Am I in a situation to invest?

Question

Hi everyone, I am looking at getting into real estate investing in some form with the goal of cash flow.  I'm not in the real estate field whatsoever other than having bought a sold a couple primary residences.  I was hoping for some insight and advice on my current situation and I'm wondering if I might be in a position to get started.  So we are a family of 5, annual income about $200k, live in Southern California with about $550k left on the mortgage. I haven't gotten an official appraisal but sites like Zillow etc estimate it's value upwards of $725k (I know these aren't very reliable).  We have about $25k liquid in savings and another 50k in retirement accounts.

Now I'm wondering what are your thoughts on pulling out cash from my primary residence to use towards REI?  I haven't talked to a bank yet but what's the rule of thumb in terms of how much cash I can pull out?  Is $100k feasible assuming my property appraises at >$700k?  My concern with refinancing is that I've got a great deal on my current mortgage (3.5% fixed 30yr, lender paid PMI).  Any thoughts on my situation? Is getting into REI a reasonable thought at this point?  If so any advice as to what avenue (flips, rentals, etc)?

Arlen Chou · Answer

@Jon S. protect that rate on your home, rates are just going to go up. The issue is that you think the value of you primary is $700k but you still have $550k in loans. To pull out $100k you would need to do a cash out refi of $650k, that is over a 90% LTV. I am pretty sure you are not going to get that, at least NOT with a reasonable rate/terms. Even in your current situation you are over a 75% LTV. I am surprised that you were able to get such a favorable loan in the first place. You might talk to your lender and see if they will do a HELOC. They might give you some money. But honestly speaking I think reaching $100k might be difficult. Sorry to rain on your parade.

Russell Gronsky · Answer

@Jon S., the short answer to your question is yes, you are in a position to invest in RE.

As @Arlen Chou said, do NOT refi that loan on your primary residence. You will NOT get terms that favorable at this time and probably not for the foreseeable future.

The HELOC might be an option, but I honestly doubt it. 75%-80% LTV is the sweet spot for HELOCs to get the good interest rates. Anything more than that and the rates increase exponentially. Some HELOCs go up to 90% and even 95% LTV but the rate is going to suck really bad so probably won't be worth it.

Look at borrowing against your retirement account. Maybe you can borrow on margin? If not, perhaps it is worth it to actually take money out to invest and pay the penalty? I'm not suggesting you actually do this, but I'm throwing out leads for you to look into and see what makes sense in your situation.

Also, if you own stocks, you might be able to borrow on margin against your holdings. Not all stocks are marginable but a quick call to your broker and you'll know if and how much you can borrow. I personally love this strategy because there is no mortgage approval process to do this. You just call the broker and tell them you want it. Boom, wired to your account in 3 days or less. It's a beautiful thing if you have it.

Also, you might be able to just get a loan for a new house purchase. Some lenders get weird on you if you've bought and sold property before and you try to get an FHA loan but if you run into that, maybe your wife can get the FHA loan, if she's never bought property before?

You might also be eligible for a conventional loan with 5% down. You'll get PMI but if you go back to your curretn lender, maybe they will pay the PMI for you again? If you make 200k a year, your credit is good (720+) and your only debt is your house, your DTI should be fine to take on another loan. If you are driving that sweet, new 7-series and wifey is rolling in a new GLE Mercedes, then your DTI will be all sorts of hosed up. Your DTI needs to be under 43% to get a loan.

Overall, name of the game is look at any assets you own...absolutely everything from savings accounts to any bonds you hold and see if you can borrow against them. Also, look at asset-based lenders who will loan based on how well a property will perform instead of your personal financials. These guys are great if your DTI is above 43%. And finally, look at Hard Money Lenders. These guys will give you short term financing (6 months to a year) and then you need to refi into a conventional loan. This can work out if you find a beat up property, buy it, fix it up, get the appraised value up, get renters in it, and then you can refi into a conventional loan under the new appraised value. IF you do this right, you'll pay off your hard money lender, end up in a conventional loan and have a new property.

Jon S. · Answer

@Arlen Chou Thank you for the input.  You aren't raining on my parade at all!  This is exactly the type of insight I came here seeking, so thank you for that.

@Anthony Dooley Thanks.  Maybe I should consider out of state, but somewhere that is a reasonable drive from me, (i.e. Las Vegas, ~4hrs)? I am also concerned about finding positive cash flow properties in my area.

@Russell Gronsky I agree with you guys, I should not refinance on my primary.  Last year I looked at HELOC and my lender (Quicken/Rocket) told me they don't provide them.  I called around to a couple other banks and they said they would only do HELOC's if they held the principal mortgage.  To be honest I gave up at that point but perhaps it's something I can look into again.

@Michael Tripp PITI is right around $3400/mo.  You're right, we haven't been saving all that much for several reasons.  We've remodeled the house and have continued putting money into it (just put a new roof on it this last year), and also to be honest haven't been diligent about saving.  We've changed our focus and will now be tightening our wallets and putting away cash.  To be honest I am just starting my research in REI with a realistic goal of saving for now while looking at our options.

Michael T. · Answer

@Jon S. there have been a few that have mentioned that you are in a position to invest and a few that have mentioned you are not in a position to invest.  Honestly, it comes down to what your long term goals are and what you want to do to achieve those goals.

As @Arlen Chou mentioned you should protect the current interest rate you have, as interest rates are most likely to continue to increase going forward.

You can try to do get a HELOC but most likely the maximum you'll get is approximately $50k which isn't too bad.  If you go this route I recommend you google "introductory HELOC Los Angeles" and there will be numerous banks and credit unions that will have an introductory offer of 2.99 or 3.99%.

My recommendation is to reach out to a mortgage lender both here in Southern California and out of state (depending on where you want to invest) and determine how much you'll qualify for based on your current numbers.

While it will be a process to get everything figured out the key is to take action.  Don't just sit on the sidelines.

Caleb Heimsoth · Answer

@Jon S.  What’s your monthly PITI on the mortgage?  How much money do you save per year?  I’m guessing after taxes living expenses and that giant mortgage there isn’t much left to save.  You should talk to an agent and see what your house is roughly worth.  You could

Maybe get a heloc but it won’t be for much.  My advice would to just save normal money and go buy rentals with that.  Borrowing money as a down payment and then borrowing the rest from another bank can be a risky game if the heloc money isn’t short term money

DJ Cummins · Answer

hello @Jon S.,

I would say it is absolutely feasible to get started.  It sounds like you are in a pretty good spot financially.  I think the most important thing for you to do right now would be to figure out what exactly your goals are.  Do you want to flip houses? - if so do you have contractors and systems in place?  Do you want to buy and hold a rental in Orange County with prices being so high?  Are you interested in buying something out of state that would have a cheaper entry point/possibly higher returns?

Figuring out what path you can see yourself on comfortably makes a big difference.  Bottom line is there is when there is a will, there is a way.  What do you feel like doing?

Just an example, the 25k you have liquid could buy you a turn key rental in a good/safe area here in the Midwest that would bring in roughly $200-300 in cash flow each month. A lot of people don't like the thought of investing from afar, and I get that.  I am 5 years into the game and am just now starting to consider the possibilities of it.

Russell Gronsky · Answer

@Jon S., local credit unions will do HELOCs on properties where they don't hold the 1st position note. Wells Fargo, US Bank and Chase will do them too, if you're interested in big banks. But with your house already being at 75% LTV, it is unlikely that you'll be able to get a HELOC on your house...not without agreeing to astronomical interest rates and having a credit line that frankly, isn't that large. But, I guess if Brandon Turner was willing to take on a 12% interest and 12 points loan to get in the game, the high interest HELOC might be something you are willing to take on.

Anthony Dooley · Answer

@Jon S. I suggest becoming proficient at calculating the return on investment of a rental property. YouTube has several sources. Gross income, net operating income, debt service, cash flow, cash on cash return, etc. Why? Because you stated that cash flow was your goal. Unless you plan to purchase out of state, which I wouldn't recommend for a beginner, I am very doubtful that you can purchase property in your area that will cash flow after expenses and debt service. You will make more in a good mutual fund or index fund. In most parts of the U.S. 10% return is very easy to find. In your market, I doubt you make 4%. Not trying to be negative, it is just what I have personally seen.

Am I in a situation to invest?

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