How to best leverage my position?

Question

Trying to find what is the most advantageous way to accomplish my goals. I currently have a primary residence and one rental property that was a former residence. I have around $70k in cash, which is almost exactly what’s owed on the rental.

I am going to start purchasing rentals, hopefully using the BRRRR method, but for my wife’s sanity am going to continue to aggressively pay down current debt (primary home plus large student loan debt).

My thought is to pay off the rental home, and continue to use my income to pay off debt. While doing this, I thought about taking a HELOC out on the rental and use that to buy, rehab, and rent out new properties, each time doing a cash refi to pay off the HELOC. The rental value is in the 130-140 range, so an 80% HELOC would give me around $100k for each new investment purchase and rehab.

Am I looking at this correctly or is there a better way to go about it? I know I could use the case I have but by paying off the rental I would eliminate that payment and pay only interest on the HELOC, saving me monthly cash.

Current income is between 200-300k yearly, depending on how much side work I do.

Thank you for any help and please let me know if I’m leaving anything out that would help with the decision. I’m loving this place!

Jim Cummings · Answer

@Brandon Cook. Run the numbers! I consider paying off a Rental with a low Balance (approx $55K). After running the numbers, I found my Cash Flow would only increase by about $225 / Month.

By upping my out-of-pocket Cash to about $65K, I was able to purchase another Rental that does approximately $400 in Monthly Cash Flow.

Brandon Cook · Answer

@Frank Gamez, thanks.

I did speak with a lender I’ve worked with before who has some good connections. He said he believes we can get the HELOC on the rental, especially since it will be paid off and factoring in my debt to income. He also has commercial and private lending partners I can work with.

He did say that even with purchasing the new investment with cash, there are regulations that require a 6 month period before being able to cash refi the rental. I asked if that was bank specific and he said it was federal regulation.

I thought starting out with one every 6 months is fine while I learn and get better. Within 2-3 years I will be able to take another line of credit on my primary home also. Being able to stagger them I can potentially do 4 properties a year pretty easily (hopefully 🤞)

Frank Gamez · Answer

@Brandon Cook This sounds like a sane strategy, especially if paying down the rental with the 70K will allow it to cashflow. One thing to check before you pull the trigger is to find out if you're allowed to take out a heloc on a rental property i.e. not your primary residence. I know here in Texas, we can only take a heloc out on a primary residence.

Brandon Cook · Answer

@Jaysen Medhurst, thank you for the response.

The current rental is not cash flowing right now...not because it can’t but because of how it was set up. Currently rents for $750, but could probably get $950 for it. It was our primary home and I have a 10 year mortgage on it, so the payment is higher than the rent. The primary reason for rental initially is because we were planning on moving back in but as always plans changed. It is also going to be used for my in-laws to live in in about 2 years when they retire. I know I could get more out of this house but I’m ok with the current situation, especially if I pay it off then it will be cash flowing and I can use the equity for the HELOC.

The idea behind the HELOC was precisely for short term financing. I am looking to purchase single family homes in disrepair cash and rehab rent them out, then refinance to pay back the HELOC and do it all again. I would like to get into some multi family investments down the road, but I am familiar with SFH so it seemed like an obvious way to start.

Jaysen Medhurst · Answer

@Brandon Cook, nothing convinces a spouse like an ever-fattening checkbook...

Your over all plan looks like a good one. I wouldn't use all my cash to pay down the rental's mortgage. The rental HELOC is "as good as cash," just make sure you're using that for short-term financing.

What's the current place renting for?

What kind of properties are you hoping to purchase next?

John Corey · Answer

I am sure some others will provide great advice on what solutions exist.

One key will be getting your wife onboard. That could mean using a solution that is not everyone's cup of tea yet works for her. Or, it means shifting her thinking a bit so she is more comfortable with debt being a tool.

Play the long game. You are doing well. Dampen the need to rush if you feel it. Unless you want to ditch the wife, you are in this as a team and what works for the team is what you need to do. Happy wife, happy life.

You are doing really well. Keep doing what has worked so far. Think about what things will look like in 5 or 10 years. Stay on target (Star Wars) and all will be fine. As you make more progress, your wife is likely to continue to trust you to make good choices.