Creative Financing and help on investment strategy

[Andrew Yip]

Hi BP experts,

First of all thank you for reading this thread, I am a newbie here and have been reading, listening and learning about real estate through BP.

I would like to ask for some of you experts opinion regarding my situation and what would be best options for me according to your experience.

Although I live in west Los Angeles, I really appreciate all of experts input despite of the state where they live in. Regarding my finances, I have a good job and businesses that sustain my day to day expenses. However last year I made stupid decision on raking my inventory that cost me arms and legs. Right now I'm about 20k negative which i'm thinking to put this under second mortgage instead of my current credit card. Just this month, I got approved for 195k second mortgage.

Question that I have:

1. What would be the best scenario for me to do Real estate Investment?

I like appreciation and cash flow. But with the amount of money that I have I'm not sure what kind of investing that I could do. Definitely property near my area is ridiculously overpriced now, I might seek something in CA or nearby that still make sense and also something that I can afford.

If I buy property, most likely I would have to utilize my second mortgage to buy it cash.. then perhaps take the money out.. through equity line of the new property that I will buy.. Is this the right strategy?

I don't think I can get financing/ refinance using conventional loan given my option.. maybe I could but the max is probably 200k unless if I could increase my income significantly this year. This is where I need your input on what kind of creative financing strategy that i could adapt from my situation.

I would like to buy and sell (flipping) however I m aware of the risk of not selling and potential big loss as newbie. Thus I would probably buy and hold it for for a few years while renting the property.

However, I also don't want to be stuck in just one property. (maxing my options). I would like to have the ability to buy more properties next year, etc when my finances get better.

2. I'm aware that CA potential, can any investor in CA area guide me on how likely if I were to do flipping and where to start. I have hardware, flooring, appliances business that I think could help me if I were going to do this route. However I would like to minimize my risk as much as I could. I just don't want my girlfriend not to marry me if she realize I am in much higher debt than now. :P

If I were going to find partner..

3. If I were going to do cash flow, where would be the best place to do this and how 's the best way to start and finance this? CA caps rate is perhaps not good for cash flow investing.... but at least it's within my reach if something happen to the property. :P perhaps I'm wrong... I've never dealt with property management before. :) I am also a bit afraid on the risk on having hard to find tenants or troubled tenants. I also learned through BP how people can declare bankruptcy and investor could be stuck for 1 year. ouch :) what do you guys think about vegas or memphis?

Thank you very much for taking time on helping me with my questions.

Andrew

[Albert Bui]

Originally posted by @Joshua McGinnis:

Hey @Andrew Yip

I'll try and give you what advice I can given you haven't gotten any responses yet.

In general, I would avoid using a line of credit to pay off a debt, unless you meet two criteria: a: the interest rate on that line of credit is substantially lower and would help you pay the debt off quicker. b: if you don't do it, you risk financial and/or credit hardship (eg. it helps you avoid bankruptcy)

Second, use leverage. Why max out a HELOC to pay for a property all-cash, when you could work hard, save up a downpayment, and then finance a property through memphisinvest.com (as an example), which offers turnkey cash-flow properties that you can comfortably and reliable acquire sight unseen? Point here is - I would not leverage your home to the max in order to start investing. Leverage the banks money.

Leverage maximizes your investment opportunities and reduces your exposure to risk by allowing you to place less of your own cash up front.

If you're trying to put together your first deal, I personally recommend you don't work with a partner. You haven't much to offer a partner at this stage unless you were going to partner with another new investor and share the risk. Personally, I'd rather have all the risk and the final say of what happens for my first few deals.

All that said, if you want to invest in CA, look at the USC area, West Adams, south of the I-10, or outside of LA County. There's an emerging market happening in the USC area and you can easily find a fixer-upper in the sub $400-600K range. You should be able to finance with FHA 3.5% down if you state the property will be owner-occupied.

Feel free to message me if you have any other questions or would like for me to put you in contact with my wife who is an investor-friendly realtor in the LA area.

Hope this helps point you in the right direction.

Average credit cards are the low of 9% - 22% while most HELOC's if under 80% LTV are 3.75-4.5% and assuming 30% tax bracket the HELOC's after tax rate is 2.63 - 3.15% allowing him to recooperate a huge portion of interest he'd otherwise pay. Even worst case scenario HELOC's max out usually at 18% (margin and indexed considered).

Credit cards and HELOC's have the same risk since both financial facilities base their rate off a fixed margin + prime rate and prime fluctuates. I would look at the spread between the CC and the HELOC's margins.

The HELOC provides the borrower a 1098 int at the end of the year so its easier to bookkeep for the interest cost and is less hassle since it can be written off as opposed to credit cards you have to search through all interest statements and trace which interest expense was attributed to investment/business use otherwise it cannot be written off which is an added hassle for end of year taxes.

HELOC's can only be written off up to 100k max for one primary and secondary home as this is the "home equity indebtedness," limit. Anything over the 100k can be written off if its used as business/investment use generally.