Getting Started in Real Estate with a HELOC (COVID-19 Edition)

Introduction

In Real Estate Investing, one of the biggest hurdles to overcome is figuring out how to get started. When I started getting educated into real estate investing, COVID-19 came into the world, so I set a personal goal to obtain as much money and knowledge as I could with the resources I had in the case that there was a recession. Most likely (but not always) money is necessary in order to obtain a real estate asset. Several of the BiggerPockets authors give suggestion on how can a newbie have access to money starting out and it is what led me to share this Blog post with the BiggerPockets Family.

One of those ways is obtaining a Home Equity Line of Credit (HELOC). In this post, I will walk you guys step by step on how I was able to obtain $20,000 dollars through a HELOC on my primary home in the two years that I owned the property when I used $0 money down to acquire house.

First of all, I would like to disclaim that I am not a loan officer, or a financial advisor. This is simply my recent experience in obtaining this HELOC. In addition, this was a HELOC on my primary home located in Alabama done on March 2020 (Mid COVID-19 pandemic). Many of the items mentioned here may not work for you and may not have the same value. Therefore, do your own research and see what would work for you since every situation can be different.

Getting Started

I first began my Real Estate career reading books, with the first book being (you guessed it) “Rich Dad Poor Dad” by Robert Kiyosaki. After reading ‘Rich Dad Poor Dad’, I needed to find out where to start and this led me to read BiggerPockets’ very own “The Book on Rental Property Investing” by Brandon Turner and “Buy, Rehab, Rent, Refinance, Repeat...” by David Greene. In these books, both Brandon and David bring up that a HELOC is a good way to start obtaining money and using that money to make you more money. Therefore, I began to look into having access to a HELOC. The topics below will explain the whole process of my analysis and how I got my first investment capital.

Analysis of Your Home

If you choose to obtain a Home Equity Line of Credit, you have to do an analysis of your home first to see how much appreciation your home has generated over time. The two kinds of appreciation are Natural appreciation or Forced appreciation.

• Natural appreciation is the worth increase of a home that occurs over time based on its location. The factors that determine this appreciation will not be discussed in this post but this value can be estimated using Zillow’s “Zestimate” (Zillow.com) or other Real Estate Tools.

• Forced Appreciation: This value is determined by the investments you have done on your home. However, not every money invested on your property is a value added. The major elements that add value to a home can be cosmetic looks, kitchen remodels, bathroom remodels, floors, addition of square footage, etc.

Before reaching the option of a HELOC, you want to be sure your home has generated some equity through either of these two types. If you are like any new homeowner, you make many changes for the better when you first buy a house. Several of those improvements can build equity that belongs to YOU. My home as it stood on March 2020 estimated the following figures:

1. Purchase Price: $135,000 (0% Down with an USDA Loan)
2. Purchase Date: April 10th, 2018
3. Loan Balance: $132,200 (Owned for 2 Years)
4. Natural Appreciation: +$7,000 (Per Zillow’s sold homes estimates)
5. Forced Appreciation: +$8,000 (Renovations done on the house)

Before the appraisal, I expected my home to be worth $150,000 Dollars. Therefore creating an equity total of $17,800 dollars (Equity = Property Value - Balance Owed). I will not go in details on the Natural Appreciation due to the scope of the post, but in the next topics I will dive deep in the forced appreciation value.

This estimated value will be very dependent on the bank that provides the line of credit, therefore our first step is to find the lender that can give us the best product to fit our plans. So let’s dive into it, let’s find our HELOC lender!

Choosing a HELOC Lender

Banks are the institutions that provide a HELOC, so the first step I did was get a list of the banks that can issue these services. A lot of this information was accessible on the bank’s website, however, there was some information that I could not find online, so I had to get on a call with the loan officers and ask them for the information. I recommend always looking for three or more banks, because every bank is different and you never know which one will offer the best option that will benefit you. I acquired information from seven different banks (See the list below):

Below is the explanation of each of the fields:

• Interest Rate & “Interest Only”: The first piece of information I looked for is the interest the bank would charge me if I was to use the HELOC. The interest rate varies depending on your Credit Score. This is self-explanatory, but it is a very important piece of information if you were to do a flip or a BRRRR. Many of the HELOC accounts allow you to pay “Interest Only”, what this means is that your periodic payments can be the amount of the interest alone, thus it does not decrease the loan balance. This is a good option, if and only if, you have a plan to repay the principal balance in a huge quantity at once. I do not recommend using the ‘interest only’ option if you do not have a plan to return the principal due all at once. The lower the interest rate, the better for you as an investor.
• Loan Amount Percentage: Most banks will protect themselves by only lending a part of that Equity, for that reason this information is important because it determines how much you can get after your home has been appraised. The best way to explain this is with an example. Let’s say you have $10,000 dollars in equity on your home. A bank that will only loan 80% of the equity will only be able to provide you a HELOC of $8,000. ($10k x 80%). The higher the percentage, the more money you can have access to.
• Closing Cost: Most banks will charge fees and points when a loan or HELOC is issued. These fees are for the transaction itself. The value of this cost can vary depending on the bank. This value is important because it will either be paid out of pocket, incurred into the loan, or the bank will cover it all. The lower the closing cost, the better will it be for you since you are trying to obtain money without having to spend much money. You should always ask a lender to give you an approximate of how much will your closing cost be.
• Appraisal Cost: An appraisal is a report that will show the worth of your home. There are two kinds of appraisals: Desktop Appraisal and Full Appraisal.
  • A desktop appraisal is lower in cost and only analyzes the home based on the location and the appreciation it has generated over time. This type of appraisal does not take in consideration any improvements made on the home. An appraiser does not necessarily has to walk in or around the home to determine the value.
• The Full appraisal is where an appraiser comes and actually sees/evaluate the value of your home. This appraisal is more costly because more work goes into providing a value for the home. This value varies, but some banks are willing to cover this cost as well.

From the seven banks I looked into, the best option that was aligned with my plans was Redstone Federal Credit Union and you can imagine why. Although Redstone did not have the lowest Interest rate out of the banks I looked into, it did offer to loan 100% of the Equity amount. This is HUGE! This means that I can get the most money out of the equity of my home. Since my plan for a HELOC is for the purpose of a BRRRR I did not mind much of the interest rate (because I would not last a long time to Rehab a property) but I did needed the most cash possible. Redstone also covered all closing costs including the appraisal. This is ALSO HUGE! This means that not a single dime would come out of my pocket to be able to obtain this HELOC. I hope the picture is much clearer as to why I went with Redstone. I am here to succeed, and any transaction that requires little cash, I am all for it!

Preparing For the Appraisal

After choosing Redstone Federal Credit Union the process was very smooth: filing application and paperwork, running credit score, scheduling the appraisal, etc. Once I obtained a date, it was time to prep the home so I can get most value out of it.

In the two years that I have owned my home, I have done many renovations to it. I completely renovated the master bathroom, I painted the house all-around, I added a front walkway to the door, painted parts of the exterior, added a Dehumidifier, and other minor renovations. This was important because without me even planning for it in the last two years, I created some forced appreciation on my home. On February, when I decided to invest in real estate, I discovered that I generated money with which I can start my real estate career. Don’t be discouraged if you have not done any renovations on your home, as I mentioned before, there is always natural appreciation and also there are some minor things that you can do to make your home appraise.

I looked in the BiggerPockets Website to see how I can get the most value out of my property and ran into several Blog Posts. One post was “Controlling (and Conquering) Your Appraisals” by J Scott (Click this link to see post). J Scott’s post was the key to success in this appraisal. Although his post is directed towards someone who is Rehabbing a home, the principles of the appraisal still applies for the use of your own home. J Scott first recommends to provide information for the appraiser and I did just that. The four pieces of information you should provide is the following:

1. Renovation Overview
2. Rehab Cost Breakdown
3. Before/After Pictures
4. Comps

Let’s look at how I targeted these four documents in order to obtain the Max value of my property. The renovation Overview should be the first thing presented to the appraiser but the last document to complete on your end. The reason for this is that in the overview you summarize everything that is explained in the rest of the documents. I first started acquiring information on the Rehab Cost Breakdown.

Rehab Cost Breakdown

(See the link for this document to follow along)

In order to obtain a lot of the information shown here I had to go back to receipts, bank statements, text messages with contractors, etc. because this was all completed in a period of two years. You may have to do the same if you identify a renovation that is value-add to the house.

I broke down this document into two parts, Interior renovations and exterior renovations. This would most likely help the appraiser locate and identify what has been done on the house. The cost of each line item was separated by materials and labor cost. In my case, I purchased most the material and the contractors did the work, therefore paying them the labor was something that had to be separated and it also helps the appraiser understand where each cost came from. Also, just because you may have done something yourself, it does not mean you can’t add labor to the job. Example, for a plumbing job that I did myself, I googled the standard pay rate for a plumber in my area and applied that into my calculations. This will show the real cost of what a company would charge you for the job.

I liked to include the Trade or task associated with a renovation. This will tell the appraiser what renovations task are the ones that will add value to the home. As I mentioned earlier, not all the renovations done to the home will be of value-add, however, I included everything because some items are just important to include in order to consider a home to be attractive to a buyer. Example, adding dehumidifier on my home. The cost of this device was of $1,229 dollars, maybe or perhaps not the appraiser took this in consideration, but without this device my house would have a potential of generating mold in the crawl space. Adding this device may be something that can make a home attractive to a buyer. With that being said, you may be wondering, why would I make my home attractive to a buyer if I am not selling it? The reason why is because the appraiser’s job is to find out how much a buyer should pay for a property. The value of the home is determined by how attractive your property would be to a buyer. Every item that you add on these documents you must tell yourself to “Think like an Appraiser” so that you can know what renovations to include or do.

The items in this spreadsheet should associate with all the documents you will give to the appraiser. Make sure everything aligns together and that the costs are justifiable with the images shown and the task described.

Before and After Pics

(See the link for this document to follow along)

There’s a saying: “A Picture is Worth a Thousand Words”, but in our case ‘A Picture is Worth a Thousand Dollars’. I don’t mean to take away from this genuine phrase, it’s just that in this particular scenario the pictures are what will notate the dollar worth of your home. When an appraiser comes to analyze your home, it is not until the day after, maybe days or weeks, until he prepares your report (in my case it was weeks due to COVID-19). When he is preparing your appraisal report, it would be of good reminder for him to see what your house looked like before you made all the renovations. Without much thought this is probably the most important part of your report.

For every project I complete on my home I try to take pictures before the project begins so that I can compare what it used to look like before. It may be your case that you forgot to take picture; don’t worry, you’re not alone, it happened to me and it happens to many investors as well. Before I painted the house, I did not have many pictures, what I did was, I went to find pictures of when my house was listed on the market back in 2018 and I just took the pictures from the listing when I first bought the house. If you already have pictures, then GREAT! If not, get creative and find ways you can compare the before and after with pictures.

Your ‘After Pictures’ should be taken with a professional camera if you are able to obtain or borrow one. If you cannot, make sure your phone has a good camera that takes good quality pictures. Almost every recent iPhone or Samsung Galaxy can do that now.

One important element with pictures is the lighting. The ‘after pictures’ should have plenty of light to clearly show the renovation you completed, these can even show how the atmosphere has changed on the home. Take the pictures on a sunny day on the outside and turn on all your lights on the inside when you take the pictures. Don’t worry about the electricity bill, the HELOC is worth all those watts.

Be sure to let the appraiser know the before and after on every picture and make sure that if you present a picture, the Renovation overview has those particular tasks at the top of the list or section.

Selecting Comps

(See the link for this document to follow along)

The biggest factor in the appraised value of your property is the recent comparable sales (comps) in the area. I have read from many investors cases where appraisers either missed things or made mistakes, so by you providing some Comps, helps the appraiser see some things he possibly could have missed.

When it comes to selecting Comps, I researched closely on how to select these properties. Yet again, you can guess where I got most of my information, the BiggerPockets Forum. I ran into Andrew Syrios’s blog post “How to Determine a Property’s Value Using Real Estate Comps”. From Andrew’s post I was able to understand the factors that can make another property be a good comparison to mine and the items taken in consideration were the following:

• Distance from my home
• Age
• Size/Square Footage
• Bedrooms & Baths
• Sale Date & Price
• 
  

All the above information can be obtained for FREE from Zillow.com It is a great free source for finding comps and it is what I used. When you go into Zillow.com, type in your property’s address on the search bar. In the criteria bar, you can choose the following:

1. Select only homes that have been ‘Sold’
2. Distance: Same Subdivision
3. Bedrooms: Same or +/- 1
4. Baths: Same or +/- 1
5. Select the same home type (Single Family, Multi-family, condo, townhome, etc.)
6. Square Feet: +/- 10 Percent
7. Year built: +/- 10 years
8. Days on Zillow: ‘6 months’

You should be seeing some properties returned from the criteria you searched. If you did not get many or any results, open your range a little, starting with the “Days on Zillow” (sold date) to 12 months, the +/- range, etc. Make sure your properties have a picture; it will help the appraiser identify a property when he goes to visit it.

All the information on this spreadsheet can be found on Zillow when you click on a property details. Start by placing all the values in the sheet and later you can make adjustments based on your findings. Making a dollar value adjustment is a judgement call based on the market. In my particular case, I made the adjustments based on the price of the square footage because all of the properties I found had the same bed/bath combination. I proportionally added or subtracted according to the size of the house. This is how most homes are appraised in the Southeast; it may be different in other areas.

I would highly recommend the layout of this spreadsheet; it is the same format the appraiser’s use in their report and it helps compare what they should look for. Three or four properties is all an appraiser should need.

The last piece of advice I would give is to select properties that are both below and above the value you are looking to appraise. Appraisers look for properties that make sense, not the most expensive house in the neighborhood. Don’t just select any property, it has to meet the criteria shown above. If the value is not what you are looking for, just wait for the right time for your home to appreciate or create some forced equity.

Renovations Overview

(See the link for this document to follow along)

This is the last piece of the puzzle and the easiest to gather the information. In this sheet, you will summarize all the renovations you have done to your home in one or two lines per item. The first section of the overview should list the purchased price (or the priced when it was last appraised) and the total estimated cost of the forced appreciation (gathered from your Cost breakdown). I broke the sheet into the following categories as J. Scott did:

• Floor Plan
• Waterproofing Mold Remediation
• Plumbing
• Electrical
• Appliances & Furniture
• Interior Painting
• Flooring
• Roof
• Landscaping
• Exterior Painting

The key point to all of this, is to ‘Think Like An Appraiser”. Every item added on these sheets should tell a story, one that should interest the appraiser to read and to consider increasing the value of your home.

Results

After you have gathered all the information, print it out in color, place it in a nice looking folder, and offer to give it to the appraiser once he is done inspecting the property. I personally followed the same steps J Scott recommends in his post.

At the end of my appraisal the appraiser asked me ‘Are there any other renovations that you have done to the home?’, I replied, ‘Yes, it is all in this folder’, as I gave him the folder. I continued respectfully ‘All the cost breakdown is on there as well as some comps in the neighborhood that can help you as well’ The appraiser replied ‘This makes my job a lot easier’, we both thanked each other and he continued on his way.

As a result of all these efforts, my home came to appraise at $152,000 dollars which was $2k higher than I expected. After receiving the report, the appraiser used all 3 comps that I suggested and the adjustment dollars were very similar and some even better.

The bank was able to give me a HELOC valued $19,800 dollars ($20k to round up) which I plan on using for my first BRRRR property. This is more than enough money to begin my real Estate career. One of the many lessons learned from this experience is to always ask ‘Why’ and don’t deem one person’s opinion the fact. Ask around, ask other investors, don’t be afraid to network and call others for help. I have learned early that being a real estate investor is more of a network business than a real estate business. No one can do this alone. I hope this bog posts help other Real Estate Investors begin this wonderful career.