All Forum Posts by: Edward B.

Amy,

You don't have to qualify for a refinance loan before you flip a property, but it will give you more of a warm fuzzy if you have someone who says you should qualify for a loan before you get started. You can always run the risk that you won't be able to refinance it. Based on what little I know of your situation, I don't know why you wouldn't qualify for one though. The more properties you acquire the harder it will be but if you are just starting out and have good credit and the debt to income you should be fine. Understand that on an investment property they will probably only do 70% to 75% LTV. Just factor that in. Again the HELOC would let you move fast, that's why I recommend having it regardless if you are looking at a deal right now or not.

I am very impressed if you have a family that would allow you to move into a rehab. Or even just move twice in one year to support you REI habit. Be careful that you are not overestimating their enthusiasm because it can be a big, and I mean HUGE, strain to do what you are proposing. Of course, it can be very lucrative too.

Ed

Amy,

I have run into HELOCs that require a minimum payment of say 2% of the outstanding balance vice just an interest only payment, but make sure you are getting a quote for a Home Equity Line Of Credit (HELOC) and not a Home Equity Loan. The first is revolving debt like a credit card (payoff and use, payoff and use) the second is an installment loan like your first mortgage or a car loan.

Definitely shop around. I have not recently, but you should be able to get a 10yr draw with interest only payments I would think. Many places used to open a HELOC for free too. Those days may be gone but I would think it would be less than $500 and less than $1000 for sure. Again, once you open it, it doesn't cost you anything unless you pull money off of it.

In terms of the monthly payment, make sure you factor that into your holding costs. You can simply ACH (electronic transfer) money from your HELOC to a checking account so you could make the payments with the HELOC if you had too. Maybe not directly, but certainly indirectly, i.e. transfer a chunk of money to make a couple months payments ahead of time. The monthly payment should not concern you because if you have done your due diligence it will all be factored in to your equation.

To specifically answer your question: yes, it makes sense to see how much you qualify for to see what price point you will be at. Personally, I would take as much as they would give me. For my last one I agreed to 5.75% vice the high threes so that I could get 90% LTV vice 80%. That equated to another ~$30k in capital. As long as you use the money intelligently for investments vice vacations or a new car it should pay off. It is better to have access to the capital in my opinion rather than a better interest rate. The interest rate is just part of the cost you calculate on your investments or deals so you control its use. If you need the extra capital, though, and can't access it yourself you need to go to someone else for it and it is out of your control.

In terms of flipping, make sure you know what you are doing and are very conservative on your first deal. It will make it extremely hard to compete with the investors who know how to run thinner margins and don’t require as much of a buffer but I highly doubt if they are putting up their homes as collateral if the deal goes bust. If you start out wholesaling like you mentioned that should give you a leg up. On the other hand, getting that first deal done is very liberating. It’s like renting your first home (Wow, people really will pay me to live in my property!) That aha moment really helps get the ball rolling.

Ed

James,

Ironically, I have an appointment with an attorney this afternoon out of Williamsburg and will be discussing this exact issue. It is mostly about estate planning but the two are so intertwined that I am looking for someone who can do it all and make sure the the appropriate structure and entities are in place. I will let you know how it goes.

This happens a lot where any forcible action you take would likely be futile and not worth the effort. If getting the applicant in to see the property is a priority you can try bribing the current tenant. It is maddening that you are rewarding them for their defiant behavior, but the bottom line is this should just be a business decision for you. If you have give them $50 or a gift cetificate or something in order to minimize your vacancy it may be worth it. Should be simple to run the numbers. As a "man of principle" this has been one of the hardest parts of landlording for me. Do what you have to to maximize your profits and then dream about when the next landlord calls you for a reference while screening this clown.

Amy,

HELOCs vary in terms but will typically have a "draw" period where you can use it like a credit card and only be on the hook for interest payments. This allows you to tap into the equity of your home with a lot more flexibility. If you need it, it's there. If you don't, it doesn't cost you anything to just sit on it (assuming you haven't pulled any money off of it). If you have the opportunity to pay it down for some reason (i.e. inheritance, flip, etc.) you can easily access it again whenever you want. That is why it is ideal for strategies that allow you to cash out, either through flipping or refinancing. You will be able to move faster than people who have to secure financing because you do not have to ask to borrow money on your HELOC. Essentially, you will be doing cash deals. If you don't cycle it though, you will eventually tap out the HELOC and be looking for capital again.

During the interest only period, the payments on a HELOC are usually very reasonable. I have several HELOCs at prime (just above 3%) from the glory days of lending before the crash and one at 5.75% at 90% LTV from after the crash. Always remember, though, that after the "draw" period, there will be a repayment period where any outstanding balance will be amortized for some period of time. For example, you may have a 10yr draw period that will switch to a 20yr repayment period. That means your payment on the balance will jump considerably when it switches. That is kind of a worse case scenario. I have one HELOC like that. Others that I have are 20yr draws with a 20 or 30 year payback and one that they just keep renewing the draw period as long as I keep making the payments. Shop around for the best rate and terms that work for you and your strategy.

If you refinance your house you will have a pile of money that you will need to employ for it to be profitable. Even if you never do a deal you will be paying for that cash and your mortgage payment will be much higher too. Also, if you decide to pay down your mortgage with a windfall of some sort as mentioned above, not only will your payment not go down like it would with a HELOC, but you will not be able to get that money back without refinancing again or selling your house, unlike the HELOC. If it is not obvious, I would definitely recommend the HELOC over refinancing.

Always remember too that these loans are on your personal residence. So if you blow the money and can't make the payments you will lose your house. I don't say that to discourage you or scare you but to ensure you understand the potential consequences and adopt a strategy accordingly. I would certainly be more conservative with this money than I would other sources of financing. Also, if you are responsible with your money, I would highly encourage you to get the HELOC regardless. Just having access to that kind of money is very powerful, assuming you only use your powers for good.

As far as wholesaling is concerned I would not dissuade you from giving it a go if you think you have what it takes. Personally, I know that is not for me. Those are the guys that find the best deals, though, and I completely agree with the person who urged you to do it and cherry pick the best deals for yourself. Would that I could do that. It does take an investment of time and money though, and it is not nearly as easy as many gurus make it out to be. Still, many people, and many people on BP, have been very successful doing it.

Ed