What’s a better leveraging options for all experienced investors

[Dorian Guin]

I'm a relatively new investor, debating which strategy would work in leveraging some properties I own free and clear. But with recent changes in the markets I'd love to move in moderation. Options I'm considering is, would I be better off taking out HELOC options on the properties. Or taking out a mortgage on current properties that is already tenant occupied? Thanks in advance for all insight available.

[John Warren]

@Dorian Guin the real question is how do you want to pay the money back? If you do a traditional cash out refinance, you lock in the debt for a long time and have a nice fixed payment. The down side is that you start paying for the opportunity to get your hands on the capital immediately. This route is also more expensive up front as you have higher closing costs. 

The HELOC is a great tool if you want access to capital, but you don't want to use it for anything in particular right now. It costs almost nothing to set up, and you don't pay on it until you use it. The down side is that the interest rates are typically higher, are not fixed, and the amortization periods are typically a bit shorter.

I have used both when I was starting out. I used both because I was able to gain a bit more leverage early on to buy my first four unit in Lyons, IL. Going forward, I normally prefer to use the HELOC as it gives me greater flexibility.

[Jay Hinrichs]

Originally posted by @John Warren:

@Dorian Guin the real question is how do you want to pay the money back? If you do a traditional cash out refinance, you lock in the debt for a long time and have a nice fixed payment. The down side is that you start paying for the opportunity to get your hands on the capital immediately. This route is also more expensive up front as you have higher closing costs. 

The HELOC is a great tool if you want access to capital, but you don't want to use it for anything in particular right now. It costs almost nothing to set up, and you don't pay on it until you use it. The down side is that the interest rates are typically higher, are not fixed, and the amortization periods are typically a bit shorter.

I have used both when I was starting out. I used both because I was able to gain a bit more leverage early on to buy my first four unit in Lyons, IL. Going forward, I normally prefer to use the HELOC as it gives me greater flexibility.

 Although Heloc's can be frozen and or called at the sole discretion of the lender.. unlike fixed term debt.. and especially in markets that lenders feel their collateral could be at risk..  If your sand box is Detroit I think free and clear and keep stacking them up that way.. and or go for owner finance.. plenty of homes to buy there.  I would not risk FICO debt on those assets unless i had to 

[John Warren]

@Jay Hinrichs was there any warning that the debt would be frozen? I have heard about this before, and have been curious about whether this would/will happen again. I like having my HELOC partially as an extra layer of cushion.

[Jay Hinrichs]

Originally posted by @John Warren:

@Jay Hinrichs was there any warning that the debt would be frozen? I have heard about this before, and have been curious about whether this would/will happen again. I like having my HELOC partially as an extra layer of cushion.

NOPE borrowers got a letter about 45 days after the fact they usually found out when they tried to access the HELOC and were not able.

when the banks that give these loans feel their collateral is going down in value they shut them down.. read the small print in your mortgage its there..  I bailed out a lot of flippers 09 to 2011  who counted on the heloc to do their projects only to be half way through and the money was frozen..   so just something to be thinking about and for sure take a deep dive into your 20 page mortgage and read every clause thoroughly and your Note..  And it makes sense when helocs many times if they are maxed out and market retreats are now negative equity loans. 

[Dorian Guin]

@Jay Hinrichs thanks for your insight. What do you mean by owner financing? I have multiple properties that’s free and clear but aren’t in conditions to be habitable right now. That’s kind of the purpose to leverage my existing occupied properties. All my properties are free and clear, but with the unoccupied homes sitting and not bringing in cash flow, but also how the maintenance cost and taxes and insurance on multiple properties. It adds up fairly quickly and keep my income on a wheel of coming in and going out

[Dorian Guin]

@John Warren thanks. The HELOC sounds like the better option. As my intentions isn't to hold the debt over an extended period of time, and there's not a clear blueprint of every dollar those funds would be directed toward. So the ability to have access to those funds like a credit card sounds like it appeal to my needs better.

[Jay Hinrichs]

Originally posted by @Dorian Guin:

@John Warren thanks. The HELOC sounds like the better option. As my intentions isn't to hold the debt over an extended period of time, and there's not a clear blueprint of every dollar those funds would be directed toward. So the ability to have access to those funds like a credit card sounds like it appeal to my needs better.

 Helocs are great for fix up. Then sell or pay them off 

[Steve Vaughan]

Out in MI, this would most likely mean to sell on a Land Contract.  Lower down, sweat equity for the buyer.  Get some cash-flow coming in, but you would sell it on terms, being the bank.  With a Land Contract, the seller keeps the property in their name during the payment period, but you still have to foreclose if they default.

Banks won't refi or place a LOC on property with too many repairs needed. Plus, low value is tough. Most lenders flinch at anything less than $50k.

I'd probably offer a Land Contract on one or two until you can bankroll the whole BRR in the future.

[Dorian Guin]

@Steve Vaughan I’m currently prepping to move into another home (first mortgage property). And afterwards I was considering this for a property that’s in a developing area in the inner city of Detroit where home values are still relatively low but allows for a investor or home buyer to get some instant equity. If I require them to put roughly 7,500k which is half my investment into the property and make payments on this home over the next two years. IF they default on payments what’s the process and time frame for me to cancel or foreclose the contract terms?

[Steve Vaughan]

 Here in WA, it's a simple notice of intent to forfeit and 90 days to allow them to cure. They don't cure, that's it. I file the contract forfeiture and move to evict, if necessary.

I'd check with someone in MI, though. Maybe @Joe Villanueva  ?  

[Peter LaBreck]

@Dorian Guin I think in the circumstance you have is once you use those HELOC funds, how quickly can you pay them back? If using cash out refinance you now have a fixed rate potentially and a base line of monthly expenses. If after some renovations you cash flow within what you see fit then I would think you would be better off cash out refinancing.

It’s a personal question that varies solely based on the persons circumstances. Another question I would ask is if you plan on keeping these properties why not leverage them to an extent? It’s a balancing act of course but some questions to ask yourself?

[Dorian Guin]

@Peter LaBreck what do you mean by leveraging them to an extent? The cash out refi sounds great considering what the properties appraised for is more than twice my all in budget on the home. But it’s intimidating as that’s more than I need at the time and I’m still working on my self discipline for myself and family wants and needs. Having that much excess of capital with no clear direction, I’m not certain I’m prepared for that. Credit cards I have previously used in moderation to fund a rehab and successfully paid the balance off.

[Peter LaBreck]

Originally posted by @Dorian Guin:

@Peter LaBreck what do you mean by leveraging them to an extent? The cash out refi sounds great considering what the properties appraised for is more than twice my all in budget on the home. But it’s intimidating as that’s more than I need at the time and I’m still working on my self discipline for myself and family wants and needs. Having that much excess of capital with no clear direction, I’m not certain I’m prepared for that. Credit cards I have previously used in moderation to fund a rehab and successfully paid the balance off.

A few questions I have would ask is are you comfortably paying the expenses for those properties as is right now? Meaning if you wait and come up with a game plan/strategy, do you have time for that or are the expenses for that property overwhelming? 

What I meant by "to an extent" is for you to sit down with a broker and discuss options on cash out, LTV %'s and how to make the money work for you. There very well be other options than doing a full 75% etc cash out refinance, but still utilizing a cash out method versus HELOC. On another note, with the properties you have, what was the plan or strategy with those and has that plan changed a lot or just feel stuck? I think if planning for the long haul it is good to sit down and write out the strategy that fits you best. That strategy may not be a straight line and will involve straying from that plan but overall having that concept is a plus. Taking money out in cash out methods right now then coming up with a plan is doable as the cash you take out now can help get an idea of exactly what you are capable of achieving. Different mind sets for different people.

[Tom B.]

I also was thinking of using my HELOC to help me put down 20-25% on my first investment. I just read that it could hurt your credit? Anyone have experience with this situation? Wonder how much of a hit I would take

[Dorian Guin]

@Peter LaBreck I can definitely hold out longer and manage the cost associated with the upkeep as of now. But the original strategy was to acquire the properties cash and self finance the rehabs with a commercial cleaning company I own. But this is my third year in commercial cleaning and trying to scale the business I’ve made some mistakes and let employees take on things I should’ve continued to manage myself and those mistakes cost me contracts, and being overwhelmed with my family structure between work, husband, father of three, realtor and investor mentally I wasn’t prepared for it all and it took a toll on my mental health, so I scaled back on business til I had a better structure meanwhile properties sat. And self financing is limited with lost business contracts.

[Dorian Guin]

@Tom B. To be exact as to the extent of how it will impact your credit I can’t say. But keep in mind it does function like a credit card so depending on how much of the credit is being utilized will impact your credit. For example I had a 10k credit card I used just over half to buy material for a rehab. Since that was a substantial amount of my total available credit my credit utilization was above 30% causing my score to go from roughly 722 to 670’s until that credit was paid down. Hope this is helpful

[Tom B.]

Thanks for the heads up Dorian-the HELOC lender didn't mention that. I wonder how much of a hit I would take as that was going to be my down payment as I don't have enough to cover 20-25k for a 100k investment.

[Adeva Edobor]

@Tom B. Like @Dorian Guin said, it's a matter of your utilization. If you get a HELOC try to get way more than you need then use just a little if it. The lender can't tell how it'll affect your score. It looks risky to the credit bureaus if you have access to a certain amount and you use most of it. To them, It means you are in a tight situation and need as much as you can get. On the other hand, if you have a lot and you use a little of it, you look like you have everything under control financially.

[Tom B.]

Thanks Adeva!  Good advice.   Hoping to get at least 45-80k in equity then possibly (depending on the deal) use 20k of heloc for buy and hold.  Then refinance, pay off heloc.   If you disagree with this idea and see another way (I currently won't have that kind of $ for a while) please let me know.  Thanks!

[Jay Hinrichs]

Originally posted by @Steve Vaughan:

 Here in WA, it's a simple notice of intent to forfeit and 90 days to allow them to cure. They don't cure, that's it. I file the contract forfeiture and move to evict, if necessary.

I'd check with someone in MI, though. Maybe @Joe Villanueva  ?  

 if your talking about contract for deed.. in Oregon you have to do a strict foreclosure same process as a sheriffs sale. 

[Joseph Back]

@Dorian Guin I would recommend taking out a HELOC on the properties. Main reasons being is you can access it like a credit card, using parts of it as you needed and only paying interest when you choose to take money out. The problem with taking out mortgages if you have to take it all at once and need to have somewhere to put it all. Also I like the idea of a HELOC because they can be interest only which means a much lower payment than a principal + interest payment that would required with a mortgage.