What would you do if you were in my place!

Question

Hey BP community! My name is Aymen and I am super excited to be a part of this community and look forward to learning and growing with everyone! Thank you in advance for taking the time to read my post!

My goal with this post is to get some opinions from more experienced individuals that have been on this journey before. This will be my 1st time genuinely pursuing any real estate ventures. I would like to eventually step away from my 9-5 and pursue real estate investing full time.

Here is my situation.

I currently own a house I am renting out and cash flows roughly $400/month. I sat down with my lender I am financing the house through and they mentioned I would be able to pull out a $100k line of equity. I have 750-760 credit score and my debt to ratio is fairly low. My lender mentioned I have several options available.

Here is what I’m thinking. (Which I honestly don’t know if it’s doable)

1- Applying for that line of credit.

2- Purchasing a single family home or multi-family property at 75% ARV. (Not sure what loan option to pick, etc...)

3- Using the line of credit to BRRRR. (At the same time I am pursuing step 2)

4- Not sure if I should pay off the line of equity or keep the money out and make the monthly payments and keeping BRRRRing that’s where I lack the knowledge to make a quality decision. :/

Hope I am not asking too much and if there are any questions you have please let me know!

Dennis Cosgrave · Answer

I would suggest that you apply for the line of credit and see if you get it. I would then utilize a BRRS strategy, i.e. buy, renovate, rent and then sell. Find a property that is priced under market that requires some renovation to get the rents up to market rate. Calculate a budget for the renovations, then use what is left of the $100k for the down payment. It might take some time to find a property that fits the numbers. Get the renovations done as quickly as possible and get the unit(s) rented. On the sale of the property, repeat the process until you reach the point where you have sufficient capital so that you no longer require the line of equity but I would keep it in place for emergencies.

Derek Diamond · Answer

@Aymen Mandil

Don't be scared of not knowing. Cover your bases with good numbers but don't be afraid to jump in! It won't work exactly the way you want but you will learn on the way.

It is truly laughable how little I knew when I bought my first place.

Derek Diamond · Answer

@Aymen Mandil

It will change your debt/income ratio but like most things in life that is not the only factor.  What is a deal killer to one lender might not matter to the next.  I bought my second property without a job and limited rental income (that was not close to 5 years of ownership, closer to 1 year) so you can probably guess I got a bunch of "No's" before I found a lender that would help me take the deal down. So I feel like I know a bit of what you are going though.  And with your solid rental income it might not be a problem at all.  I was just something I dealt with so I wanted to share.  In my state rental income can not be used unless you have 2 years or rental income. This is what I have been told time and time again.  The funny thing is, just days ago my go to lender stated that he could get me into a deal with a signed lease ( no history or anything) so things change.

Your plan about paying it back and repeating the process is a great plan.  Stick with your plan and don't let one or two lenders saying no change it.  Now if 15 say no maybe then revisit the plan.

Derek Diamond · Answer

Hey@Aymen Mandil

Welcome to the community!  It sounds like you are off to a great start.  I have used the HELOC strategy before and I personally like it.  Mine had a variable rate so I made sure to pay it off and lock up a fixed 30 year mortgage.

When you use it, that debt to income will change making it a little more difficult to get another loan.  Loan on your first house, the HELOC and the new loan. You will jump from 1 to 3.

If you pull out the money will the $400 a month in cashflow go away and/or will you end up owning money?

I would say all and all it is a great plan.  Good luck and welcome to the party!

Dennis Cosgrave · Answer

As you know, every real estate transaction is unique. In the case of BRRR it is all a function of the market and the numbers. When I was doing BRRR, I was fortunate to be in a very hot market. Prices were going up 25% a year. In the space of 2 years I managed to get 4 triplexes and a 5 plex. I did this while holding a full time job. I think the environment is very different now. In some markets, prices are already softening, so I would not expect fast results. Regardless of the market, you always make money by adding more value that is greater than the cost of adding that value. In a hot market, price appreciation is icing on the cake.

Aymen Mandil · Answer

@Dennis Cosgrave

I agree for sure. I just don’t have the experience to take that route and I would love to build a portfolio that helps me achieve the goal of stepping away from my 9-5. I need roughly around $6k a month/$70k a year to be able to do that.

Based on the information I shared do you still believe BRRR is not the best way? Would you recommend BRRS still? If so can you give me a rough idea of how it would look like starting out?

Dennis Cosgrave · Answer

It should never be about speed. There is a fundamental question: If you don't have time to do it right the first time, when will you have time to do it over again ?? The key is not to over leverage yourself. Murphy's Law often applies and you always need a back up plan.

Aymen Mandil · Answer

@Dennis Cosgrave Thank you for the feedback Dennis!

I don’t believe I’m in a market that will allow me to do that and move as fast as I would like and mainly help me achieve walking away from my 9-5 job. I do think that would be a great strategy once I take on RE full time though!

Aymen Mandil · Answer

@Derek Diamond Perfect! Thank you for the feedback.

Debt to income ratio***** :/ totally typed that wrong.

One big thing I learned in the past year is when filing my taxes the goal isn’t to write off as much as you can and pay less taxes because when the lenders look at that they do not count it (rent you are receiving) towards your debt to income ratio hence the reason why I started exploring the HELOC path.

Thank you once again for sharing your experience and allowing me to learn from it. I plan on taking that path and I will definitely stay in touch and try my best to share updates.

Anything else I need to keep in mind as I start this journey?

Aymen Mandil · Answer

@Derek Diamond thank you for your feedback!

Your feedback is exactly what I need to think about. I figured since I am a landlord I would be able to get approved or my chances of getting approved are higher.

I figured when I refinance the money I get back would pay off the equity and I would be able to keep it open and just repeat the process. I did not know that it would affect my debt to ratio/income, well at least I didn’t think it would matter since I would have it rented out with a 12 month lease and 3-6 months worth of expenses set aside for each property....

If the debt to ratio/income is a major factor for banks/commercial lenders approving future loans then my plan are done and I would been to revisit my plan and figure out how I can overcome that. Most of the info shared on youtube/podcast via BP don’t necessarily hit on that topic.

What would you suggest in that situation? I feel like if I refinance I would have at least $100k in my pocket that I could invest with and the house has rental history for at least 5 years so surely they would take that into account and property #1 should affect my debt to ratio/income.

What would you do if you were in my place!

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