LA Property with lots of Equity

[Anna Brown]

I purchased my Los Angeles (Compton) 4-bedroom home in 2013 for 240K; according to Redfin, it is now worth 686K. 2 years ago the entire house was completely renovated (Insurance claim) due to a burst pipe that caused extensive damage while vacant. I'm not sure what I want to do or what my options are. I've been thinking I would like to fix the outside landscaping/fence/Kitchen cabinetry and roof so I that I can get the max rent or just sell and buy in the midwest, 1031 exchange (not sure if I qualify). I mainly would like to expand my portfolio using the equity but am hesitant to refi because my current rate is 3.3%. Even Airbnb would be an option but I'm starting to feel like I need a partner who knows what they are doing to guide me. HELP!!

[Erik Estrada]

Hey Anna, 

Is the goal to keep this property? You could look into a DSCR 2nd mortgage or a HELOC to use the equity in the home.

[Kerlous Tadres]

Quote from @Anna Brown:

I purchased my Los Angeles (Compton) 4-bedroom home in 2013 for 240K; according to Redfin, it is now worth 686K. 2 years ago the entire house was completely renovated (Insurance claim) due to a burst pipe that caused extensive damage while vacant. I'm not sure what I want to do or what my options are. I've been thinking I would like to fix the outside landscaping/fence/Kitchen cabinetry and roof so I that I can get the max rent or just sell and buy in the midwest, 1031 exchange (not sure if I qualify). I mainly would like to expand my portfolio using the equity but am hesitant to refi because my current rate is 3.3%. Even Airbnb would be an option but I'm starting to feel like I need a partner who knows what they are doing to guide me. HELP!!

Hey Anna, 

I would pull a HELOC on the property. You're definitely thinking right! Just try to find some really reliable people that can give you good quotes on your landscaping/fence/Kitchen cabinetry and roof. Selling the place at this time would not be the best idea to be honest. Let me know if there is anyway I can help!

[Dave Foster]

@Anna Brown, it's not clear if that property was your primary residence or not.  Is that why you're not sure you would qualify?

If it was your primary residence and you sell while you have lived in it for 2 out of the 5 years prior to sale then you would get the first $250K of profit ($500K if married) tax free.

If you're not living in it now and your intent was to hold it as a rental but you decide to sell then you could do a 1031 exchange.  And you could also take the primary residence exclusion.  

You've got several options depending on the specifics.

[Bradley Buxton]

@Anna Brown

Is keeping the property going to give you a return greater than energy, capital and time you put into it?  If it can be a stabilized long term rental and give you good cash flow keep the property. If you think you can get a better return by taking the equity and buying something else (duplex, triplex etc..) that will be easier to manage and give better returns then sell.  Most people are trying to build wealth through real estate and ideally you're money continues to work toward that goal. There are options to leverage this property and that is a strategy which involves risking the one asset to buy another. I don't like to make moves that will take you out of the game if something went wrong. 

[Mike Day]

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

[Travis Biziorek]

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

[Mike Day]

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

[Allan C.]

@Anna Brown you have 2 factors that give you a competitive advantage right now - low interest rates and a low tax basis. I suggest you evaluate rental comps to see how much you can cash flow as a long term rental - either with the current loan structure or if you took an additional HELOC.

Selling and not paying capital gains isn’t a bad idea either, but you’ll need to figure out where to invest, and what asset class. If you’re a relatively inexperienced RE investor, I suggest you try renting out your home first to determine if this approach suits your style. Just keep your eye on the cap gains exclusion time limit and mark a decision before your time runs out.

[Dan H.]

It is not clear to me if you currently occupy the home.  

I wanted to expand on something @Allan C. stated.   Your property taxes are artificially low due to prop 13.   I suspect on the order on $400/month low.  This equates to ~$400/month additional cash flow as a rental
In addition, 3.3%loan repayments is likely ~50% of what an RE investment loan would be.
 
Combine the 2 and you have a cash flow situation that would be real difficult to match on a new purchase.  The cherry on top is you are located in historically one of the higher appreciation markets.  This means do not sell this property in hopes of better returns as you are very unlikely to achieve better returns.  

For scaling, you likely do not want to touch your current loan.  Heloc in general are variable so I strive to use them for limited duration financing such as the rehab on a brrrr or a flip.   For longer term financing I prefer the fixed rate.  In your case that would mean a second.  Seconds have worse rates than primary loan, but sleep well knowing the rate is fixed.  Another way to look at it is how would you feel if you took out a heloc 3 years ago and your rate has nearly doubled?

As for where to invest?    All markets are difficult now.  LA will likely be very large negative. cheap Midwest is going to have pittance cash flow (if any) and historically an appreciation that does not keep up with inflation so that value is declining in inflation adjusted dollars.  

in my market (San Diego) in general there are 3 RE residential investment plays 1) patience. 10 years from now investment will likely look great. I am not that patient. 2) value adds. I have made enough on value adds to cover negative cash flow. My last purchase I am up over $600k above costs in 2.5 years and it has just recently entered positive cash flow. This approach involves work and risk 3) alternate rent models such as STR, MTR, rent by bedroom. These also require work.

In general, I do not believe you will but a rent ready property and get positive cash flow worth the effort on day 1.   I believe this.  Rates too high, prices too high, rents too low.  

Good luck

[Travis Biziorek]

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

[Mike Day]

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

[Travis Biziorek]

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

What you're describing is a simple interest rate arbitrage in an idealistic situation that "works" until it doesn't. There are a ton of flaws and holes in your scenario.

I did glance at Zillow for MFH in Peoria. There are 5 properties total at $115k or below and all of them have significant deferred capex and repairs. Thinking you can just put 30% down on something here and start collecting rent without additional upfront capex/repair costs is insane. 

So what then? Are you borrowing that money from the HELOC as well? That changes the math a fair bit.

I'd also be shocked if anyone is insuring this for $65/mo. I generally see duplexes in these lower end markets costing $120-$150/mo in insurance. Seems like a small difference but there goes literally more than 50% of your "cash flow".

Beyond that, this just doesn't scale for several reasons. You say OP can buy 13 "such properties" but that's not true. Your math depends on conventional loans. Beyond 10 of those you're going to need to go DSCR which will change your interest rate and therefore the math.

But that's actually completely moot because you won't get to that point. When you're borrowing money to borrow money you're going to quickly hit DTI limits. In short, this "strategy" just doesn't scale. I'm guessing you've managed to do this a handful of times and think you've hit some infinite free money loop.

But the reality is this is no way to build wealth. It's a great way to build a house of cards by borrowing yourself into a corner though. 

Lose a job, economy struggles, tenants stop paying, etc. and you're in a very difficult spot.

But hey, what do I know!

[Mike Day]

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

What you're describing is a simple interest rate arbitrage in an idealistic situation that "works" until it doesn't. There are a ton of flaws and holes in your scenario.

I did glance at Zillow for MFH in Peoria. There are 5 properties total at $115k or below and all of them have significant deferred capex and repairs. Thinking you can just put 30% down on something here and start collecting rent without additional upfront capex/repair costs is insane. 

So what then? Are you borrowing that money from the HELOC as well? That changes the math a fair bit.

I'd also be shocked if anyone is insuring this for $65/mo. I generally see duplexes in these lower end markets costing $120-$150/mo in insurance. Seems like a small difference but there goes literally more than 50% of your "cash flow".

Beyond that, this just doesn't scale for several reasons. You say OP can buy 13 "such properties" but that's not true. Your math depends on conventional loans. Beyond 10 of those you're going to need to go DSCR which will change your interest rate and therefore the math.

But that's actually completely moot because you won't get to that point. When you're borrowing money to borrow money you're going to quickly hit DTI limits. In short, this "strategy" just doesn't scale. I'm guessing you've managed to do this a handful of times and think you've hit some infinite free money loop.

But the reality is this is no way to build wealth. It's a great way to build a house of cards by borrowing yourself into a corner though. 

Lose a job, economy struggles, tenants stop paying, etc. and you're in a very difficult spot.

But hey, what do I know!

Not sure we're looking at the same MLS then! Actually after I posted that I found one listed for $90k that's currently renting at the exact rent I mentioned: https://www.realtor.com/realestateandhomes-detail/1110-N-Fri...

Clearly, the cashflow would be significantly better than my example. It's hard to tell if a property needs maintenance without seeing it in person. I never said OP should expect to sit back and collect a check without dealing with any issues. It doesn't work like that.

"Thinking you can just put 30% down on something here and start collecting rent... is insane." Well, no, it isn't. Or are you suggesting every property on the MLS has some fatal flaw? Man, get off your computer and out into the world and see some properties. It's not true.

You'd be shocked if someone would insure this for $65/mo? Then you should talk to my insurance agent. I have several places insured for approximately that and they're actually worth more than the one in my example.

Sure, excuse me, OP could buy 9 properties like the ones I described with conventional loans, as she apparently already has one (?). For the 10th-14th, when OP is already profiting to the tune of $70k+ a year, she'll have to accept lower cashflow.

There are many other viable variations to the idea I mentioned, but none of that invalidates the general concept: OP refis the place in Compton to buy out of state rentals that will have a small amount of cashflow and make her very wealthy over time.

We don't know OP's income, so how do we know she'll hit DTI limits? Sounds like she's already an established landlord so conventional lenders should be counting the income from each property she buys right away. If she doesn't have enough income, she can use DSCR loans and accept lower cashflow. The cashflow might perhaps be $0 once she runs out of income and has to start using DSCRs, but again--come on, the strategy is basically valid.

If you think this strategy sucks, don't use it. Meanwhile, I'll be over here running a profiting business. You do you.

[Travis Biziorek]

Quote from @Mike Day:

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Quote from @Mike Day:

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Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

What you're describing is a simple interest rate arbitrage in an idealistic situation that "works" until it doesn't. There are a ton of flaws and holes in your scenario.

I did glance at Zillow for MFH in Peoria. There are 5 properties total at $115k or below and all of them have significant deferred capex and repairs. Thinking you can just put 30% down on something here and start collecting rent without additional upfront capex/repair costs is insane. 

So what then? Are you borrowing that money from the HELOC as well? That changes the math a fair bit.

I'd also be shocked if anyone is insuring this for $65/mo. I generally see duplexes in these lower end markets costing $120-$150/mo in insurance. Seems like a small difference but there goes literally more than 50% of your "cash flow".

Beyond that, this just doesn't scale for several reasons. You say OP can buy 13 "such properties" but that's not true. Your math depends on conventional loans. Beyond 10 of those you're going to need to go DSCR which will change your interest rate and therefore the math.

But that's actually completely moot because you won't get to that point. When you're borrowing money to borrow money you're going to quickly hit DTI limits. In short, this "strategy" just doesn't scale. I'm guessing you've managed to do this a handful of times and think you've hit some infinite free money loop.

But the reality is this is no way to build wealth. It's a great way to build a house of cards by borrowing yourself into a corner though. 

Lose a job, economy struggles, tenants stop paying, etc. and you're in a very difficult spot.

But hey, what do I know!

Not sure we're looking at the same MLS then! Actually after I posted that I found one listed for $90k that's currently renting at the exact rent I mentioned: https://www.realtor.com/realestateandhomes-detail/1110-N-Fri...

Clearly, the cashflow would be significantly better than my example. It's hard to tell if a property needs maintenance without seeing it in person. I never said OP should expect to sit back and collect a check without dealing with any issues. It doesn't work like that.

"Thinking you can just put 30% down on something here and start collecting rent... is insane." Well, no, it isn't. Or are you suggesting every property on the MLS has some fatal flaw? Man, get off your computer and out into the world and see some properties. It's not true.

You'd be shocked if someone would insure this for $65/mo? Then you should talk to my insurance agent. I have several places insured for approximately that and they're actually worth more than the one in my example.

Sure, excuse me, OP could buy 9 properties like the ones I described with conventional loans, as she apparently already has one (?). For the 10th-14th, when OP is already profiting to the tune of $70k+ a year, she'll have to accept lower cashflow.

There are many other viable variations to the idea I mentioned, but none of that invalidates the general concept: OP refis the place in Compton to buy out of state rentals that will have a small amount of cashflow and make her very wealthy over time.

We don't know OP's income, so how do we know she'll hit DTI limits? Sounds like she's already an established landlord so conventional lenders should be counting the income from each property she buys right away. If she doesn't have enough income, she can use DSCR loans and accept lower cashflow. The cashflow might perhaps be $0 once she runs out of income and has to start using DSCRs, but again--come on, the strategy is basically valid.

If you think this strategy sucks, don't use it. Meanwhile, I'll be over here running a profiting business. You do you.

Yes, I saw the property you linked to. I do TONS of deals like these so I'm not a keyboard warrior like you insinuate. I can guarantee there is significant deferred maintenance on this property. 

Your strategy relies on 100% financing. You're being disingenuous by claiming they'd be able to do more than a handful of these before hitting DTI issues. But you know that... your post history shows you've had that same issue already. Saying we don't know their income is just deflecting. 

How many properties do you own with this strategy? Your post history indicates that it's not that many which further proves my points...

It's a low margin arbitrage game when you're 100% financing deals and you will quickly run into DTI issues that will prevent it from scaling. Oh, and you're one emergency from having the entire house of cards fall down on you.

Best of luck.

[Mike Day]

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

What you're describing is a simple interest rate arbitrage in an idealistic situation that "works" until it doesn't. There are a ton of flaws and holes in your scenario.

I did glance at Zillow for MFH in Peoria. There are 5 properties total at $115k or below and all of them have significant deferred capex and repairs. Thinking you can just put 30% down on something here and start collecting rent without additional upfront capex/repair costs is insane. 

So what then? Are you borrowing that money from the HELOC as well? That changes the math a fair bit.

I'd also be shocked if anyone is insuring this for $65/mo. I generally see duplexes in these lower end markets costing $120-$150/mo in insurance. Seems like a small difference but there goes literally more than 50% of your "cash flow".

Beyond that, this just doesn't scale for several reasons. You say OP can buy 13 "such properties" but that's not true. Your math depends on conventional loans. Beyond 10 of those you're going to need to go DSCR which will change your interest rate and therefore the math.

But that's actually completely moot because you won't get to that point. When you're borrowing money to borrow money you're going to quickly hit DTI limits. In short, this "strategy" just doesn't scale. I'm guessing you've managed to do this a handful of times and think you've hit some infinite free money loop.

But the reality is this is no way to build wealth. It's a great way to build a house of cards by borrowing yourself into a corner though. 

Lose a job, economy struggles, tenants stop paying, etc. and you're in a very difficult spot.

But hey, what do I know!

Not sure we're looking at the same MLS then! Actually after I posted that I found one listed for $90k that's currently renting at the exact rent I mentioned: https://www.realtor.com/realestateandhomes-detail/1110-N-Fri...

Clearly, the cashflow would be significantly better than my example. It's hard to tell if a property needs maintenance without seeing it in person. I never said OP should expect to sit back and collect a check without dealing with any issues. It doesn't work like that.

"Thinking you can just put 30% down on something here and start collecting rent... is insane." Well, no, it isn't. Or are you suggesting every property on the MLS has some fatal flaw? Man, get off your computer and out into the world and see some properties. It's not true.

You'd be shocked if someone would insure this for $65/mo? Then you should talk to my insurance agent. I have several places insured for approximately that and they're actually worth more than the one in my example.

Sure, excuse me, OP could buy 9 properties like the ones I described with conventional loans, as she apparently already has one (?). For the 10th-14th, when OP is already profiting to the tune of $70k+ a year, she'll have to accept lower cashflow.

There are many other viable variations to the idea I mentioned, but none of that invalidates the general concept: OP refis the place in Compton to buy out of state rentals that will have a small amount of cashflow and make her very wealthy over time.

We don't know OP's income, so how do we know she'll hit DTI limits? Sounds like she's already an established landlord so conventional lenders should be counting the income from each property she buys right away. If she doesn't have enough income, she can use DSCR loans and accept lower cashflow. The cashflow might perhaps be $0 once she runs out of income and has to start using DSCRs, but again--come on, the strategy is basically valid.

If you think this strategy sucks, don't use it. Meanwhile, I'll be over here running a profiting business. You do you.

Yes, I saw the property you linked to. I do TONS of deals like these so I'm not a keyboard warrior like you insinuate. I can guarantee there is significant deferred maintenance on this property. 

Your strategy relies on 100% financing. You're being disingenuous by claiming they'd be able to do more than a handful of these before hitting DTI issues. But you know that... your post history shows you've had that same issue already. Saying we don't know their income is just deflecting. 

How many properties do you own with this strategy? Your post history indicates that it's not that many which further proves my points...

It's a low margin arbitrage game when you're 100% financing deals and you will quickly run into DTI issues that will prevent it from scaling. Oh, and you're one emergency from having the entire house of cards fall down on you.

Best of luck.

Interesting that you can know there's deferred maintenance on every property in Peoria without seeing them in person.

I'm doing well, thanks, there's no house of cards that's about to fall and I'm not gonna get into a, er, manhood-measuring contest about numbers of properties.

Like I said, you do you.

Hope you have a great day. I'm going to go attend to one of my properties now.

[Travis Biziorek]

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

What you're describing is a simple interest rate arbitrage in an idealistic situation that "works" until it doesn't. There are a ton of flaws and holes in your scenario.

I did glance at Zillow for MFH in Peoria. There are 5 properties total at $115k or below and all of them have significant deferred capex and repairs. Thinking you can just put 30% down on something here and start collecting rent without additional upfront capex/repair costs is insane. 

So what then? Are you borrowing that money from the HELOC as well? That changes the math a fair bit.

I'd also be shocked if anyone is insuring this for $65/mo. I generally see duplexes in these lower end markets costing $120-$150/mo in insurance. Seems like a small difference but there goes literally more than 50% of your "cash flow".

Beyond that, this just doesn't scale for several reasons. You say OP can buy 13 "such properties" but that's not true. Your math depends on conventional loans. Beyond 10 of those you're going to need to go DSCR which will change your interest rate and therefore the math.

But that's actually completely moot because you won't get to that point. When you're borrowing money to borrow money you're going to quickly hit DTI limits. In short, this "strategy" just doesn't scale. I'm guessing you've managed to do this a handful of times and think you've hit some infinite free money loop.

But the reality is this is no way to build wealth. It's a great way to build a house of cards by borrowing yourself into a corner though. 

Lose a job, economy struggles, tenants stop paying, etc. and you're in a very difficult spot.

But hey, what do I know!

Not sure we're looking at the same MLS then! Actually after I posted that I found one listed for $90k that's currently renting at the exact rent I mentioned: https://www.realtor.com/realestateandhomes-detail/1110-N-Fri...

Clearly, the cashflow would be significantly better than my example. It's hard to tell if a property needs maintenance without seeing it in person. I never said OP should expect to sit back and collect a check without dealing with any issues. It doesn't work like that.

"Thinking you can just put 30% down on something here and start collecting rent... is insane." Well, no, it isn't. Or are you suggesting every property on the MLS has some fatal flaw? Man, get off your computer and out into the world and see some properties. It's not true.

You'd be shocked if someone would insure this for $65/mo? Then you should talk to my insurance agent. I have several places insured for approximately that and they're actually worth more than the one in my example.

Sure, excuse me, OP could buy 9 properties like the ones I described with conventional loans, as she apparently already has one (?). For the 10th-14th, when OP is already profiting to the tune of $70k+ a year, she'll have to accept lower cashflow.

There are many other viable variations to the idea I mentioned, but none of that invalidates the general concept: OP refis the place in Compton to buy out of state rentals that will have a small amount of cashflow and make her very wealthy over time.

We don't know OP's income, so how do we know she'll hit DTI limits? Sounds like she's already an established landlord so conventional lenders should be counting the income from each property she buys right away. If she doesn't have enough income, she can use DSCR loans and accept lower cashflow. The cashflow might perhaps be $0 once she runs out of income and has to start using DSCRs, but again--come on, the strategy is basically valid.

If you think this strategy sucks, don't use it. Meanwhile, I'll be over here running a profiting business. You do you.

Yes, I saw the property you linked to. I do TONS of deals like these so I'm not a keyboard warrior like you insinuate. I can guarantee there is significant deferred maintenance on this property. 

Your strategy relies on 100% financing. You're being disingenuous by claiming they'd be able to do more than a handful of these before hitting DTI issues. But you know that... your post history shows you've had that same issue already. Saying we don't know their income is just deflecting. 

How many properties do you own with this strategy? Your post history indicates that it's not that many which further proves my points...

It's a low margin arbitrage game when you're 100% financing deals and you will quickly run into DTI issues that will prevent it from scaling. Oh, and you're one emergency from having the entire house of cards fall down on you.

Best of luck.

Interesting that you can know there's deferred maintenance on every property in Peoria without seeing them in person.

I'm doing well, thanks, there's no house of cards that's about to fall and I'm not gonna get into a, er, manhood-measuring contest about numbers of properties.

Like I said, you do you.

Hope you have a great day. I'm going to go attend to one of my properties now.

It's not about measuring, Mike. It's about proving your point.

How many properties have you successfully acquired with this strategy? And what is your HELOC amount?

You won't answer because it contradicts everything you're saying. This "strategy" does not scale. If it does, why aren't you buying that lovely $90k duplex in Peoria that you linked to? 

You know, the one that MIGHT not have any deferred maintenance even though there are no interior photos... yeah lol

The reality is, you've done this a couple times (using your HELOC to fund investment purchases in Peoria). But beyond that, it doesn't work because you hit DTI issues. I can prove this with math or with your BiggerPockets posting history.

The other side of this is you're one false step from financial ruin. That's harder to prove until it happens. And I genuinely hope it does not for you.

What I do hope that's accomplished from this dialogue is that nobody walks away from this thinking your strategy is good/smart/feasible. 

It isn't. 

[Mike Day]

Quote from @Travis Biziorek:

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Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

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Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

What you're describing is a simple interest rate arbitrage in an idealistic situation that "works" until it doesn't. There are a ton of flaws and holes in your scenario.

I did glance at Zillow for MFH in Peoria. There are 5 properties total at $115k or below and all of them have significant deferred capex and repairs. Thinking you can just put 30% down on something here and start collecting rent without additional upfront capex/repair costs is insane. 

So what then? Are you borrowing that money from the HELOC as well? That changes the math a fair bit.

I'd also be shocked if anyone is insuring this for $65/mo. I generally see duplexes in these lower end markets costing $120-$150/mo in insurance. Seems like a small difference but there goes literally more than 50% of your "cash flow".

Beyond that, this just doesn't scale for several reasons. You say OP can buy 13 "such properties" but that's not true. Your math depends on conventional loans. Beyond 10 of those you're going to need to go DSCR which will change your interest rate and therefore the math.

But that's actually completely moot because you won't get to that point. When you're borrowing money to borrow money you're going to quickly hit DTI limits. In short, this "strategy" just doesn't scale. I'm guessing you've managed to do this a handful of times and think you've hit some infinite free money loop.

But the reality is this is no way to build wealth. It's a great way to build a house of cards by borrowing yourself into a corner though. 

Lose a job, economy struggles, tenants stop paying, etc. and you're in a very difficult spot.

But hey, what do I know!

Not sure we're looking at the same MLS then! Actually after I posted that I found one listed for $90k that's currently renting at the exact rent I mentioned: https://www.realtor.com/realestateandhomes-detail/1110-N-Fri...

Clearly, the cashflow would be significantly better than my example. It's hard to tell if a property needs maintenance without seeing it in person. I never said OP should expect to sit back and collect a check without dealing with any issues. It doesn't work like that.

"Thinking you can just put 30% down on something here and start collecting rent... is insane." Well, no, it isn't. Or are you suggesting every property on the MLS has some fatal flaw? Man, get off your computer and out into the world and see some properties. It's not true.

You'd be shocked if someone would insure this for $65/mo? Then you should talk to my insurance agent. I have several places insured for approximately that and they're actually worth more than the one in my example.

Sure, excuse me, OP could buy 9 properties like the ones I described with conventional loans, as she apparently already has one (?). For the 10th-14th, when OP is already profiting to the tune of $70k+ a year, she'll have to accept lower cashflow.

There are many other viable variations to the idea I mentioned, but none of that invalidates the general concept: OP refis the place in Compton to buy out of state rentals that will have a small amount of cashflow and make her very wealthy over time.

We don't know OP's income, so how do we know she'll hit DTI limits? Sounds like she's already an established landlord so conventional lenders should be counting the income from each property she buys right away. If she doesn't have enough income, she can use DSCR loans and accept lower cashflow. The cashflow might perhaps be $0 once she runs out of income and has to start using DSCRs, but again--come on, the strategy is basically valid.

If you think this strategy sucks, don't use it. Meanwhile, I'll be over here running a profiting business. You do you.

Yes, I saw the property you linked to. I do TONS of deals like these so I'm not a keyboard warrior like you insinuate. I can guarantee there is significant deferred maintenance on this property. 

Your strategy relies on 100% financing. You're being disingenuous by claiming they'd be able to do more than a handful of these before hitting DTI issues. But you know that... your post history shows you've had that same issue already. Saying we don't know their income is just deflecting. 

How many properties do you own with this strategy? Your post history indicates that it's not that many which further proves my points...

It's a low margin arbitrage game when you're 100% financing deals and you will quickly run into DTI issues that will prevent it from scaling. Oh, and you're one emergency from having the entire house of cards fall down on you.

Best of luck.

Interesting that you can know there's deferred maintenance on every property in Peoria without seeing them in person.

I'm doing well, thanks, there's no house of cards that's about to fall and I'm not gonna get into a, er, manhood-measuring contest about numbers of properties.

Like I said, you do you.

Hope you have a great day. I'm going to go attend to one of my properties now.

It's not about measuring, Mike. It's about proving your point.

How many properties have you successfully acquired with this strategy? And what is your HELOC amount?

You won't answer because it contradicts everything you're saying. This "strategy" does not scale. If it does, why aren't you buying that lovely $90k duplex in Peoria that you linked to? 

You know, the one that MIGHT not have any deferred maintenance even though there are no interior photos... yeah lol

The reality is, you've done this a couple times (using your HELOC to fund investment purchases in Peoria). But beyond that, it doesn't work because you hit DTI issues. I can prove this with math or with your BiggerPockets posting history.

The other side of this is you're one false step from financial ruin. That's harder to prove until it happens. And I genuinely hope it does not for you.

What I do hope that's accomplished from this dialogue is that nobody walks away from this thinking your strategy is good/smart/feasible. 

It isn't. 

Pretty incredible arrogance, Travis. You know all and your strategy is better than everyone else's.

I'm doing perfectly fine and I'm comfortable and that's all I'm going to say. I don't get into these discussions of specifics and I'm not insecure or on the brink of ruin.

It's scalable up to the amount of OP's income, then when she's already wealthy from doing that she can get a commercial loan, DSCR, whatever. She's not going to need the conventional loans anymore. Say OP makes $80k outside of real estate, I'm sure with all your knowledge you can figure out how many properties she can buy on that.

This is my final response because I have stuff to do. Tchau!

[Travis Biziorek]

Quote from @Mike Day:

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Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

What you're describing is a simple interest rate arbitrage in an idealistic situation that "works" until it doesn't. There are a ton of flaws and holes in your scenario.

I did glance at Zillow for MFH in Peoria. There are 5 properties total at $115k or below and all of them have significant deferred capex and repairs. Thinking you can just put 30% down on something here and start collecting rent without additional upfront capex/repair costs is insane. 

So what then? Are you borrowing that money from the HELOC as well? That changes the math a fair bit.

I'd also be shocked if anyone is insuring this for $65/mo. I generally see duplexes in these lower end markets costing $120-$150/mo in insurance. Seems like a small difference but there goes literally more than 50% of your "cash flow".

Beyond that, this just doesn't scale for several reasons. You say OP can buy 13 "such properties" but that's not true. Your math depends on conventional loans. Beyond 10 of those you're going to need to go DSCR which will change your interest rate and therefore the math.

But that's actually completely moot because you won't get to that point. When you're borrowing money to borrow money you're going to quickly hit DTI limits. In short, this "strategy" just doesn't scale. I'm guessing you've managed to do this a handful of times and think you've hit some infinite free money loop.

But the reality is this is no way to build wealth. It's a great way to build a house of cards by borrowing yourself into a corner though. 

Lose a job, economy struggles, tenants stop paying, etc. and you're in a very difficult spot.

But hey, what do I know!

Not sure we're looking at the same MLS then! Actually after I posted that I found one listed for $90k that's currently renting at the exact rent I mentioned: https://www.realtor.com/realestateandhomes-detail/1110-N-Fri...

Clearly, the cashflow would be significantly better than my example. It's hard to tell if a property needs maintenance without seeing it in person. I never said OP should expect to sit back and collect a check without dealing with any issues. It doesn't work like that.

"Thinking you can just put 30% down on something here and start collecting rent... is insane." Well, no, it isn't. Or are you suggesting every property on the MLS has some fatal flaw? Man, get off your computer and out into the world and see some properties. It's not true.

You'd be shocked if someone would insure this for $65/mo? Then you should talk to my insurance agent. I have several places insured for approximately that and they're actually worth more than the one in my example.

Sure, excuse me, OP could buy 9 properties like the ones I described with conventional loans, as she apparently already has one (?). For the 10th-14th, when OP is already profiting to the tune of $70k+ a year, she'll have to accept lower cashflow.

There are many other viable variations to the idea I mentioned, but none of that invalidates the general concept: OP refis the place in Compton to buy out of state rentals that will have a small amount of cashflow and make her very wealthy over time.

We don't know OP's income, so how do we know she'll hit DTI limits? Sounds like she's already an established landlord so conventional lenders should be counting the income from each property she buys right away. If she doesn't have enough income, she can use DSCR loans and accept lower cashflow. The cashflow might perhaps be $0 once she runs out of income and has to start using DSCRs, but again--come on, the strategy is basically valid.

If you think this strategy sucks, don't use it. Meanwhile, I'll be over here running a profiting business. You do you.

Yes, I saw the property you linked to. I do TONS of deals like these so I'm not a keyboard warrior like you insinuate. I can guarantee there is significant deferred maintenance on this property. 

Your strategy relies on 100% financing. You're being disingenuous by claiming they'd be able to do more than a handful of these before hitting DTI issues. But you know that... your post history shows you've had that same issue already. Saying we don't know their income is just deflecting. 

How many properties do you own with this strategy? Your post history indicates that it's not that many which further proves my points...

It's a low margin arbitrage game when you're 100% financing deals and you will quickly run into DTI issues that will prevent it from scaling. Oh, and you're one emergency from having the entire house of cards fall down on you.

Best of luck.

Interesting that you can know there's deferred maintenance on every property in Peoria without seeing them in person.

I'm doing well, thanks, there's no house of cards that's about to fall and I'm not gonna get into a, er, manhood-measuring contest about numbers of properties.

Like I said, you do you.

Hope you have a great day. I'm going to go attend to one of my properties now.

It's not about measuring, Mike. It's about proving your point.

How many properties have you successfully acquired with this strategy? And what is your HELOC amount?

You won't answer because it contradicts everything you're saying. This "strategy" does not scale. If it does, why aren't you buying that lovely $90k duplex in Peoria that you linked to? 

You know, the one that MIGHT not have any deferred maintenance even though there are no interior photos... yeah lol

The reality is, you've done this a couple times (using your HELOC to fund investment purchases in Peoria). But beyond that, it doesn't work because you hit DTI issues. I can prove this with math or with your BiggerPockets posting history.

The other side of this is you're one false step from financial ruin. That's harder to prove until it happens. And I genuinely hope it does not for you.

What I do hope that's accomplished from this dialogue is that nobody walks away from this thinking your strategy is good/smart/feasible. 

It isn't. 

Pretty incredible arrogance, Travis. You know all and your strategy is better than everyone else's.

I'm doing perfectly fine and I'm comfortable and that's all I'm going to say. I don't get into these discussions of specifics and I'm not insecure or on the brink of ruin.

It's scalable up to the amount of OP's income, then when she's already wealthy from doing that she can get a commercial loan, DSCR, whatever. She's not going to need the conventional loans anymore. Say OP makes $80k outside of real estate, I'm sure with all your knowledge you can figure out how many properties she can buy on that.

This is my final response because I have stuff to 

 You dodged the question, Mike! 

I wonder why?

For anyone wanting to know how well your “strategy” works it’s as simple as reading your old posts. You had your first Peoria property 9 years ago. NINE! 

By the looks of things you haven’t been able to acquire many more with this route in those 9 years. 

It’s not a strategy, folks.

[Dan H.]

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

 Are you allocating $240/month on a duplex for vacancy, maintenance, cap ex?  If not, where is the cap ex costs?   This would be $120 per unit for vacancy, maintenance, and cap ex.  If so, you are orders of magnitude low.  The maintenance/cap ex per unit is higher than you allocated for the entire property and destroys the return at these low rent points ($800/month per unit) long term.

Do you not include misc expenses such as bookkeeping, asset protection, accounting/tax prep, etc? A year ago my asset protection cost doubled over night. I now spend $5.8k on umbrella policy and $800 on LLC for a total of $6.4k for asset protection (divided across my unit count). I include these type of charges in my misc. misc also includes unexpected charges such as water charge associated with a leak such as a slab leak.

In addition, at this rent point you will find it difficult to get a PM at 10% all inclusive (including tenant placement, inspections, lease renewals, etc).   At 10% the PM would get $80/unit.   I do not believe they can place a tenant inclusive of $80/unit.  

At that purchase price, historically the appreciation has not kept up with inflation.  This implies that in inflation adjusted dollars, the property value is declining.   This declining value affects the return and should be noted in any pro forma calculations.  

The rent has the same issue.  At $800/unit, the rent likely is not keeping up with inflation.   This implies that cash flow growth historically is non existent in inflation adjusted terms. so the $122/unit cash flow is unlikely to increase in inflation adjusted value   

It appears that numerous expenses are missing, the property historically has depreciated in inflation adjusted dollars, and even with the expenses you provided, it cash flows $122/unit    To me this does not justify the effort of owning residential units.  I would not even spend effort to get docs together for the purchase and go through effort of acquiring financing for that unit cash flow (which also does not seem likely to ever increase in inflation adjusted terms)

There is no way I would recommend the property you referenced for an OOS investor from CA.  It could be a good purchase for a local investor who can be more hands on.  

Best wishes

[Mike Day]

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea. 

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments. 

I would definitely be interested to see your specifics with this strategy. 

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today). 

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

 Are you allocating $240/month on a duplex for vacancy, maintenance, cap ex?  If not, where is the cap ex costs?   This would be $120 per unit for vacancy, maintenance, and cap ex.  If so, you are orders of magnitude low.  The maintenance/cap ex per unit is higher than you allocated for the entire property and destroys the return at these low rent points ($800/month per unit) long term.

Do you not include misc expenses such as bookkeeping, asset protection, accounting/tax prep, etc? A year ago my asset protection cost doubled over night. I now spend $5.8k on umbrella policy and $800 on LLC for a total of $6.4k for asset protection (divided across my unit count). I include these type of charges in my misc. misc also includes unexpected charges such as water charge associated with a leak such as a slab leak.

In addition, at this rent point you will find it difficult to get a PM at 10% all inclusive (including tenant placement, inspections, lease renewals, etc).   At 10% the PM would get $80/unit.   I do not believe they can place a tenant inclusive of $80/unit.  

At that purchase price, historically the appreciation has not kept up with inflation.  This implies that in inflation adjusted dollars, the property value is declining.   This declining value affects the return and should be noted in any pro forma calculations.  

The rent has the same issue.  At $800/unit, the rent likely is not keeping up with inflation.   This implies that cash flow growth historically is non existent in inflation adjusted terms. so the $122/unit cash flow is unlikely to increase in inflation adjusted value   

It appears that numerous expenses are missing, the property historically has depreciated in inflation adjusted dollars, and even with the expenses you provided, it cash flows $122/unit    To me this does not justify the effort of owning residential units.  I would not even spend effort to get docs together for the purchase and go through effort of acquiring financing for that unit cash flow (which also does not seem likely to ever increase in inflation adjusted terms)

There is no way I would recommend the property you referenced for an OOS investor from CA.  It could be a good purchase for a local investor who can be more hands on.  

Best wishes

Thanks for you response, Dan. I think that you're correct: in this interest rate environment, small variations in costs like the ones you've mentioned can easily eat up your cashflow. So I'll make a tweak. If I were actually going to use this strategy, I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow. I'll reiterate my general point: it's a viable and sensible strategy to refi properties in high-cost, low-cashflow states and use the funds to invest in low-cost, high-cashflow states. Many have done it and it's a timeworn path.

Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest (I don't own anything in Peoria, by the way). My overall point remains, again: OP can refinance her California property to acquire a number of out of state properties with modest cash flow that will make her wealthy over time.

I take issue with one thing you wrote: how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before. https://www.zillow.com/home-values/19903/peoria-il/

Maybe there's a market somewhere in the US where home price increases haven't kept pace with inflation over time, but it certainly would be an exception, and this market is not.

Regarding asset protection, it's up to OP and her team to decide, but I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. Yes, if OP is a California resident and decides to use an LLC, it's $800/yr. Every other state I believe is far cheaper. Also not needed while just starting out. I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

Generally, again, refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point. I just started out by trying to say that and then someone started absolutely raking me over the coals. So sure, to ensure cashflow, do something in addition to what I described at first: Airbnbs, flip something, improve something, manage something yourself... my general point absolutely stands.

Also, this is only ONE WAY that OP might go about things. Unlike others here, I'm not trying to say it's my way or the highway. I'm talking modest cashflow and wealth-building over time, and my strategy is valid for that. If OP wants something else, she can do something different.

[Dan H.]

Quote from @Mike Day:

Quote from @Dan H.:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Quote from @Travis Biziorek:

Quote from @Mike Day:

Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea.

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments.

I would definitely be interested to see your specifics with this strategy.

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today).

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

Are you allocating $240/month on a duplex for vacancy, maintenance, cap ex? If not, where is the cap ex costs? This would be $120 per unit for vacancy, maintenance, and cap ex. If so, you are orders of magnitude low. The maintenance/cap ex per unit is higher than you allocated for the entire property and destroys the return at these low rent points ($800/month per unit) long term.

Do you not include misc expenses such as bookkeeping, asset protection, accounting/tax prep, etc? A year ago my asset protection cost doubled over night. I now spend $5.8k on umbrella policy and $800 on LLC for a total of $6.4k for asset protection (divided across my unit count). I include these type of charges in my misc. misc also includes unexpected charges such as water charge associated with a leak such as a slab leak.

In addition, at this rent point you will find it difficult to get a PM at 10% all inclusive (including tenant placement, inspections, lease renewals, etc). At 10% the PM would get $80/unit. I do not believe they can place a tenant inclusive of $80/unit.

At that purchase price, historically the appreciation has not kept up with inflation. This implies that in inflation adjusted dollars, the property value is declining. This declining value affects the return and should be noted in any pro forma calculations.

The rent has the same issue. At $800/unit, the rent likely is not keeping up with inflation. This implies that cash flow growth historically is non existent in inflation adjusted terms. so the $122/unit cash flow is unlikely to increase in inflation adjusted value

It appears that numerous expenses are missing, the property historically has depreciated in inflation adjusted dollars, and even with the expenses you provided, it cash flows $122/unit To me this does not justify the effort of owning residential units. I would not even spend effort to get docs together for the purchase and go through effort of acquiring financing for that unit cash flow (which also does not seem likely to ever increase in inflation adjusted terms)

There is no way I would recommend the property you referenced for an OOS investor from CA. It could be a good purchase for a local investor who can be more hands on.

Best wishes

Thanks for you response, Dan. I think that you're correct: in this interest rate environment, small variations in costs like the ones you've mentioned can easily eat up your cashflow. So I'll make a tweak. If I were actually going to use this strategy, I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow. I'll reiterate my general point: it's a viable and sensible strategy to refi properties in high-cost, low-cashflow states and use the funds to invest in low-cost, high-cashflow states. Many have done it and it's a timeworn path.

Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest (I don't own anything in Peoria, by the way). My overall point remains, again: OP can refinance her California property to acquire a number of out of state properties with modest cash flow that will make her wealthy over time.

I take issue with one thing you wrote: how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before. https://www.zillow.com/home-values/19903/peoria-il/

Maybe there's a market somewhere in the US where home price increases haven't kept pace with inflation over time, but it certainly would be an exception, and this market is not.

Regarding asset protection, it's up to OP and her team to decide, but I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. Yes, if OP is a California resident and decides to use an LLC, it's $800/yr. Every other state I believe is far cheaper. Also not needed while just starting out. I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

Generally, again, refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point. I just started out by trying to say that and then someone started absolutely raking me over the coals. So sure, to ensure cashflow, do something in addition to what I described at first: Airbnbs, flip something, improve something, manage something yourself... my general point absolutely stands.

Also, this is only ONE WAY that OP might go about things. Unlike others here, I'm not trying to say it's my way or the highway. I'm talking modest cashflow and wealth-building over time, and my strategy is valid for that. If OP wants something else, she can do something different.

>I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow.

Do you have any STRs? I suspect I am in top 20 on BP site in terms of STR longevity (first 2 STRs were in 1999). In my market, STR with pm, utilities, and furnishing costs is about on par with LTR without PM. Every market I have looked at gets tight with use of a pm. I pay pm 25% so if I self managed, I would have greater profit than LTR but it is work and takes time. I get well compensated for working, so I choose not to self manage the STRs. Note self managing will impact the ability to scale. My point is STRs have challenges.

>Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest

It is orders of magnitudes too low. First reference look at average apartment maintenance/cap ex which NAR publishes. Realize that is with maintenance staff, benefits of large volume,etc. Alternatively you can fill out a life/cost for each item spreadsheet to determine your cost. What would a water heater replacement cost for OOS investor? Divide by 144 to determine monthly expense then multiply by 2 for the duplex. Do refrigerator, range, faucets, toilets, kitchen, flooring, bathrooms, rough plumbing, siding, roof, HVAC, fencing, rough electrical, hardscape. Everything has a lifespan and replacement cost. You are I suspect at least 3x low.

>how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before.

10 years is not long term. You can look at building cost and know that property has depreciated in inflation adjusted dollars since build. Neighborhoodscout shows it has appreciated 1.95% annually for this century which as I indicated is long term appreciation below the rate of inflation. https://www.neighborhoodscout.com/il/peoria/real-estate

>I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. 

My umbrella policy is far greater than what most people need and far more costly but it is distributed across all my units and includes a fleet of vehicles and other toys.  However, I recommend asset protection for all landlords.   It is worth the cost when $hit happens.   I suspect that a $0.5m policy on small number of assets would be about 10% of what I pay.  

>I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

I self manage my LTR properties but still include pm in my underwriting.   I deserve to be paid for all work and want to know I can pay someone to do the work if I decide I no longer desire to be the pm.  You can do the taxes and bookkeeping but what about as you scale? 10 units might be ok.  20 units and it gets difficult and doing the job yourself may be costing you lost tax benefits.  50 units, the bookkeeping would likely be a full time job.  So it is important to show the cost in the underwriting otherwise when you hire out the work you could have an under performing property.  

>refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point.

I think I am in the few.  Last time I saw an underwriting in Midwest market that I believed was worth the risk and effort for an OOS Ca investor with low unit count was before the rates increased.   Note I am not saying it cannot work for hands on local investor or a large volume OOS investor such as bob stevens.  I also believe local investors can more easily manage value adds providing another option.   

note, I believe it is a tough RE market everywhere.   i can find flips that would work, but flipping is a job.   New development can work but also a job.   Brrrr do not work for me after the refi as in my market they are very cash negative (using my underwriting, not at $120/unit for vacancy, maintenance and cal ex).   I have not purchased in 2.5 years (I purchased $4m in Dec 2021) which is my longest duration without purchase since 2010.  My point is that  do not show your examp,e to be worthy for CA OOS investor just means it is like the other properties I have analyzed in the last couple of years.

Best wishes

[Mike Day]

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Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea.

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments.

I would definitely be interested to see your specifics with this strategy.

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today).

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

Are you allocating $240/month on a duplex for vacancy, maintenance, cap ex? If not, where is the cap ex costs? This would be $120 per unit for vacancy, maintenance, and cap ex. If so, you are orders of magnitude low. The maintenance/cap ex per unit is higher than you allocated for the entire property and destroys the return at these low rent points ($800/month per unit) long term.

Do you not include misc expenses such as bookkeeping, asset protection, accounting/tax prep, etc? A year ago my asset protection cost doubled over night. I now spend $5.8k on umbrella policy and $800 on LLC for a total of $6.4k for asset protection (divided across my unit count). I include these type of charges in my misc. misc also includes unexpected charges such as water charge associated with a leak such as a slab leak.

In addition, at this rent point you will find it difficult to get a PM at 10% all inclusive (including tenant placement, inspections, lease renewals, etc). At 10% the PM would get $80/unit. I do not believe they can place a tenant inclusive of $80/unit.

At that purchase price, historically the appreciation has not kept up with inflation. This implies that in inflation adjusted dollars, the property value is declining. This declining value affects the return and should be noted in any pro forma calculations.

The rent has the same issue. At $800/unit, the rent likely is not keeping up with inflation. This implies that cash flow growth historically is non existent in inflation adjusted terms. so the $122/unit cash flow is unlikely to increase in inflation adjusted value

It appears that numerous expenses are missing, the property historically has depreciated in inflation adjusted dollars, and even with the expenses you provided, it cash flows $122/unit To me this does not justify the effort of owning residential units. I would not even spend effort to get docs together for the purchase and go through effort of acquiring financing for that unit cash flow (which also does not seem likely to ever increase in inflation adjusted terms)

There is no way I would recommend the property you referenced for an OOS investor from CA. It could be a good purchase for a local investor who can be more hands on.

Best wishes

Thanks for you response, Dan. I think that you're correct: in this interest rate environment, small variations in costs like the ones you've mentioned can easily eat up your cashflow. So I'll make a tweak. If I were actually going to use this strategy, I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow. I'll reiterate my general point: it's a viable and sensible strategy to refi properties in high-cost, low-cashflow states and use the funds to invest in low-cost, high-cashflow states. Many have done it and it's a timeworn path.

Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest (I don't own anything in Peoria, by the way). My overall point remains, again: OP can refinance her California property to acquire a number of out of state properties with modest cash flow that will make her wealthy over time.

I take issue with one thing you wrote: how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before. https://www.zillow.com/home-values/19903/peoria-il/

Maybe there's a market somewhere in the US where home price increases haven't kept pace with inflation over time, but it certainly would be an exception, and this market is not.

Regarding asset protection, it's up to OP and her team to decide, but I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. Yes, if OP is a California resident and decides to use an LLC, it's $800/yr. Every other state I believe is far cheaper. Also not needed while just starting out. I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

Generally, again, refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point. I just started out by trying to say that and then someone started absolutely raking me over the coals. So sure, to ensure cashflow, do something in addition to what I described at first: Airbnbs, flip something, improve something, manage something yourself... my general point absolutely stands.

Also, this is only ONE WAY that OP might go about things. Unlike others here, I'm not trying to say it's my way or the highway. I'm talking modest cashflow and wealth-building over time, and my strategy is valid for that. If OP wants something else, she can do something different.

>I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow.

Do you have any STRs? I suspect I am in top 20 on BP site in terms of STR longevity (first 2 STRs were in 1999). In my market, STR with pm, utilities, and furnishing costs is about on par with LTR without PM. Every market I have looked at gets tight with use of a pm. I pay pm 25% so if I self managed, I would have greater profit than LTR but it is work and takes time. I get well compensated for working, so I choose not to self manage the STRs. Note self managing will impact the ability to scale. My point is STRs have challenges.

>Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest

It is orders of magnitudes too low. First reference look at average apartment maintenance/cap ex which NAR publishes. Realize that is with maintenance staff, benefits of large volume,etc. Alternatively you can fill out a life/cost for each item spreadsheet to determine your cost. What would a water heater replacement cost for OOS investor? Divide by 144 to determine monthly expense then multiply by 2 for the duplex. Do refrigerator, range, faucets, toilets, kitchen, flooring, bathrooms, rough plumbing, siding, roof, HVAC, fencing, rough electrical, hardscape. Everything has a lifespan and replacement cost. You are I suspect at least 3x low.

>how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before.

10 years is not long term. You can look at building cost and know that property has depreciated in inflation adjusted dollars since build. Neighborhoodscout shows it has appreciated 1.95% annually for this century which as I indicated is long term appreciation below the rate of inflation. https://www.neighborhoodscout.com/il/peoria/real-estate

>I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. 

My umbrella policy is far greater than what most people need and far more costly but it is distributed across all my units and includes a fleet of vehicles and other toys.  However, I recommend asset protection for all landlords.   It is worth the cost when $hit happens.   I suspect that a $0.5m policy on small number of assets would be about 10% of what I pay.  

>I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

I self manage my LTR properties but still include pm in my underwriting.   I deserve to be paid for all work and want to know I can pay someone to do the work if I decide I no longer desire to be the pm.  You can do the taxes and bookkeeping but what about as you scale? 10 units might be ok.  20 units and it gets difficult and doing the job yourself may be costing you lost tax benefits.  50 units, the bookkeeping would likely be a full time job.  So it is important to show the cost in the underwriting otherwise when you hire out the work you could have an under performing property.  

>refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point.

I think I am in the few.  Last time I saw an underwriting in Midwest market that I believed was worth the risk and effort for an OOS Ca investor with low unit count was before the rates increased.   Note I am not saying it cannot work for hands on local investor or a large volume OOS investor such as bob stevens.  I also believe local investors can more easily manage value adds providing another option.   

note, I believe it is a tough RE market everywhere.   i can find flips that would work, but flipping is a job.   New development can work but also a job.   Brrrr do not work for me after the refi as in my market they are very cash negative (using my underwriting, not at $120/unit for vacancy, maintenance and cal ex).   I have not purchased in 2.5 years (I purchased $4m in Dec 2021) which is my longest duration without purchase since 2010.  My point is that  do not show your examp,e to be worthy for CA OOS investor just means it is like the other properties I have analyzed in the last couple of years.

Best wishes

Yep, I do have short term rentals that I manage myself. Mine certainly make more than my long-term rentals. I brought that up as one means of dealing with thin cash flow, which is simply a fact of life under current conditions no matter what you do. It's far from unique to the scenario I've described. Everything has its pros and cons. I'm not saying you should self-manage 25 properties, but certainly managing 3-5 isn't a big deal and can be done while holding down a job. It's just an *option* that someone could choose to protect their cashflow when they have other properties that are only barely making money.

So you think that capex, maintenance, and vacancy should be 45%??? Then nothing in this country is ever going to cash flow. That's just going way overboard. If you want to put it at 25%, I won't say you're nuts. 45%, though, is nuts.

It is simply a fact of the US economy that the growth of housing prices outstrips inflation by far, and so does rent growth. These are some of the basic premises of real estate investing. You can take the last 25 year period most places and price growth wasn't amazing. The reason is that the period from 2000-2015 was pretty flat. But if you want to go long term, really go long term. This is an odd thing to have to argue with a real estate investor. Properties appreciate over time above and beyond inflation. Could you end up in a 25-year period with growth under inflation? Sure, you could. As investors, we take on risk. This being the case, should people just put their money in bonds?

Right, if you have significant assets on top of your investments, you should have an umbrella. But there's no way someone in OP's situation needs one that costs $5k. I agree, a $.5 million umbrella might be like $500 a year which is reasonable if you have a few properties, along with significant other assets someone could take in a lawsuit.

Okay, again, in a situation like OP's, she can just do her bookkeeping and taxes herself. She's hardly in the position of needing a full-time accountant. If we're talking 50 units, then she needs to hire someone, but that's not the situation.

Well, I have investments in both California and the Midwest and it works for me. I'm not just here blowing smoke. It's almost always better to stay local, but it's different when you live somewhere like California or New York and are just starting out. Can you point me to a property in the LA area that I can put 15% down and cashflow on? Maybe there's some shack somewhere that is technically habitable that would? It's far, far from a normal situation. In, say, Indiana, Kentucky, Ohio, and Illinois--more states than that, actually basically the entire Midwest and South--this is relatively easy to achieve. So that's why I say people in California who want to invest should give that a strong look. There are many, many already doing this, too, not like I just pulled it out of my rear end this morning. Again, every single choice has its pros and cons. A good PM is absolutely key.

BRRR is absolutely my business model in the Midwest and it works. I would not do it in California, at least not without major modifications.

My way is just one way. It works. If people don't want to deal with long-distance landlording, I think that's totally fine.

Jeez, I really feel like I'm going through the Spanish Inquisition over basic stuff everyone does all the time. I'm really not saying anything new at all. This all very old and time-tested stuff.

[Dan H.]

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Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea.

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments.

I would definitely be interested to see your specifics with this strategy.

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today).

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

Are you allocating $240/month on a duplex for vacancy, maintenance, cap ex? If not, where is the cap ex costs? This would be $120 per unit for vacancy, maintenance, and cap ex. If so, you are orders of magnitude low. The maintenance/cap ex per unit is higher than you allocated for the entire property and destroys the return at these low rent points ($800/month per unit) long term.

Do you not include misc expenses such as bookkeeping, asset protection, accounting/tax prep, etc? A year ago my asset protection cost doubled over night. I now spend $5.8k on umbrella policy and $800 on LLC for a total of $6.4k for asset protection (divided across my unit count). I include these type of charges in my misc. misc also includes unexpected charges such as water charge associated with a leak such as a slab leak.

In addition, at this rent point you will find it difficult to get a PM at 10% all inclusive (including tenant placement, inspections, lease renewals, etc). At 10% the PM would get $80/unit. I do not believe they can place a tenant inclusive of $80/unit.

At that purchase price, historically the appreciation has not kept up with inflation. This implies that in inflation adjusted dollars, the property value is declining. This declining value affects the return and should be noted in any pro forma calculations.

The rent has the same issue. At $800/unit, the rent likely is not keeping up with inflation. This implies that cash flow growth historically is non existent in inflation adjusted terms. so the $122/unit cash flow is unlikely to increase in inflation adjusted value

It appears that numerous expenses are missing, the property historically has depreciated in inflation adjusted dollars, and even with the expenses you provided, it cash flows $122/unit To me this does not justify the effort of owning residential units. I would not even spend effort to get docs together for the purchase and go through effort of acquiring financing for that unit cash flow (which also does not seem likely to ever increase in inflation adjusted terms)

There is no way I would recommend the property you referenced for an OOS investor from CA. It could be a good purchase for a local investor who can be more hands on.

Best wishes

Thanks for you response, Dan. I think that you're correct: in this interest rate environment, small variations in costs like the ones you've mentioned can easily eat up your cashflow. So I'll make a tweak. If I were actually going to use this strategy, I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow. I'll reiterate my general point: it's a viable and sensible strategy to refi properties in high-cost, low-cashflow states and use the funds to invest in low-cost, high-cashflow states. Many have done it and it's a timeworn path.

Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest (I don't own anything in Peoria, by the way). My overall point remains, again: OP can refinance her California property to acquire a number of out of state properties with modest cash flow that will make her wealthy over time.

I take issue with one thing you wrote: how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before. https://www.zillow.com/home-values/19903/peoria-il/

Maybe there's a market somewhere in the US where home price increases haven't kept pace with inflation over time, but it certainly would be an exception, and this market is not.

Regarding asset protection, it's up to OP and her team to decide, but I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. Yes, if OP is a California resident and decides to use an LLC, it's $800/yr. Every other state I believe is far cheaper. Also not needed while just starting out. I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

Generally, again, refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point. I just started out by trying to say that and then someone started absolutely raking me over the coals. So sure, to ensure cashflow, do something in addition to what I described at first: Airbnbs, flip something, improve something, manage something yourself... my general point absolutely stands.

Also, this is only ONE WAY that OP might go about things. Unlike others here, I'm not trying to say it's my way or the highway. I'm talking modest cashflow and wealth-building over time, and my strategy is valid for that. If OP wants something else, she can do something different.

>I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow.

Do you have any STRs? I suspect I am in top 20 on BP site in terms of STR longevity (first 2 STRs were in 1999). In my market, STR with pm, utilities, and furnishing costs is about on par with LTR without PM. Every market I have looked at gets tight with use of a pm. I pay pm 25% so if I self managed, I would have greater profit than LTR but it is work and takes time. I get well compensated for working, so I choose not to self manage the STRs. Note self managing will impact the ability to scale. My point is STRs have challenges.

>Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest

It is orders of magnitudes too low. First reference look at average apartment maintenance/cap ex which NAR publishes. Realize that is with maintenance staff, benefits of large volume,etc. Alternatively you can fill out a life/cost for each item spreadsheet to determine your cost. What would a water heater replacement cost for OOS investor? Divide by 144 to determine monthly expense then multiply by 2 for the duplex. Do refrigerator, range, faucets, toilets, kitchen, flooring, bathrooms, rough plumbing, siding, roof, HVAC, fencing, rough electrical, hardscape. Everything has a lifespan and replacement cost. You are I suspect at least 3x low.

>how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before.

10 years is not long term. You can look at building cost and know that property has depreciated in inflation adjusted dollars since build. Neighborhoodscout shows it has appreciated 1.95% annually for this century which as I indicated is long term appreciation below the rate of inflation. https://www.neighborhoodscout.com/il/peoria/real-estate

>I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. 

My umbrella policy is far greater than what most people need and far more costly but it is distributed across all my units and includes a fleet of vehicles and other toys.  However, I recommend asset protection for all landlords.   It is worth the cost when $hit happens.   I suspect that a $0.5m policy on small number of assets would be about 10% of what I pay.  

>I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

I self manage my LTR properties but still include pm in my underwriting.   I deserve to be paid for all work and want to know I can pay someone to do the work if I decide I no longer desire to be the pm.  You can do the taxes and bookkeeping but what about as you scale? 10 units might be ok.  20 units and it gets difficult and doing the job yourself may be costing you lost tax benefits.  50 units, the bookkeeping would likely be a full time job.  So it is important to show the cost in the underwriting otherwise when you hire out the work you could have an under performing property.  

>refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point.

I think I am in the few.  Last time I saw an underwriting in Midwest market that I believed was worth the risk and effort for an OOS Ca investor with low unit count was before the rates increased.   Note I am not saying it cannot work for hands on local investor or a large volume OOS investor such as bob stevens.  I also believe local investors can more easily manage value adds providing another option.   

note, I believe it is a tough RE market everywhere.   i can find flips that would work, but flipping is a job.   New development can work but also a job.   Brrrr do not work for me after the refi as in my market they are very cash negative (using my underwriting, not at $120/unit for vacancy, maintenance and cal ex).   I have not purchased in 2.5 years (I purchased $4m in Dec 2021) which is my longest duration without purchase since 2010.  My point is that  do not show your examp,e to be worthy for CA OOS investor just means it is like the other properties I have analyzed in the last couple of years.

Best wishes

Yep, I do have short term rentals that I manage myself. Mine certainly make more than my long-term rentals. I brought that up as one means of dealing with thin cash flow, which is simply a fact of life under current conditions no matter what you do. It's far from unique to the scenario I've described. Everything has its pros and cons. I'm not saying you should self-manage 25 properties, but certainly managing 3-5 isn't a big deal and can be done while holding down a job. It's just an *option* that someone could choose to protect their cashflow when they have other properties that are only barely making money.

So you think that capex, maintenance, and vacancy should be 45%??? Then nothing in this country is ever going to cash flow. That's just going way overboard. If you want to put it at 25%, I won't say you're nuts. 45%, though, is nuts.

It is simply a fact of the US economy that the growth of housing prices outstrips inflation by far, and so does rent growth. These are some of the basic premises of real estate investing. You can take the last 25 year period most places and price growth wasn't amazing. The reason is that the period from 2000-2015 was pretty flat. But if you want to go long term, really go long term. This is an odd thing to have to argue with a real estate investor. Properties appreciate over time above and beyond inflation. Could you end up in a 25-year period with growth under inflation? Sure, you could. As investors, we take on risk. This being the case, should people just put their money in bonds?

Right, if you have significant assets on top of your investments, you should have an umbrella. But there's no way someone in OP's situation needs one that costs $5k. I agree, a $.5 million umbrella might be like $500 a year which is reasonable if you have a few properties, along with significant other assets someone could take in a lawsuit.

Okay, again, in a situation like OP's, she can just do her bookkeeping and taxes herself. She's hardly in the position of needing a full-time accountant. If we're talking 50 units, then she needs to hire someone, but that's not the situation.

Well, I have investments in both California and the Midwest and it works for me. I'm not just here blowing smoke. It's almost always better to stay local, but it's different when you live somewhere like California or New York and are just starting out. Can you point me to a property in the LA area that I can put 15% down and cashflow on? Maybe there's some shack somewhere that is technically habitable that would? It's far, far from a normal situation. In, say, Indiana, Kentucky, Ohio, and Illinois--more states than that, actually basically the entire Midwest and South--this is relatively easy to achieve. So that's why I say people in California who want to invest should give that a strong look. There are many, many already doing this, too, not like I just pulled it out of my rear end this morning. Again, every single choice has its pros and cons. A good PM is absolutely key.

BRRR is absolutely my business model in the Midwest and it works. I would not do it in California, at least not without major modifications.

My way is just one way. It works. If people don't want to deal with long-distance landlording, I think that's totally fine.

Jeez, I really feel like I'm going through the Spanish Inquisition over basic stuff everyone does all the time. I'm really not saying anything new at all. This all very old and time-tested stuff.

 >So you think that capex, maintenance, and vacancy should be 45%??? Then nothing in this country is ever going to cash flow. That's just going way overboard. If you want to put it at 25%, I won't say you're nuts. 45%, though, is nuts.

Not in general but for $800/month units, I believe it should be at least 45%. I can back it up via two different means (NAR data or spreadsheet of replacement cost and lifespan). The reality is maintenance/cap ex is not a function of the rent and using any fixed percentage based on rent is flawed. In fact, in some case maintenance/cap ex has inverse relationship to rent.

Same 3/2, 1200' SFH with similar finishes, yard, etc. one is in class b area and one in in class d area. We will use my market rents but suspect the percentages are similar in other markets. Class b ~$4500. Class d ~$3k. Which do you think will typically have the higher maintenance/cap ex?

By location, 2/2 ocean 800’ ocean front class b+ for ~$6k, versus Inland class b+ 4 br, 3 ba 3000’ is $6k.  Which do you think will typically have the higher maintenance/cap ex?

Maintenance/cap ex is primarily a function of unit features and tenant quality and not a function of the rent.  

Part costs are similar nationally.   Labor rates vary, but not so substantially to be as big an impact as property features and tenant quality.  

So what does this mean for $800 units? 1) expenses other than P&i will be far higher than 50% rule 2) properties need rent to purchase cost ratio far higher than 1% (1% rule) to have positive cash flow for a high LTV purchase at current rates. 3) they likely have long term rent growth below the rate of inflation 4) PM likely has to be significantly higher than 10% all in costs. 5) they simply will never generate return that should be of interest to CA OOS investor.

Let’s say rates were 3% like 3 years ago, I still would not recommend the referenced sample for OOS Ca RE investor.   Why?   Because positive cash flow would be small.  Likely below $100/unit with accurate underwriting.  The cash flow would increase slower than inflation because rents are increasing slower than inflation.   The appreciation being lower than inflation has the property declining in value in inflation adjusted dollars (as reflected in neighborhoodscout data).  So $100/unit decreasing in inflation adjusted dollars with time and a property loosing value in inflation adjusted dollars.  There is work and risk owning residential units.   Why invest in something that has risk and requires work unless you can envision a path for it to improve your life?  I see no path for the referenced property to substantially improve a CA OOS RE investor’s life but I can see numerous ways for it to negatively impact their life (including one real bad tenant that does not pay and destroys the place).   

>BRRR is absolutely my business model in the Midwest and it works. I would not do it in California, at least not without major modifications.

Prior to the rate increases, I was doing brrrr in CA and recommend value adds be performed in high cost of living (HCOL) locations because the value add (rehab) will generate a higher return.  In May, I completed a rehab.   It was my most over budget ever.   There were numerous reasons including I was cocky (I expected with my level of rehab experience I would never bust budget substantially).   However I still did alright because it was in a HCOL.  In that area, a half bath adds $50k of value (mission beach).   How much would it add to those Peoria units?   Probably less than $5k.   So in HCOL areas my effort results in substantially higher value added compared to LCOL areas.

again I am not stating this unit cannot work for a hands on local RE investor or an OOS investor that has large volume (lots of little cash flow can add up).  For the OP at current rates, it would be a poor investment.  

By the way the OP purchased for 240k.  11 years later it is worth $686k.  That equates to $3378/month of appreciation.  Compare that to $122/montn cash flow (that was done with poor underwriting).   $3378 monthly appreciation can be life changing.  

for my local (San Diego area) purchases, my worst appreciation is $2700/month.  My best is over $10k month.   That can be life changing.   

Best wishes

[Mike Day]

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Interesting. I'd probably take out a HELOC and use it to invest in rentals out of state. $400k could be the down payment on eight small houses in the Midwest. This is your best cashflow option since nothing other than the situation you've lucked into is going to cashflow in California. This also allows you to keep the incredibly low-interest loan you currently have, and to only use the funds as you need them to acquire each new property.

This probably isn't a great idea.

Yes, she could put 25% down on a handful of midwest properties that might cash flow but then what? They aren't going to be cash flowing enough to cover the HELOC payments. And she'll be borrowing money at a higher rate of return than he'll earn from the properties he'll buy.

Using a HELOC is only smart if you have a plan to pay it back. That often means flips or BRRRR's where you're going to leave a fair bit less than 25% of the ARV in the deal.

Anna, a 1031 isn't an option since this is your primary residence. I'm sure if you moved out and bought something else, turning this home into a rental, there's probably an ability to do that down the road. But if you're married you'd get $500k tax free upon the sale of this home anyway. If you're single, that number is $250k.

Another option would be to pull a HELOC and use that to put as little money as possible down on a duplex that you could house hack. Then move into that and use the rental income from this home and the second duplex unit to aggressively pay down the HELOC.

I'm all for out-of-state investing in the Midwest (I own 12-doors in Detroit from California) but you have to be really smart about how you approach it. And if you have the option to stay local you likely should.

If you think that properties in the Midwest won't be cash flowing enough to cover both HELOC and mortgage payments, maybe you should run the numbers again. I primarily invest in the Midwest and you can easily gain a little cashflow from this strategy while also benefitting from appreciation. I'd be glad to get into specifics.

I disagree with the idea that using a HELOC is smart only if you have a plan to pay it back. It's smart if you plan to hold the debt and can generate cashflow, like any other loan. I suggested a HELOC mainly because it wouldn't be necessary to pay off OP's low-interest first mortgage, and because the strategy I recommended involves investing in multiple properties over time, for which the flexibility of a HELOC is ideal.

I'm not sure what your experience is investing in LA, but there' s no cashflow to be had here (I'm here at the moment). Staying local isn't an option unless you are already wealthy and can buy properties either entirely in cash or with significant down payments.

I would definitely be interested to see your specifics with this strategy.

Today, a HELOC is going to hit you with a 9% interest rate.

Let's take a very typical example of a $100k house in a market like Detroit and assume 25% down with a 7% interest rate. I know these types of deals well as I've done over 60 of them in the last 12 months working with out of state investors.

These will rent for $1,200 - $1,300/mo and your costs would be:

- Mortgage payment = $499/mo

- Property taxes = $200/mo

- Property management = $120 - $130/mo (10% gross rents)

- Insurance = $75/mo

- Capex/vacancy/repairs = $180 - $195/mo (assumes 15% gross rents)

- Interest payment on HELOC = $187.50/mo (assumes interest only at 9% for $25k borrowed)

Total costs = $1,261.50 - $1,286.50

On the low end of our rent range you're losing $61.50/mo. On the high end you're positive $13.50/mo.

This also assumes you can buy a turnkey property for $100,000 without having to put anything else into it (unlikely today).

And then you'll need to work to pay down that HELOC balance... remember these are interest only payment assumptions.

Please don't tell anyone this is a good idea!

Glad you asked.

In somewhere like Peoria, IL, OP could buy a duplex with 2br 1ba x 2 for $115k. Feel free to search the MLS and you'll find several similar places.

It should bring in the neighborhood of $1600 a month in rent. We'll deduct 15% of that to account for vacancy and maintenance--we're now at $1,360 in monthly income.

We'll need to put down 30% as it's a multifamily investment, thus the amount financed will be $80,500. Assuming a current typical interest rate of 7%, principal and interest will run $536 a month. Given that the down payment was financed on a HELOC, we need to deduct interest on that as well. I currently have a HELOC at 8.5%, so that's the figure I'm going to use. 8.5% interest on the down payment of 34,500 runs $244 a month.

Other expenses:

- Property taxes: quite high in Illinois, perhaps around $237/mo

- Property mangement: $160/mo (there may be cheaper managers, but whatever, we'll go with your 10%)

- Insurance: $65/mo

And what do you know, we're at $118/mo positive cash flow. OP also gains from appreciation and eventually recaptures principal and capital expenditures. It's hard to quantify these but let's say around $6.5k a year. So OP gains to the tune of $8k annually from each property purchased in this way. Given that they have enough down payments for around 13 such properties, a strategy like this could make OP a wealthy person. You do the math as far as what the actual annual gain is. Cashflow is likely to be better if OP does this in '25 due to lower interest rates. Or they can do it now and refinance later on.

I'm not just "telling someone it's a good idea," I actually do this. So don't go around telling people I'm giving bad advice.

I also think your idea that you have to work to pay off the HELOC is wrong. Why should you when you're cashflowing? A HELOC is not a special loan that has to be paid off ASAP. The bank will love to collect the interest payments on it and you'll love the profit.

Are you allocating $240/month on a duplex for vacancy, maintenance, cap ex? If not, where is the cap ex costs? This would be $120 per unit for vacancy, maintenance, and cap ex. If so, you are orders of magnitude low. The maintenance/cap ex per unit is higher than you allocated for the entire property and destroys the return at these low rent points ($800/month per unit) long term.

Do you not include misc expenses such as bookkeeping, asset protection, accounting/tax prep, etc? A year ago my asset protection cost doubled over night. I now spend $5.8k on umbrella policy and $800 on LLC for a total of $6.4k for asset protection (divided across my unit count). I include these type of charges in my misc. misc also includes unexpected charges such as water charge associated with a leak such as a slab leak.

In addition, at this rent point you will find it difficult to get a PM at 10% all inclusive (including tenant placement, inspections, lease renewals, etc). At 10% the PM would get $80/unit. I do not believe they can place a tenant inclusive of $80/unit.

At that purchase price, historically the appreciation has not kept up with inflation. This implies that in inflation adjusted dollars, the property value is declining. This declining value affects the return and should be noted in any pro forma calculations.

The rent has the same issue. At $800/unit, the rent likely is not keeping up with inflation. This implies that cash flow growth historically is non existent in inflation adjusted terms. so the $122/unit cash flow is unlikely to increase in inflation adjusted value

It appears that numerous expenses are missing, the property historically has depreciated in inflation adjusted dollars, and even with the expenses you provided, it cash flows $122/unit To me this does not justify the effort of owning residential units. I would not even spend effort to get docs together for the purchase and go through effort of acquiring financing for that unit cash flow (which also does not seem likely to ever increase in inflation adjusted terms)

There is no way I would recommend the property you referenced for an OOS investor from CA. It could be a good purchase for a local investor who can be more hands on.

Best wishes

Thanks for you response, Dan. I think that you're correct: in this interest rate environment, small variations in costs like the ones you've mentioned can easily eat up your cashflow. So I'll make a tweak. If I were actually going to use this strategy, I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow. I'll reiterate my general point: it's a viable and sensible strategy to refi properties in high-cost, low-cashflow states and use the funds to invest in low-cost, high-cashflow states. Many have done it and it's a timeworn path.

Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest (I don't own anything in Peoria, by the way). My overall point remains, again: OP can refinance her California property to acquire a number of out of state properties with modest cash flow that will make her wealthy over time.

I take issue with one thing you wrote: how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before. https://www.zillow.com/home-values/19903/peoria-il/

Maybe there's a market somewhere in the US where home price increases haven't kept pace with inflation over time, but it certainly would be an exception, and this market is not.

Regarding asset protection, it's up to OP and her team to decide, but I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. Yes, if OP is a California resident and decides to use an LLC, it's $800/yr. Every other state I believe is far cheaper. Also not needed while just starting out. I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

Generally, again, refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point. I just started out by trying to say that and then someone started absolutely raking me over the coals. So sure, to ensure cashflow, do something in addition to what I described at first: Airbnbs, flip something, improve something, manage something yourself... my general point absolutely stands.

Also, this is only ONE WAY that OP might go about things. Unlike others here, I'm not trying to say it's my way or the highway. I'm talking modest cashflow and wealth-building over time, and my strategy is valid for that. If OP wants something else, she can do something different.

>I would make a couple of the units Airbnbs to ensure I didn't dip into negative cashflow.

Do you have any STRs? I suspect I am in top 20 on BP site in terms of STR longevity (first 2 STRs were in 1999). In my market, STR with pm, utilities, and furnishing costs is about on par with LTR without PM. Every market I have looked at gets tight with use of a pm. I pay pm 25% so if I self managed, I would have greater profit than LTR but it is work and takes time. I get well compensated for working, so I choose not to self manage the STRs. Note self managing will impact the ability to scale. My point is STRs have challenges.

>Regarding some of the specifics,15% for capex, maintenance, and vacancy is on the low side, sure. Call it a best case scenario if you'd like but I don't think it's "orders of magnitude" low, and I've got plenty of experiencing investing in this type of property in the Midwest

It is orders of magnitudes too low. First reference look at average apartment maintenance/cap ex which NAR publishes. Realize that is with maintenance staff, benefits of large volume,etc. Alternatively you can fill out a life/cost for each item spreadsheet to determine your cost. What would a water heater replacement cost for OOS investor? Divide by 144 to determine monthly expense then multiply by 2 for the duplex. Do refrigerator, range, faucets, toilets, kitchen, flooring, bathrooms, rough plumbing, siding, roof, HVAC, fencing, rough electrical, hardscape. Everything has a lifespan and replacement cost. You are I suspect at least 3x low.

>how has the property historically depreciated in inflation adjusted dollars? Over the last ten years, inflation has been about 3%, and I can't find appreciation numbers for Peoria that allow for a one-to-one comparison, but homes seem to have appreciated about 50% since the pandemic while holding basically steady for a few years before.

10 years is not long term. You can look at building cost and know that property has depreciated in inflation adjusted dollars since build. Neighborhoodscout shows it has appreciated 1.95% annually for this century which as I indicated is long term appreciation below the rate of inflation. https://www.neighborhoodscout.com/il/peoria/real-estate

>I don't think she's going to need more than a single insurance policy while just starting out. Certainly not an umbrella costing $5.8k a year. It doesn't make sense for an investor acquiring their first few properties to destroy their cashflow with an expensive policy like that which is designed to protect significant wealth. 

My umbrella policy is far greater than what most people need and far more costly but it is distributed across all my units and includes a fleet of vehicles and other toys.  However, I recommend asset protection for all landlords.   It is worth the cost when $hit happens.   I suspect that a $0.5m policy on small number of assets would be about 10% of what I pay.  

>I also personally do my taxes and bookkeeping myself and have $0 expenses. It's not hard to do that stuff yourself.

I self manage my LTR properties but still include pm in my underwriting.   I deserve to be paid for all work and want to know I can pay someone to do the work if I decide I no longer desire to be the pm.  You can do the taxes and bookkeeping but what about as you scale? 10 units might be ok.  20 units and it gets difficult and doing the job yourself may be costing you lost tax benefits.  50 units, the bookkeeping would likely be a full time job.  So it is important to show the cost in the underwriting otherwise when you hire out the work you could have an under performing property.  

>refinancing in California and purchasing more properties in low-cost areas does allow for building wealth over time without losing money. I think few would argue that that's wrong. That's my point.

I think I am in the few.  Last time I saw an underwriting in Midwest market that I believed was worth the risk and effort for an OOS Ca investor with low unit count was before the rates increased.   Note I am not saying it cannot work for hands on local investor or a large volume OOS investor such as bob stevens.  I also believe local investors can more easily manage value adds providing another option.   

note, I believe it is a tough RE market everywhere.   i can find flips that would work, but flipping is a job.   New development can work but also a job.   Brrrr do not work for me after the refi as in my market they are very cash negative (using my underwriting, not at $120/unit for vacancy, maintenance and cal ex).   I have not purchased in 2.5 years (I purchased $4m in Dec 2021) which is my longest duration without purchase since 2010.  My point is that  do not show your examp,e to be worthy for CA OOS investor just means it is like the other properties I have analyzed in the last couple of years.

Best wishes

Yep, I do have short term rentals that I manage myself. Mine certainly make more than my long-term rentals. I brought that up as one means of dealing with thin cash flow, which is simply a fact of life under current conditions no matter what you do. It's far from unique to the scenario I've described. Everything has its pros and cons. I'm not saying you should self-manage 25 properties, but certainly managing 3-5 isn't a big deal and can be done while holding down a job. It's just an *option* that someone could choose to protect their cashflow when they have other properties that are only barely making money.

So you think that capex, maintenance, and vacancy should be 45%??? Then nothing in this country is ever going to cash flow. That's just going way overboard. If you want to put it at 25%, I won't say you're nuts. 45%, though, is nuts.

It is simply a fact of the US economy that the growth of housing prices outstrips inflation by far, and so does rent growth. These are some of the basic premises of real estate investing. You can take the last 25 year period most places and price growth wasn't amazing. The reason is that the period from 2000-2015 was pretty flat. But if you want to go long term, really go long term. This is an odd thing to have to argue with a real estate investor. Properties appreciate over time above and beyond inflation. Could you end up in a 25-year period with growth under inflation? Sure, you could. As investors, we take on risk. This being the case, should people just put their money in bonds?

Right, if you have significant assets on top of your investments, you should have an umbrella. But there's no way someone in OP's situation needs one that costs $5k. I agree, a $.5 million umbrella might be like $500 a year which is reasonable if you have a few properties, along with significant other assets someone could take in a lawsuit.

Okay, again, in a situation like OP's, she can just do her bookkeeping and taxes herself. She's hardly in the position of needing a full-time accountant. If we're talking 50 units, then she needs to hire someone, but that's not the situation.

Well, I have investments in both California and the Midwest and it works for me. I'm not just here blowing smoke. It's almost always better to stay local, but it's different when you live somewhere like California or New York and are just starting out. Can you point me to a property in the LA area that I can put 15% down and cashflow on? Maybe there's some shack somewhere that is technically habitable that would? It's far, far from a normal situation. In, say, Indiana, Kentucky, Ohio, and Illinois--more states than that, actually basically the entire Midwest and South--this is relatively easy to achieve. So that's why I say people in California who want to invest should give that a strong look. There are many, many already doing this, too, not like I just pulled it out of my rear end this morning. Again, every single choice has its pros and cons. A good PM is absolutely key.

BRRR is absolutely my business model in the Midwest and it works. I would not do it in California, at least not without major modifications.

My way is just one way. It works. If people don't want to deal with long-distance landlording, I think that's totally fine.

Jeez, I really feel like I'm going through the Spanish Inquisition over basic stuff everyone does all the time. I'm really not saying anything new at all. This all very old and time-tested stuff.

 >So you think that capex, maintenance, and vacancy should be 45%??? Then nothing in this country is ever going to cash flow. That's just going way overboard. If you want to put it at 25%, I won't say you're nuts. 45%, though, is nuts.

Not in general but for $800/month units, I believe it should be at least 45%. I can back it up via two different means (NAR data or spreadsheet of replacement cost and lifespan). The reality is maintenance/cap ex is not a function of the rent and using any fixed percentage based on rent is flawed. In fact, in some case maintenance/cap ex has inverse relationship to rent.

Same 3/2, 1200' SFH with similar finishes, yard, etc. one is in class b area and one in in class d area. We will use my market rents but suspect the percentages are similar in other markets. Class b ~$4500. Class d ~$3k. Which do you think will typically have the higher maintenance/cap ex?

By location, 2/2 ocean 800’ ocean front class b+ for ~$6k, versus Inland class b+ 4 br, 3 ba 3000’ is $6k.  Which do you think will typically have the higher maintenance/cap ex?

Maintenance/cap ex is primarily a function of unit features and tenant quality and not a function of the rent.  

Part costs are similar nationally.   Labor rates vary, but not so substantially to be as big an impact as property features and tenant quality.  

So what does this mean for $800 units? 1) expenses other than P&i will be far higher than 50% rule 2) properties need rent to purchase cost ratio far higher than 1% (1% rule) to have positive cash flow for a high LTV purchase at current rates. 3) they likely have long term rent growth below the rate of inflation 4) PM likely has to be significantly higher than 10% all in costs. 5) they simply will never generate return that should be of interest to CA OOS investor.

Let’s say rates were 3% like 3 years ago, I still would not recommend the referenced sample for OOS Ca RE investor.   Why?   Because positive cash flow would be small.  Likely below $100/unit with accurate underwriting.  The cash flow would increase slower than inflation because rents are increasing slower than inflation.   The appreciation being lower than inflation has the property declining in value in inflation adjusted dollars (as reflected in neighborhoodscout data).  So $100/unit decreasing in inflation adjusted dollars with time and a property loosing value in inflation adjusted dollars.  There is work and risk owning residential units.   Why invest in something that has risk and requires work unless you can envision a path for it to improve your life?  I see no path for the referenced property to substantially improve a CA OOS RE investor’s life but I can see numerous ways for it to negatively impact their life (including one real bad tenant that does not pay and destroys the place).   

again I am not stating this unit cannot work for a hands on local RE investor or an OOS investor that has large volume (lots of little cash flow can add up).  For the OP at current rates, it would be a poor investment.  

By the way the OP purchased for 240k.  11 years later it is worth $686k.  That equates to $3378/month of appreciation.  Compare that to $122/montn cash flow (that was done with poor underwriting).   $3378 monthly appreciation can be life changing.  

for my local (San Diego area) purchases, my worst appreciation is $2700/month.  My best is over $10k month.   That can be life changing.   

Best wishes

Okey doke, so let's say there's no cashflow on this or even slightly negative cashflow due to higher than expected capital expenditures. I mean, I own properties like this so I can tell you 45% for vacancy/maintenance/capex is way overboard. For all my disagreements with Travis I think he was on the same page with me on that. However, like I said, if I were to actually carry out the strategy I basically "back-of-the-enveloped" this morning, I would add some ingredient involving greater effort and greater likely profit, such as short-term rentals, to guarantee positive cashflow.

Let's look at the position a hypothetical investor like OP would be in if she actually bought 13 multi-family properties like the ones I described. Let's say they have $0 cash flow as long-term rentals, but she does get some positive cashflow by self-managing three units herself as short-term rentals. Three units shouldn't be an unmanageable workload for most people. It isn't unrealistic at all to expect $15k cash flow from that and that provides a cushion in case of other issues with the long-term rentals. Let's also assume 4% appreciation and let's say 10% of the rent goes to capital expenditures and 1% consists of principal that will eventually go back into the investor's pocket. All this is extremely rough, or I'd be going on for pages. So, gains outside of cashflow are 4% of $1,495,000 annually (13 properties costing $115k each), or $59,800, plus 11% of $249,600 ($1600 in monthly rent x 13 properties), or $27,456. Total of $87,256 in non-cashflow gains.  This investor would have fairly modest cashflow but be gaining six figures annually in total. Is this a position you'd tell someone not to get into?? Again, these numbers are far from exact. I don't have time to get to a granular level with this. It should still be clear this is an excellent situation. And I'm not counting the appreciation on the Compton house, which she's keeping. Another $40k maybe. So she's well into the six figures, even if my rough figures are off.

I'm curious about what you do actually recommend to someone in OP's position?? I haven't seen anything concrete. It looks like so far you've recommended 1) sit on it and let it appreciate (what can she hope to gain, maybe $40k a year?), 2) value add (you didn't say what, such as building an ADU on it? not a terrible idea, but the money can be put to much better use), 3) short-term rental, which is also part of what I proposed and which weirdly you argued against when I proposed it. By the way, if she stays local like you've recommended, her equity isn't enough to buy a suitable property for an STR, maybe (maybe) only a poorly maintained rental house in the absolute pits of south LA that is absolutely unsuited to Airbnb which guests will promptly one-star into oblivion.

I've just noticed I'm the only one in this thread to actually offer a concrete plan. Everyone else says nothing works or puts forth plans that are both very modest and very vague. OP doesn't have to do what I said, by any means, but I think she should understand the principles behind it and take action on her own--these principles are guiding in a better direction than anything anyone else has offered.

Some of your points have been valid, but the part about rent and appreciation not outpacing inflation is, plainly, hogwash. If that were true, it would literally be better to put your money in savings bonds and no one would invest in real estate.

Another thing you're saying that's way, way off:

By the way the OP purchased for 240k. 11 years later it is worth $686k. That equates to $3378/month of appreciation. Compare that to $122/montn cash flow (that was done with poor underwriting). $3378 monthly appreciation can be life changing.

You seem to be comparing the appreciation on OP's current CA property to the cashflow on a single Midwestern property when we've already clarified that she could refi and buy 13 of those. Assuming no cashflow on the Compton property seems sensible, but the Midwestern properties would have both (modest) cashflow and appreciation. You seem to want to dispute that, but home prices have approximately quintupled since 1980 in Illinois, where the initial example was set. https://fred.stlouisfed.org/series/ILSTHPI

You picked a 25-year period where they didn't, at least in Peoria, but my point remains that that's exceptional.

The correct comparison is a couple/few thousand a month in appreciation if the Compton house is the only property owned vs. something like $12k a month with the plan I've described. Should be pretty obvious that appreciation is going to be higher on $1.5m of real estate anywhere in the country vs. $700k in Compton, even though Compton's rate of appreciation is higher. But actually, that's not even the right comparison, because with my plan she keeps the Compton house.

[V.G Jason]

Sell California, buy midwest.

Not sure what more I need to say but you're going to the wrong direction.