All Forum Posts by: Brit F.

Also having trouble. Trying to upload a JPEG image that is 640x390 to a new Blog post. Using Win 10 with Chrome, Mozilla, or Edge.  Tried both browsing to an image and drag & drop.

If I refresh the page or browse to another section of the site while the blue bar is present, it logs me out and says "Sorry, only BiggerPockets members can do that".

@Jason Chao, if you want to pull cash out of your existing properties that are currently unleveraged, it's just called a Cash-Out Refinance, a very common transaction.  Plenty of lenders will do it.  Interest rates on these will always be higher than a purchase-money mortgage for a primary residence.

Alternatively, you could explore a LOC on the investment properties, but very few lenders do these. Call your favorite local title/closing companies and ask them who they've seen doing them recently. . The other, less favorable, approach is to just call around to local banks and ask...you might call ten banks and find one that'll do it. Calling a Title Co is much more efficient, in my opinion. (Plenty of threads on BP about this, just search).

No matter what you do, secure financing before you quit your W2.  Once you quit, it becomes much more difficult to qualify.  You might need up to two years of steady rental/other income on your tax return.  

@Wayne Brooks, I know what you mean. I initially struggled to define this thing until seeing the Agreement: it establishes open-ended credit based solely on home equity and is secured with a Deed of Trust. In Texas, that's a HELOC.

Texas has some of the strictest homestead laws with rigid rules & terms for the two types of allowed home equity lending products.  There's very little wiggle room for creativity.

Hypothetically, if they dropped the Deed of Trust and instead used a Mechanic's Lien for non-payment (like most contractors would do), then many of these issues disappear.

I got a copy of the contract/agreement and talked to an investigator with TX Dept of Savings & Mortgage Lending.  His ears are perked up, and he's looking into the company.

Crazy thing about the agreement: pages 1 & 2 are the standard Texas Disclosure for construction lenders, clearly stating (formatting is mine):

"Your contractor may not require you to convey your real property to your contractor as a condition to the agreement for the construction of improvements on your property".  

Buuuuut, on page 3, which is where the company-authored portion begins, it states:

"This contract creates a mortgage or lien against your (Owner's) property to secure payment and may cause a loss of your property if you fail to pay the amount agreed upon."

It's kind of ridiculous and laughable, or incredibly bold if intentional, for the company to include such a contradictory statement immediately following the required Texas disclosure.

To recap:

• Company is currently operating as an unlicensed lender across multiple states
• They require an owner-occupied home to secure an equity line of credit for a consumer
• They do not consider the borrower's Ability to Repay, which might violate federal law
• Their hybrid 'Construction HELOC' (my term) fails to meet several TX requirements:
  • Requiring a Deed of Trust violates terms of TX consumer construction loans
    
  • Borrower doesn't control money drawn from the LOC, which violates TX requirement: "The owner requests advances, repays money, and reborrows money."
  • Repayment terms do not meet TX requirements of "substantially equal successive periodic installments"
  • HCLTV could exceed 80% max allowed in TX if they use ARV, rather than FMV when credit is extended.

From this point on, the TX SML Investigator will do his thing, and we'll see where he takes it.

@Conrad Johnson, the answer depends on you and your business model. Personally, I like using cash to acquire long-term (buy & hold/BRRRR), and use HELOC to acquire short-term flips or short-term arbitrage opportunities.

Conversely, you can certainly use a HELOC for buy & hold property, but there are some gotchas (assuming conforming loans for your refi):

• Cash-Out Refi before 6mo's
  • If you refi before 6 mo's, you can only cash-out up to your original purchase price, which parks a fair bit of equity in the property, such as all your rehab costs.
  • With a HELOC, you might end up with an open balance after the refi, such as if you sourced both purchase & rehab from your HELOC.
  • With cash, you'll walk away with less cash than you invested but will have no open balances to pay.
  • A hybrid approach might be to use HELOC for purchase and cash for rehab.
• Cash-Out Refi after waiting 6 mo's, aka a 'seasoned refi'
  
  • Presuming your BRRRR numbers work out as intended, you should be able to recover your investment and still have equity required by the refi lender.
  • With a HELOC, you'll carry at least 6 mo's of interest, but you shouldn't have an open balance after the refi.
  • With cash, you'll get back your investment and won't have the carrying costs you had w/the HELOC. Downside is your cash is tied up for 6 mo's.

It's a good rule of thumb to treat a HELOC like a credit card that you pay off as fast as possible. Avoid acquiring properties without paying off the HELOC because the balance perpetually grows until the draw period ends, and you'll experience unpleasant payment shock.

Consult your CPA for tax implications: HELOC interest likely wouldn't be deductible in your situation based on your stated usage, whereas interest on your financed primary residence should be deductible.

The good news is that there's not really a right or wrong answer. Just depends on your risk tolerance and personal preferences.

@Jason C.,

You'll find BP treats this question like politics & religion; there's no right answer because it depends on factors very personal to you, which fuels the perpetual battle of risk vs return.

What value do you realize by paying it off? Are you trying to lower your risk or do you want to add a LOC on the property once it's paid off?

Given your $500/mo gain once the debt is cleared, your pre-tax Cash on Cash (CoC) return is $6k/80k = 7.5%, and subtract ~2% to approximate your after-tax CoC return. If you're comfortable with that, then do it and feel good about it.

On the other hand, if those numbers make you hesitate and if you're tolerating the risk, then look for other ways to invest your $80k (private lending, crowdfunding, traditional securities, etc). Or, do you have any other debts that you could clear that might generate a better CoC return? Student loans, car loans, primary residence, etc.?

Quick math check: I'm a little confused on your cashflow numbers.  Once the debt is cleared, how will your cashflow equal the rent (both = $1195)?  Do you have other income that's offsetting your operating expenses?

@Nick Farrell,

Did you investigate what is dragging down your returns?  Is it excessive fees, conservative investment choices, neither, both?  30 minutes looking at your statements and investment performance charts should clear it up.

Did you ask the person in charge of your account why he chose those specific investments?  Was it based on your guidance and risk tolerance?  Was it based on incentives offered?

As far as alternatives, it's personal choice based on how you want to spend your time.  Do you enjoy researching stocks, funds, etc?  Would you prefer a roboadvisor account that's more hands off?  Do you want to do passive lending on crowdfunding sites?  Do you want to get more involved with real-estate?

One potential simple solution is to ask your representative to convert your account to a non-managed account, then buy a whole index ETF and just leave it until you're ready to do something different with it.

@Wayne Brooks, gotcha. hadn't considered that variable - yet another reason to examine the agreement.  Hopefully, I can get a copy.

@Jay Hinrichs, yeah, getting in touch with the TX Dept of Savings & Mortgage Lending is on my list of things to do (am waiting to see how the company responds to some q's I sent them.)

@Wayne Brooks & @Jay Hinrichs,

I just checked one of the few properties they're doing in Dallas County.  Still 100% owned by occupant - no shared equity and no changes in ownership to a new entity.

The amounts are relatively small, ~$50k or less, and the purpose is strictly to update existing homes.  No new construction.