New to Investing, advice?

Question

Hi Everyone!

I am new to bigger pockets and new to investing as well. I have been extremely interested in RE investing for a little while now and I am now starting to take action to get moving into the right direction. I have been reading a ton throughout the forum and also started to listen to the podcasts (6 episodes so far), so i have become extremely anxious in the last week.

Currently I own a home in West Palm Beach, FL and have about 95K in equity, so i would be able to get a HELOC for about 50K (Pending approval). I also have 22K in my stock portfolio and 65k in 401K that I am skeptical about using to finance a deal, but not completely against it as I am 32 and have a strong career ahead of me.

Looking to invest in a small property to get my feet wet, around 150K and in a lower income neighborhood as our  local market is quite expensive at the moment. This would get me around $1500 in rent monthly (already found a properly that has a renter for this amount), based on the research I have been doing, and should show some cash flow based on calculations.

Looking for some advice, which route would you go? HELOC or taking from portfolio investments? Having a HELOC will lower my cash flow, and I am unsure if it will affect getting a loan.

I plan on talking to the mortgage broker that has helped me finance my last two house purchases , but would love to know what the BP community thinks about my situation.

Thanks!

Mike.

James L Roberts · Answer

The advice previously provided is noteworthy and worth considering. When it comes to running calculations or the numbers, I see most new investors trying to act without proper knowledge for valuating rental property investments. For example; based on the information provided paying $150K for a SFR-Rental with $1,500 a month rental income translates into overpaying for the property by $24K, and that will adversely affect your after expenses cash-flow and your ability to come out ahead regardless of how you choose to purchase the property.

It is important to understand that there is a difference between how the market and banks value real estate and how qualified investors value real estate (commonly referred to as cash-value). When investors buy real estate it’s all about the numbers adding up, and not knowing how to properly value real estate from an investor’s perspective leads to costly mistakes. Thus, after expenses, cash-flow may not be as much as you think and could possibly end up being in the negative.

Another issue is knowing how to properly determine the rental value of the real estate which is just as important as the rental income value determines the value of the property in question. Going with your $1,500 a month the properties value is $126K which is what would be needed to make the property profitable.

In addition, knowing how to properly screen tenants, and to guarantee rental income is especially important as well as how to properly manage and maintain the property which all affect the properties monthly expenses and profitability which needs to be included in the calculations.

As for getting your feet wet, you have already started! Congratulations…

I currently manage and oversee rental properties in Palm Beach County, and in GA, and provide Advisor services to real estate investors, and am currently investing in rental properties in MI.

An added bonus; if the market value of the property is greater than the cash-value, there will be instant equity in the property that could also be leveraged and reduce expenses.

Feel free to contact me if you wish…

Christopher Cook · Answer

Good morning!   I am in West Palm Beach also.   Great question... i think you are in a great situation.   You have some cash and some equity.. great start and that kind of position can certainly be leveraged into a healthy real estate portfolio over time.    There is no "right answer" or magic formula to which source of capital to use for investments when you have the means to choose.    Every situation is different as individuals have different short term life circumstances and wildly different long term goals and dreams.

My only advice is to do your best to match your capital sources / debt with your investment horizon.  Meaning... put long term debt with long term assets and short term debt with short term.

So in your case... your long term rental loan would not be the issue.   It would be the source of your down payment.   A HELOC is designed to be repaid within 5 years.   If you use that source as your down payment.. work to be disciplined in the HELOC repayment and get that paid down to zero as fast as you can... certainly within the 5 years.

If you use your 401k (most often as a loan as opposed to a distribution)...  make sure you don't plan to leave your employer until the loan is repaid.   Otherwise the balance will be due and if not repaid, will count as a distribution, which has penalties and tax consequences.

if you cash in your portfolio... compare and contrast your expected investment return from the portfolio vs. the real estate and choose the higher / safer return.

I'm not an investment adviser... but have issued debt most of my career in one way or another.     The biggest mistake i see is folks using short term debt from a HELOC or 401K and not having a realistic way to repay it quickly so as to recycle the  capital into future investments.

Good luck!   Feel free to reach out... I like talking to other locals!

Robert Darling · Answer

@Michael Pace

Welcome! Sounds like either one would work for you, just depends on your circumstances like he said above.

New to Investing, advice?

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