How to Get Another?

Question

Hi all!

So....my husband and I own two rental properties, both of which we were able to purchase with a home equity line. We've owned one for 15 months and the other one for 4 months. Both of which have (very good) tenants.

We really, REALLY want to buy a third property ASAP but are at a dead end financially. We are paying down the line, with payments higher than what is required monthly, but the only way to obtain the third property that we see is to wait it out til we pay off more of our line (meaning it may be another 2-3 yrs before we can get another property).

Any suggestions out there? Many thanks!

Mike H. · Answer

I guess I'm not following the problem here.

You took out an LOC on your home to buy these two properties so neither one has a mortgage on them, correct?i.e. The LOC is on your primary residence?

Or did you use the LOC for a down payment on the other two homes and you do have mortgages on them?

Thats the key question you would need to answer.

If you used the LOC as the down payment, then you need to get creative. If you used it to pay off the houses in cash, then you just need to refinance them and pull cash out. At the end of the day, the LOC is on your primary so you would have no mortgages on those homes.

By creative, though, here is one option. Its still going to require about 15k in the bank. You have to have the reserves in the bank to get financing today. Find a deal where you can be all in (purchase plus rehab) at 70% ARV or better. Then find a hard money lender that will roll in the purchase and rehab costs into the loan. Get a hard money loan. After your rehab and rent the house, then do a rate/term refi - which is much easier than a cash out refi - to pay off the hard money loan.   Rinse and repeat.

You do need to hit those numbers though and I realize its not easy in many markets. But if you can, you will be able to stretch your capital much further using that technique.

Another option is to partner with someone that has the cash to do deals but maybe doesn't have the credit or income. 50% of something is better than 100% of nothing.

Christopher Morin · Answer

@Joe Villeneuve , what a creative and interesting method to free that cash that is otherwise tied up.  Clear benefits, and certainly with it's risks as well.  I imagine clear communication with your lender on what they will approve on a refinance is necessary, and a property that can cash-flow enough to cover the HELOC debt service so that the lender doesn't see your total expenses > income.  You do lock up the equity that you'll need for the refi though in the new place, so you can't free all the cash.

@Sarah Grise  I think I understand your concern, but if the goal is to increase cash flow beyond what you have currently with the 2 x rentals, then just a hard look at the before-and-after numbers.  If Joe's strategy frees the cash in the HELOC, and the end result is that you are able to purchase other properties and create more cash flow total than your current 2 rentals do, then you have a good deal and you should do it.  If you can't find properties with the cash that give you higher cash flow, then don't.

It's definitely a leap of faith to take a good, solid thing out of play trying to find an even better one.  As long as your ducks are in a row though, I think you'll be okay.

Joe Villeneuve · Answer

@Sarah Grise I think you're missing the big picture here.  Those two properties are actually holding your progress back by keeping them at this point.  They are what I refer to as shiny objects of distraction".

There's a famous expression for this, "Penny wise, pound foolish", or this one, "Stepping over dollars to pick up a penny".

Joe Villeneuve · Answer

One of the problems with buying sub $50k properties is you tie up all your cash since you can't refi to get the money back out...or at least at a % to make it worth it.  Having said that, you are actually in a great position...believe it or not.

I'll tell you what I would do...actually what I did long ago when I was in the same position.  This may sound counterproductive, but you end up miles ahead in the end...and it wa a very short "trip" to that end for me.

1)  Sell both properties to an investor to get your cash out...since you have no liens on the properties, you get all the cash.  I know.  Now you have to pay the LOC payments without the benefit of the income from these properties.  That won't be an issue if you are ready to move fast...as in step..

1a)  At the same time you are selling these two properties you are lining up another property, just one) that you will use the cash from the sales to buy.  This property must be bought so that you can refinance it and get all the cash back out of it.

2)  In the mean time, the cash flow from this one property should pick up where the previous two properties left off paying on your LOC...but, you have the cash back in your hands so you can...

3)  Buy the next deal, the same way you did in step #2.

4)  Now you have two deals that are bigger then the two deals you had before , and should be cash flowing better than the two deals you had before, and when you refinance this 2nd property, your take that cash and...

5) Get your next property...and so on.

The big keys here are you must find your lender that will do the refis for you as needed, and you have to have the next property ready to move on as soon as your refinance the previous one.

Sarah Grise · Answer

@Mike H - The LOC was used to fully purchase both of our rental properties, the only mortgage we have is for the home we live in.

Joe Villeneuve · Answer

@Christopher Morin Not so much a leap of faith, unless you went forward based on only the info I gave here.  There's more to it, but the rest is just supporting numbers that turn that "leap" into a short walk.

Maria Durflinger · Answer

OK. I hope to be in the same boat as Sarah in the next few years. We are in the process of purchasing our first rental property. Bought cheap, will need a rehab. Great location, Hope to have a great renter as Sarah has.  I see that since it is not bought for much (20k) that to refinance, you would only get squat out of it.  But if it is making income (I estimated getting my investment back in 4 years) Why sell? As of now, I plan to hold. You can't say this only leads to dead ends. Save save save and put 20% down on another? There must be more answers. I'm interested as well.

Sarah Grise · Answer

We are greatly benefitting from the rent and are not ready to let go of that just yet. We are 29 yrs old and have had both properties for a year or less. We would prefer to hang on to them for a little while longer.

Joe Villeneuve · Answer

@Sarah Grise You are sounding like someone that looks at the properties as a homeowner, not an investor.

Sarah Grise · Answer

Thanks for the detailed response, Joe. We most definitely do not want to sell the properties. We put a lot of blood sweat and tears into them and want to enjoy the consistent rent we're currently receiving on them.

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