All Forum Posts by: Edward B.

@Ana Marie B.,

The lender that will be underwriting the investment property will factor the payment that will result from using the HELOC for the down payment into your Debt to Income ratio. If your DTI is still below their requirement then it should not be an issue.

@Daria B.,

Go Gators!

I spent several years of my youth in Gainesville, FL. To answer your question, yes the interest is deductable because the loan is against your primary residence, regardless of what you use the money for. If you have a loan against an investment property you can write it off against the income from the property. Always confirm with your CPA, though.

I have a love/hate relationship with WF. I have a HELOC with them which has been good. I have two business checking accounts with them that I am in the process of moving because they no longer offer no fee business checking. And they slow rolled us so badly on a VA loan in 2010 that I wound up just financing with someone else.

If I refused to do business with every bank that upset me though I would be done in this business. Sometimes you have to just forgive and forget. Unless it is Bof A, of course, I have a hate/hate relationship with them and will never do business with those @#$% @#$%^# again! Same deal, miserable experience with a loan that drug on for years, even after I had refinanced. All I can say is keep all of your paperwork and correspondence, because they won't.

Ed

HELOCs typically have a lower interest rate because they are variable. Since all the talk recently is about the fed raising rates you need to make sure you understand that your payment will go up when rates go up.

I almost always recommend the HELOC over a Home Equity Loan for the sheer flexibility that it offers. The payments are usually lower because of the lower rate and because most are interest only for the draw period. I have seen some with a minimum based on the outstanding balance though so know what you are getting.

The key for me, though, is that you can reuse the HELOC over and over. If you choose to pay it off or down faster, you can access that money again at your whim. With a home equity loan if you pay it down faster you can not get that money back without going back to the bank. This makes the HELOC better suited for flipping strategies (i.e. fix and flips or BRRRR) but it can still be used for buy and holds where you want to pay the loan down faster with extra cash and then reuse for a downpayment on another property. Also, if you aren't using the money (i.e. you have it paid off right now) it costs you nothing to have the loan except perhaps a small annual fee, although none of my HELOCs have annual fees. With a home equity loan you will be making the monthly payments and incurring the interest regardless of whether or not you are using the money.

Ed 

@Dharmesh R.,

You are not missing something. There should be different rules for SoCal and unfortunately I can not tell you what they are. What I know is that there are investors in SoCal that are making money, but not with these rules. Maybe they are better capitalized, partnering, or investing in different types of properties. They may be investing for appreciation mainly which is a financial form of russian roulette in my opioion but does work for very savvy investors. Others simply choose to just look elsewhere (i.e. midwest), some look in lower priced areas of CA (they do exist), but neither option is without its challenges. I guess 75-85 degree weather and sunshine year round is not without its penalties.

@Dharmesh R.,

That might be tough to work. It is often very difficult to make higher priced SFHs work with the numbers. Some quick calculations for you. Assuming no appreciation, principle buy down or sweat equity, all of which would help your case; 75% of $620K is $465k. At 4.5% amortized for 30 years you are looking at a Principle and Interest payment of ~$2,350/mo. So you would need your property to rent for $4,700 in order to meet the 50% rule. If you are no where near that you probably need to cut this one loose and invest in something that performs better.

I'll be honest, I have a few properties that don't meet the 50% rule and over time have been cash out of pocket. BUT, they are not cash flow negative every month and they have been good investments when you factor in the principle paydown, appreciation, and tax benefits. The key though, is that I have enough properties that those that don't cash flow are supported by the others. I also bought those before I had a good handle on this whole REI thing and would probably do it differently if I had it to do over again. My point is, if you get it closer to a cash flowing property, it does not necessarily NEED to meet the 50% rule, which is arguably the most arbitrary rule used here. You need to understand the risks, however, of not cash flowing and ensure you are taking a calculated risk vice just not unloading the property for emotional reasons.

Man, that is a tough one. If you are meeting the 50% rule handily (which is just a guideline) then I agree it is your debt service that is killing you. I would run the numbers with the higher interest rate. It may make sense to refinance it even though it kills you to do so.

I don't know what you do for a living but that kind of negative cash flow can kill you really quickly if things don't go totally right. You lose your job, you want to change jobs, the market turns, you want to finance another property, and on and on.

If it is a performing property and you can make it cash flow by paying someone else more for your capital I would seriouosly consider it. If it just doesn't work no matter how you crack the financing, I would consider cutting it loose.

@Account Closed,

Definitely talk to some professionals, CPAs and lawyers. It is actually a relatively complicated matter that should not be undertaken lightly. Otherwise, you may incur hundreds or thousands of dollars in costs and not acheive what you want. For example, you can indeed incorporate in any state but you will have to register it in your own state to do business there, i.e. hold rental property. So now you are paying the annual fees in two states. Here's another one. You cannot transfer an FHA loan into an LLC without triggering the due on transfer clause. I have read posts on BP where the investor set up the LLC per recommendations here and then was upset to find out he couldn't transfer his property without risking the loan being called. Then he finds out that loans to an LLC are much more difficult to come by and the rates and terms are not nearly as good, which changes all of your performance projections. Also, with the type of investing you are talking about you will likely have to personally guarantee any loan to the business entitiy so your personal assets will in fact be on the table if you default.

There are many very...very...successful investors on BP that will tell you not to bother with incorporating and to just buy plenty of insurance. Personally, I am not one of them. I believe that if you are going to be doing business you should do it in some form of entity. For your purposes that is typically an LLC. I feel that relying on insurance alone leaves too much to chance, but that is just me. I would rather spend the money on the LLCs. BUT, you need to understand the intricacies involved with doing so or not doing so. Whole books have been written on the topic and thousands of posts on BP address this very decision. Do a little bit of research and then if you are confused on something or have a specific question reach out to the BP community and you will get many very different points of view.

Ed

@Brian Jones,

This is absolutely possible and, in fact, encouraged. It is somewhat of a twist on the BRRRR strategy, Buy/Renovate/Rent/Refinance/Repeat. It may be a little more difficult in execution though. I would develop a relationship with some lenders now in order to understand what their requirements are going to be and ensure you will be able to meet them. They likely will want to see some seasoning on the investment before they will lend so be prepared for that and there will be LTV, DSC, and personal credit requirements that you will have to meet.

Ed

@Ayodeji Kuponiyi

You are focusing on the wrong thing. It is irrelevant whether or not mom stays. What matters is what you can rent it for and how fast.

Say you kick him out because he wouldn't pay $950 and mom had to stay. Then you find out you can only rent it for $900/mo. Oops.

Or say you rent it for $950 but it takes you 2 months to do so. Oops.

Both of those and a variety of other scenarios will wind up costing you money. What if the next tenant is worse? If he is a decent tenant as you said in your original post, and if you know your market like I said in my original post, then you will know how to handle this situation.

But don't cut off your nose to spite your face. This should be a business decision, not a personal one.

@Austin Davis,

My two cents on the 2in1 idea. I have a Lenovo Yoga and much as I suspected, rarely use it as a tablet. For one, it is much too big, but really I think it is true of anything that bills itself as both. If you get a Surface, I bet you will rarely break out the keyboard or even carry it around. Or else, you will only use it with the keyboard and wish you had a full blown laptop. There are exceptions but mostly it will be one way or the other. I do like how light weight my Yoga is but think I prefer a 15" screen to the 13". If I could get a 15" ultra book that is the route I would go. I got mine for nearly 50% off at the Lenovo outlet (refurbished). Those deals pop up infrequently and go fast but they are there.

So my recommendation would be a strong, light weight laptop and a separate tablet. I have halfway been eyeballing Android tablets because you can find them on the cheap but haven't pulled the trigger yet. They are all predominantly media outlets unless you are dedicated to transforming the way you work. I'm just not there yet.

Ed