Rental properties with equity, now what?

Question

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Hi,
First of all I can't say thank you enough for this message board. I've been a landlord/investor for 3 years winging it more or less (usually less) on my own.

Here are a few questions regarding my situation that I hope you can help me with and that may also help others:

Scenario:  I own 7 rental properties that I paid cash for, each worth approx 100,000 each with a cash flow of average 1,250/mo. (It may seem I paid alot, but these are California prices) I had to pay cash because I had no documented income at that time.   Now I can use the rentals as income because I've owned them for over 2 years.

My main question....where do I go from here?  I think I should start leveraging, so I'd like to cash out refi about $200,000 to purchase a few more properties.  (Out here, you need all cash to compete in that price range so getting a loan would seriously decrease my buying power.)

Would cashing out $50,000 in 4 or 5 properties be a sound move?  (Scary after having no debt).   And would having all those HELOCS effect my credit score  or just my income, in the case I want to buy a new private residence (where I might need a 30 year fixed) in a few years?

Thanks in advance for your insights.

Jon Holdman · Answer

Debbie Farmer, I have to question your numbers a little before giving any advice.  You say you're getting $1250 cash flow from properties worth $100K.  Even without any debt, that's quite an amazing figure.  Even if you're doing the management yourself, that translates into rents of about $1900 a month, over the long term.  Even for seven properties for three years, you may have done much better than that.  But if you're in this for the long haul, that's my guess at the rent you need to produce $1250 in cash flow.

OTOH, you later mention $200K properties that rent for $1600.  I'm guessing that $1250 is the rent from your properties, not the cash flow.  What are the actual rents your getting?

Assuming you can qualify, I would do a couple of things.  One is to do refis on the fewest possible properties.  Each will have a batch of loan costs.  Doing four refis for $50K each will be more expensive than three for $72K each.  Assuming they will actually appraise at $100K, getting a 75% loan should be possible.

If your intention is to grow your portfolio, and you don't need the income, I think this makes sense.  If you do need the income, then you need to do the math more carefully.

Debbie Farmer · Answer

@ Scott, I just realized I didn't answer all of your questions.  Here's an example on one property: purchase price 90,000 rehab $500 (it was a short sale so in good condition) and rented for 1595/mo.  No HOA. $150/mo in TI.

Debbie Farmer · Answer

Thanks Mike!  All good points.
Best,
Debbie

Debbie Farmer · Answer

@ Scott, these aren't condos, they are single family duets (sounds pardoxical, I know).  There are no HOA fees in the development. Insurance 40/mo and taxes approx 100/mo.

Unfortunately, other investors have caught on to my idea and it's next to impossible to get anything in that area nowadays for under $100,000.  My four bedroom duet that I purchased for 90,000 in 2009 (Note: my investments *averaged* 80,000 purchase price in case you were following the numbers in above posts) just sold for $145,000 - even though it's the worst area in town. It's a crazy market out there.

@ Jeff, thanks so much.  Your advice makes alot of sense.

Cheers,
Debbie

Mike H. · Answer

If you're worried about your credit score, a HELOC is typically a bad idea.  Not necessarily when you open it up - that might actually help. But if you were to use it all to buy a couple of houses, that will show up the same as a maxed out credit card.

Then again, as soon as you use it up, you can turn around and refi one of your other properties as a cash out (assuming you have less than 5 mortgages in your name) to pay them off and then they'll be available again.

But taking out a HELOC won't affect your credit at all. Maxing it out, on the other hand, will.

As for being overleveraged, if you have 7 houses paid off, you do not need to be worried about being overleveraged. Holy cow. That kind of cash flow eliminates just about any concern you should have as far as having enough of a rainy day fund for repairs or vacancies - especially at those rates.

I'd say go get a loan now to get that money ready because while prices may be higher today than where you bought, they're still far better than what they're going to be in the next couple of a years. Buy as much as you can today even at the higher prices - or you'll be kicking yourself later for not grabbing more.

You definitely have the cash flow you need to handle more.

If it were me, I would feel fantastic about having a ratio of one paid off house for every one I had a 70% mortgage on. Heck, I don't have a single home paid off or am even close to doing so and I have 17 houses. :-)

And while I understand the desire not be overleveraged, the bottom line is that there is no way I could grow a portfolio if I had to pay off the first house before I could buy a second.

Good luck and good bidding. But definitely don't be worried about your credit score for opening up a line of credit. And definitely do not be worried about being over leveraged. Not with the 7 houses you have already that are owned free and clear.

Jeff S. · Answer

Debbie Farmer having HELOC's aren't necessarily a bad thing as far as your score goes. It would be the potential payment that might reduce your ability to borrow. This is best answered by your lender.

If your priority is to buy a new home for yourself then I would probably do that first. Your best rates are going to be on an owner occ purchase. OTOH some people would like to have their home be F&C so in that case you might pull money from rentals to do that purchase. If it is to be a long-term loan then getting a fixed rate is preferable

Locking in low rates is to your advantage. HELOCs are adjustable but if you lock them in the rates are very high IMO.

Others on here are fine with mortgaging their homes for the best rates and have a F&C rental or 2. You want to have a philosophy that works for you.

Scott W. · Answer

are these condos? if so, how much for HOA? let's do 1 house as an example; how much for taxes & insurance? what was purchase price & the (even more) important rehab amount? how much rent do you get for that property?

Debbie Farmer · Answer

Thanks Jon! I really appreciate you sharing your expertise. :)   Yes, I got lucky.  However these properties are one side of a duet, but they are considered SFR since the other half is owned by a different owner and has it's own parcel number, etc.   A completely detached SFH that gets the same rent would sell for between 100,000-150,000.  Four are in a bad area so I try to get Section 8 tenants for those.  Before going into RE I used to teach first grade in that area so I know most of the families so it's not so scary....and no matter how frustrating landlording gets, it's easier than teaching 34 six year olds :)
Cheers,
Debbie

Jon Holdman · Answer

Debbie Farmer, that's roughly how I'd do the math.  If you're been getting $1250 a month in real cash flow from $1450 rents, you've been quite lucky.  That won't persist forever.

I think its difficult to get HELOCs on investment properties.  Plus they're at variable rates and short terms.  And I think they will affect your credit score whether you're using them or not, at least to some extent.  If you want to apply leverage (and I would, in your situation), I'd get 30 year fixed loans and lock in todays low rates.  $75K at 4% for 30 years is a P&I of $358.  That still leaves you cash flow $367 a month on the mortgaged property.

This are good deals - $80K for $1450 in rent.

Debbie Farmer · Answer

@ Jeff, I wanted to have HELOCs set up so I could jump when necessary, but didn't want it to bring down my credit score in the meantime if I end up not using the lines.

Rental properties with equity, now what?

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