

Thank you so  much for taking time to hear (read) my story and respond.  i will go to my bank and see about a heloc....

Thomas S. · Answer

Sorry to hear you have dead equity not earning it's keep. If you can not access it with a HELOC I would strongly advise you sell the property so you can put the money to work. It is being wasted where it now sits earning you barley more than a high interest bank account.

Dam shame but if you want to grow you must leverage.

Ricardo R. · Answer

@Clinton Davis sorry to hear you had financial problems in the past however, it seems like you've been busy and are now in a much better position. I would try to go the traditional financing route however, if it was met with resistance and either I couldn't get it or it didn't make sense, I'd consider placing my payed off rental into an LLC. Since it's paid off, it shouldn't be much of a hassle, by starting an LLC and then 'funding' it with a paid home (collateral), you could then try to have the LLC (not you) purchase your future rental properties, in this way the banks would be looking to the LLC to back the loan and since you would have your paid off home in your LLC they would likely see it as collateral and would make them feel more at ease and your credit worthiness wouldn't matter as much.

A few additional things to consider however, if you place your rental into an LLC 1) that new purchase as well as the paid off home would be on the line if you fell in trouble with your new rental purchase however, this is no different and perhaps better than you personally signing on the loan; 2) The terms offered to your LLC would be more inline with commercial terms so probably not as good as a personal mortgage but they are not bad 20-25yr. at a slightly higher rate; 3) You would need to update your property insurance with your provider under your LLC as well; 4) The banks may require a 'seasoning' period from the time you open up your LLC and may still require you to sign (co-sign) for the loan of your new purchase however, because you have your paid off home as well as the new purchase as collateral they may waive all of this.

Just another option, you may not have thought of, hope it helps.

Alex

Kyle Doney · Answer

You can get a heloc and use it to buy another. Season 6 months - year and repeat. Make sure to pay them down though as quick as possible since the rates are adjustable. If you can get a heloc you can probably get a loan. Depends on your goals and appetite for debt.