All Forum Posts by: German E.

Good job on this flip!  You didn't write how much 'sweat equity' you put into this place, but it was likely well worth it given the $400K cash out.  How long did you hold this property for?  Office space is gutsy at this time with many companies working remotely, maybe part of your investment was to bet that people will be coming back to work in person.  

I sometimes use Loopnet.com for quick examples of multifamily properties in different cities and the cap rate they produce, including the calculation itself.  Cap rates are not very well defined as sometimes they don’t include repairs or vacancies.  Some people even write in estimated cap ex in the calculation.  

Just to add to what has been said here - if the seller described this as a triplex on the sale documents, they might have a legal liability.  Sometimes you are able to undo a sale or ask for compensation when you are misled in official documents.  More difficult after spending money on a rehab, but it might be worth an appointment with an attorney.  

Hi @AJ Wong, I have an important addition to my comments - as I mentioned I just finished qualifying for a heloc, and I'm in the process of qualifying for a loan on a conforming mortgage for a rental property. As it happens, I have another heloc on $0 balance, and I was curious how heloc payments would be treated for the purposes of DTI. Would they could the maximum payment during the repayment period, which is almost 10 years away?

As it turns out, both the heloc loan officer and the confirming mortgage loan officer said the same thing - since my heloc has a $0 balance, it doesn't count towards DTI calculations! This is at least what they said, and at least in my specific case. Maybe if you're 1 year from starting repayment it would be another story. To be clear, there is no debt counted in my heloc towards DTI, it is treated like a large balance on a credit card that is not being used.

To answer your question, yes, I qualify for these helocs using full income documentation, which is a pain. One thing I discovered recently is they make heavy use of the Schedule E from your tax return, so if you clean up your Schedule E (eg by minimizing repairs and maximizing CapEx and accelerated depreciation), you should be in much better shape.

It would be great to start using DSCR for refinancing properties once the rates get low enough. Question - do you know if ADU income is counted as part of the income for the property? Best,

German

Hi Jason, 

Sorry for taking a while to respond and thank you for your comments, it's great to hear the opposite opinion on this.  It does seem that rates are going down, and at some point like you say we will end up refinancing to a perhaps somewhat larger rate on a 1st position mortgage to consolidate.  

In the meantime, I'm still more positive on helocs and heloans than you are.  For one thing, if after getting a heloc your property appreciates, you can always refinance the heloc to a larger heloc, even with the same bank, no need for 3rd position loans.  I have done this myself multiple times.  

Helocs (as opposed to heloans) are interest-only for a period of time, usually 10 years, so during that time the monthly payment is lower on a DTI calculation than a first position mortgage with the same balance. Long before you reach the 10 year mark and start making payments, you can refinance your heloc and start over if needed, as long as the equity has not decreased.

What if you have a heloc at $0 balance and are not using it? You mentioned an underwriter will use the maximum payment for DTI purposes, and I have had this as an open question for a while. Now I'm in a position to answer it, as I had an existing heloc at $0 balance and just last month went through qualification for other loans. I asked two different loan officers (one at a credit union and one for a conforming mortgage loan), and they both said that if you're not borrowing from the heloc, it doesn't increase your debt or your DTI ratio. They seem to look at it as the balance you have on a credit card - it doesn't increase debt if you're not using the funds.

So there - I don't think helocs are a long term solution, but until we get to the point that rates are sufficiently low, we can use them to get equity from homes and continue to grow our portfolio.

Regarding the problem you mentioned of 100% leverage, it definitely makes it harder to pencil in an investment when you're effectively borrowing 100% of the funds. But, it is no different from implementing the BRRR strategy so vaunted in Biggerpockets. You buy a first property, and when you refinance to get equity out you're effectively borrowing the money for the downpayment and paying interest on it. It is harder than having the money saved up, but not a lot of people have the money for a downpayment ready to go. I guess your argument is that this is particularly tricky in the current high-interest, high-price environment, which is a point well taken.

Hi Nathan - I agree that there are potential pitfalls when considering a heloc as an option, as you pointed out.  But sometimes the numbers can still work in that case.  For instance, the heloc property could be a rental that is producing enough cash flow to make the heloc payments, so it can pay for itself and not depend on the other purchase.   Or it could be a primary home with a low interest rate and plenty of equity, that could be tapped for a down payment.

@Rich Albert This law allows property owners to turn the property with the ADU into a condo building, with an HOA to manage common areas such as driveways and such. In this way the ADU does not need to be in a corner and the layout is a lot more flexible.

It is great to slowly have cities that do 1033, in order to establish a proof of principle of how this law can work, and encourage other cities to follow suit.

Hi all, just as an update, there was finally a city that implemented AB 1033, this is San Jose CA, effective July 2024.  This is the very first city carrying out this change. Another city on the way is Berkeley, which has approved it to begin 2025.

Hi Dennis, your newest plan sounds very reasonable and is a widely used strategy in real estate.  It has the added benefit that it greatly expands the budget for your rental purchase price.  Instead of having say $100K for the property, you could get a bigger multifamily property at $400K, and only put $100K down.  If the property appraises at $500K, 25% higher than purchase price, either because you bought it for less or due to market appreciation, then you essentially get all your $100K back.  

I'm not saying you need to buy a multifamily property, and I'm ignoring closing costs, repair costs etc.  But this example shows how this leverage can work for you and accelerate your investment returns.  Good luck, G