All Forum Posts by: Drew James

I'd like to hear what others have to say about this.  I have a bank that is willing to do a line of credit based on the equity in my other two rental properties.  The line of credit would be $100k.  I have $100k in cash as well for an additional property.  Once I purchase the property the bank will allow me to take a line of credit out on the just purchased property (80% ltv) based on the after rehab appraisal.  They would also allow a cashout refi on the property with no seasoning requirement, but lets stick with the line of credit for now. 

Now lets say I purchase a property with that second line of credit only.  I put a renter in the property.  The property will cash flow significantly during the draw period.  If i use the rent to pay down principal during that time, I could sell the property 5 years down the road for a significant profit.  Here's a generic example (of an actual previous flip) of what I'm trying to explain:

Purchase of Property: $124K

Rehab cost: $30K

Total in: $154K

Appraisal: $215K (Based on appraisal and 80% LTV, I would be approved a line of credit of up to $172K, so if i chose I could get my $154k back that I invested, I could use this for another property down the road.)

Payment of Line of Credit during draw period: $630

Rents for: $1200

After 5 years of using the rent to pay down the loan the remaining amount of the loan is: $114K

Lets say you sell the property at that point (assuming it doesn't appreciate at all) for $215K

Profit: $101K

You could do this with one, two, or three properties per year.  

I'd like to know your thoughts on this, especially with using a line of credit but still starting off with a deal good enough to have significant equity in the property right off the bat.  Would a cashout refi be better? Pitfalls? Over-leveraged? Talk to me...