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Updated almost 6 years ago on . Most recent reply

User Stats

72
Posts
40
Votes
Derek Sperzel
Pro Member
  • Rental Property Investor
  • Jeffersonville, IN
40
Votes |
72
Posts

Weigh in on my plan to increase liquidity pre-correction

Derek Sperzel
Pro Member
  • Rental Property Investor
  • Jeffersonville, IN
Posted

With all the talk of a Real Estate Correction looming, we've been self-educating, and considering different ways to prepare.  We understand that being highly liquid is especially critical for acquiring deals during an economic downturn.  We personally need to make a choice regarding our future liquidity, and we're asking the BP Community to weigh in with their thoughts.  

We have a recently completed flip under contract, and should be closing in the next few weeks(fingers-crossed). We own the flip "free-and-clear" and do not plan to immediately reinvest this capital. For some background, we typically use the BRRRR Strategy, we focus on SFH, and only flip houses when a property doesn't meet our buy-and-hold criteria. We anticipate that after closing costs, commissions, and taxes, we should take home approximately $195k on this deal (acquisition cost, rehab, & profit). In our market (Southern Indiana/Louisville, KY) that is enough capital to take on as many as two more small/medium SFH BRRRR deals without leverage (we prefer delayed financing).

We are not risk adverse, so we thought, how can we leverage this upcoming cash position? We owe about $165k on our personal residence, it should appraise for around $285k, and that means we've got about $120k in equity. If we pay off our mortgage, it would allow us to establish a HELOC for about $256,500 based on 90% LTV. In essence we'd be increasing our accessible cash position from $195,000 up to $256,500, which is an increase of $61,500, or 31.5% change in cash(256,500 - 195,000 / 195,000). Obviously HELOC's comes with a variable rate, but we also would be saving money that would have otherwise been consumed in the form of interest payments on our existing mortgage. Given our current business model (BRRRR), we usually can pull most of our initial investment back out in 6-7 months through a refinance.

We'd love for you all to give us your thoughts on this strategy, what you would do in our position, and why.  Thanks in Advance!

  • Derek Sperzel
  • Most Popular Reply

    User Stats

    72
    Posts
    40
    Votes
    Derek Sperzel
    Pro Member
    • Rental Property Investor
    • Jeffersonville, IN
    40
    Votes |
    72
    Posts
    Derek Sperzel
    Pro Member
    • Rental Property Investor
    • Jeffersonville, IN
    Replied

    @Chris Mason That makes a lot of sense, and we like not giving a lender the ability to "handcuff" our capital via ceasing draws against a HELOC. It seems like a compromise my be the prudent play here, whereas we'd keep the cash proceeds in a liquid low risk investment until we identify our next deal, and also utilize a HELOC to leverage the $120,000 of current equity we have. Even if the banks tighten up post-correction, we should be in a strong cash position to reap the opportunities that come our way. We will also continue refinancing out our initial investments as we've been doing. Thank you all for your input.

  • Derek Sperzel
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