All Forum Posts by: Jason Pedersen

I am interested in doing the same! My family is considering a new primary residence and want to convert current home into a rental if the numbers look right. Before we convert there are some expensive improvements I'd like to make like new roof and replace an aging outdoor patio cover. We have roughly 40% equity (put 25% down two years ago and has appreciated ~25% since then), so there is plenty of room there for a HELOC. I would prefer to pay for these improvements with the HELOC and let the future renters pay it off. We aren't too concerned with cash flow from the property at this stage (both have W2's now) so would be happy to dump everything over PITI each month into paying that off.

When opening up a HELOC, is there typically language in the contract that you have to live in the residence (or perhaps for a certain period like conventional loans on primaries for 12 months)? How will the terms differ for a primary vs investment? Higher interest rate, lower combined loan to value (CLTV), higher credit score requirement, etc.?

Thanks!

That’s a really good, simplified explanation. I went down this rabbit hole a few months back. I’m OK with the idea of paying interest on borrowing your money (the cash value) to allow it to continue to compound uninterrupted, but what I don’t like is the premiums that have to be paid. I didn’t go as far as getting an actual quote, but it seemed to me the cost of the premiums makes this not really worthwhile unless you have some decent excess cash flow.

A few other ways to borrow "your" money are a HELOC (home equity which potentially continues to grow even though you're borrowing against it), 401k loan (retirement assets, though I'm pretty sure you will have to liquidate the loan amount... so it doesn't really continue to grow BUT you do pay yourself interest) and a stock portfolio line of credit (account can stay invested and grow while it is borrowed). All have their own pros and cons, but I think all three are better options for myself personally than an "infinite banking" whole life policy.

A great option for the portfolio line of credit is M1 Finance. You can only borrow 35% of your portfolio value ($10k account minimum required), but 3.5% APR (2% for "plus" accounts) makes the math work really well. If invested conservatively, you should be able to continue to grow your principal while taking the loan out against it. I'm considering doing something like this to invest in Fundrise.

Another option is peer to peer lending. This is something I have only become aware of recently and haven't researched it all that much yet, but might work for you. I believe Lending Club, for example, provides loans up to $40k, and interest rates are based on credit rating.

Yeah, Zillow is riddled with them in my area as well, and I suspect pretty much everywhere. It means the owner has missed one of their mortgage payments, right? But not necessarily going to be moving into foreclosure?

@Joe Villeneuve I think we are talking about two different risks here. I was thinking purely risk of an investment (sort of like comparing bonds and stocks), and I think you're talking about a liability risk. I suppose you can argue these two risks can't be decoupled, and I'm admittedly very naive when it comes to the risks associated with rental properties.

Comparing the two just in terms of investments... if @Tim Siocheng decides to cash out with 2.375% and pay off the rental, he's guaranteeing himself an increased monthly cashflow of "at least $300" (as he stated). If he instead decides to cash out for a new investment, there is going to be increased risk in acquiring that new investment. In the end he may be rewarded with more than $300 in cashflow from the new rental (and when you count the equity paydown, it's of course going to be quite a bit more), but what if after buying it he finds out it needs XYZ repairs that he hadn't thought of? Or he can't find a renter? or ...? Now he may be in a situation where he would have been better off in not acquiring this new rental and just paying off the previous ones. 

When looking at potential returns one option is safer, the other is riskier.

It's definitely a reasonable question and I'm sure one many people have faced. First and foremost, what's your current interest rate on your primary? I find 2.375% hard to believe for a refi, but maybe you're paying some hefty points or have a much better lender than I do. Would you be able to pull enough cash out of the primary refi to payoff the rentals entirely? In that case you are essentially consolidating your debt to an unbeatable interest rate, and it may be a smart move. There is probably going to be a disadvantage to your taxes since the rental income is higher, but you can still deduct the interest payments on the primary (which will likely go up despite the impressive interest rate because of the increase in principal from the cash out).

Also, are you interested in acquiring more properties, or are you happy with the ones you have and plan to hold onto them for a while?

I think paying down mortgages early gets a bad rap here on BP some times. It can be a smart move, especially if you want to reduce risk and aren't looking to acquire more assets. As @Joe Villeneuve and others have pointed out, there is still an opportunity cost to doing that.

If I was heading into retirement OR trying to leave my W2 and needed the income, I would consider paying it off. Otherwise, let the tenants pay it down as others have said.

Thanks @Jim Kittridge  (and @Jason Bott) for the liability comments. I have an umbrella policy now, but will definitely consider increasing the insurance policy coverage if/when we make this a rental.

Thanks for the input. Sounds like continuing to pay for gardener is the way to go, and just be upfront with the tenant that it's included in the rent.

No, our first property was in Porter Ranch (San Fernando Valley). Our property now is in Simi Valley, where we have a 5/2 2100 sq ft house on .32 acres. Most of the lot is in the backyard. It extends pretty deep! We actually share property line with six neighbors! 

This has definitely crossed my mind! Besides the family/privacy consideration, I'm also not sure there is a demand for small one bedroom rentals here in my town. We are in a suburb outside LA (Simi Valley... it's actually in Ventura County) and it's almost exclusively families. If we were in Santa Monica it would be a no brainer. But definitely something to look into!