What would you say is my best option?

Question

Hello everyone,

This is my first post on BP, but I've been listening to the podcasts for several months now. I own a rental property in Washington State that cashflows only a few hundred each month, but has a large amount of equity according to online sources such as Zillow. Roughly $140,000. I do not have a large amount saved for down payments, but I am working on that by saving as much of my main source of income as possible and working a side job. In addition to that, I've been driving around in my spare time and writing down the addresses of homes that seem to be in need of repair, although I'm mostly only seeing homes that have drooping blinds or peeling paint, not many true distressed properties. I'm also not entirely sure what to do with these addresses as I am not a wholesaler. However, I am beginning to work on some real estate classes and may attempt to get a real estate agent license, but mostly just for the knowledge.

With that information, I have several questions.

Would you consider a HELOC on the Washington property a good choice, or is it a better choice to Cash-out refinance and essentially lose all cash flow?

Do you have any recommendations on how to find a lender that might provide a HELOC on investment property equity?

Do you have any recommendations for wholesalers in the Tempe, Arizona, or Pensacola, Florida areas?

Do you have any other recommendations for networking outside of the BP website?

Thank you for your time!

Matt Jones · Answer

@Raymond Turner I think Account Closed gave you a very solid analysis so my addition will be brief.

If your property in Washington only cash flows a few hundred per month and has that much equity it may not be a great rental long term if your desire is to scale to 20 doors over the next decade.  If you do a heloc or cash out refi to generate a downpayment on a property in another area your original property may not cash flow at all.  Let's assume that your "few hundred" is $300 per month or $3600 per year that is only a 2.5% return on equity.  Unless there is a reason that you would really like to hold the Washington property you may want to consider a 1031 exchange.  You could probably use that $140k in equity to make a 25% down payment on 3 solid rentals in a less expensive market that would cash flow 2-3x what your current property is cash flowing.

As far as specific resources in Pensacola, FL I am happy to share wholesalers, contractors ect if you want to send me a DM.  I don't want to post them here as people tend to search for these things and the resources change year to year.

Account Closed · Answer

Okay, the way I make the evaluation:

1.) I always try to have enough cash on hand to do the deal first. That means things like covering the down payment, carrying costs, fix up, whatever is needed.

2. I look at my sources of cash HELOC, Cash Out Refi, Hard Money Lender, Family, 401(k), IRA, Investor, Selling a property, etc

3. Then I look at how much cash each will actually put in my hands (after loan fees, etc and taxes are taken into account) and how long it will take to get the cash. For instance, in normal circumstances, it's faster to borrow the money than it is to a sell a property. And, when you sell a property you lose the write offs and lose appreciation plus oftentimes you pay capital gains tax. So, borrowing money, which isn't taxed is both faster, less expensive. But it's usually limited to 75% to 80% of the asset minus paying off the underlying mortgage and loan costs but you get to keep the underlying asset (the property). There are drawbacks though, you now have a larger payment and less cash flow. So, you look at an "annualized" benefit. You put together a spreadsheet and compare them side by side depending on your goals.

For instance, a $400,000 property that has a $200,000 loan on it has $200,000 in equity; but not really. A lender will lend 80% on the $400,000 so they will give you $320,000 MINUS the $200,000 - so $120,000 Minus closing costs - $$$. That can usually be done in 30 to 60 days if your credit report is 720 plus, if you are W2, and if you have a good income.

To sell the same property in a normal market takes 30 days to prepare for the sale (clean up, paint, etc) then 60 to 90 days on the market then 30 days to close so about 120 - 150 days before you get your money. The real estate agents take 6% or about $24,000 on a $400,000 sale and you subtract your $200,000 mortgage and $2,000 for closing and wind up with about $174,000 that sometimes gets taxed at a capital gains rate depending on how you've treated your property for tax purposes.

Few banks are doing HELOCs right now. You have to call around to see if you can find one. Even then the HELOC can be closed by the bank, at any time for any reason without telling you before hand.

4. Then I look for the property

Alex Olson · Answer

I would 1031 exchange out of that property in Washington and put that $140,000 of equity into a midwest market. You can get a nice 4-8 unit building in the KC market that is low risk, 8-10% CoC + solid forced appreciation. Hope that helps! And nice work on having some property to build wealth!

Raymond Turner · Answer

Account Closed

I meant to discuss that in the original post. I want to add rental properties to my portfolio, possibly using the BRRRR strategy. My goal is to have 20 or more rental properties within the next 13 years. I also plan to do most of the rehabbing myself, at least where law permits me to.

I was originally looking into a $100,000 HELOC, but I didn't qualify since that property is no longer my primary.

Account Closed · Answer

Do you have a specific property in mind or in the looking stage?

Account Closed · Answer

It depends.

What are you trying to accomplish? What is your goal?

Jimmy Lieu · Answer

Hi,

Going with HELOC or cash out refinance depends on what you're trying to do. If you're trying to do a BRRRR or something where you want to repay the debt later on, you would want to go with a HELOC. This is because after you refinance, you can fully pay off the HELOC.

However, if you're looking to do a normal buy and hold purchase, you'll want to do a cash out refinance to get the capital out.

Thanks.

Raymond Turner · Answer

@John Farady I am still in the looking phase and do not have a property in mind.

What would you say is my best option?

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