All Forum Posts by: Johnny D.

@Ben Grubb, it is a bit different in that when done correctly, most of the savings come by shielding your HELOC balance with your income throughout the month so that it doesn't accrue as much interest. Personally, I prefer using the HELOC for a new rental property down payment instead of paying down mortgages as you should make far more money investing in something with a higher return than saving money on a low-interest rate mortgage, but if done correctly it definitely saves money when paying down your mortgage, even without paying extra per month.

The easiest way to show it saves money is to say you only withdraw from your HELOC whatever amount you'd normally spend each month that could be paid with a credit card. For example, let's say you have a brand new 30 year mortgage for $100,000 at 4% interest and that your expenses for the month that can be paid with a credit card are $3,000. You can then withdraw the $3,000 from your HELOC to pay extra against your mortgage and repay the $3,000 with your income as you get paid. The expenses that you would normally pay with your income you would instead pay with a credit card (as much as possible). The credit card won't be due for another month so for all future months you would pay the last statement balance in full with your income meaning your HELOC balance will always stay at $0 and the credit card is always paid before interest accrues. Since the HELOC balance will always be at $0 in this example, you wouldn't ever pay interest against the HELOC amount, but you can go to any mortgage paydown calculator online and see the extra $3,000 payment saves about 1 year and 8 months off the mortgage. However, in this example, once your mortgage is paid off you'd still have the $3,000 debt on your credit card which would take about 6 more months if paying the regular mortgage payment so you'd really only be saving about 1 year and 2 months from the mortgage without ever paying anything extra out of pocket, which may or may not be worth doing this strategy to different people as it requires the individual to consistently repeat the same strategy for every month for many years, something many people won't do.

Most people will withdraw far more from their HELOC than their monthly expenses. I definitely wouldn't recommend this as you increase the risk of your HELOC lender eventually freezing your account, plus I can't see mathematically how you are saving extra money this route as the only savings that I can tell are from shielding the HELOC interest payments by keeping the balance at $0 (or lower than it naturally would be for those withdrawing more than their monthly expenses). However, once again, you'd do far better using the strategy at something that returns a better investment than paying down a mortgage early.

@Tj Simmons

To answer your original question, I don't know if it is something weird about me individually, but for every property I have every bought, somehow Nationwide always is the cheapest, and that includes properties in multiple states and with large differences in the characteristics of the involved properties.  I always call for at least ten quotes as I continue to think this next property will be the one when I find someone cheaper, but so far, I've yet to have that happen.  It is quite the mystery to me.

To answer your original question, a tactful way to ask the owner to come down on the price would be to simply let them know you are interested in purchasing it, but unfortunately the price is a bit higher than you would be willing to pay due to...(you can then tell your reasons - house is 40 yrs old with squeaky floors, few modern updates, cracks in walls and baseboards, etc and a much more updated house sold for that same price a few months ago).  As long as you are polite about how you say this, there shouldn't be a risk of insulting the landlord.

I'd recommend keeping in mind the landlord doesn't have as much of an incentive to sell as they already have an outstanding tenant in place in addition to the craziest of the current seller's market, so they will probably factor that in their decision on whether to drop the price more or not, and I have a feeling they are also pricing in their decision that your demand for the property is a bit higher then the general public's demand for the property which could seriously put you at a disadvantage in negotiating with this specific property.  Personally, when I'm searching for a house, I try as hard as possible not to focus on one property, as the odds of the one specific property you're interested being a good deal is quite low, but when you focus on a bigger range of properties you're interested in, the odds of at least one of them being a good deal becomes much higher.

@Ethan Brown

I definitely agree you make money when you buy, but this extra money matters a whole lot more depending on what your goal is and how long you plan to hold on to the property. If you are trying to flip a property or BRRRR a property, obviously the price point is far, far more important.

If your goal is long-term buy and hold, the purchase price is still important, but it has to be considered alongside the opportunity cost of the time you wait to find a bargain.  The combined monthly principal and interest savings of purchasing a property for $10k less equates to $45 per month for a 30 year mortgage at a 3.5% interest rate which would total $540 per year ($486 if using a property manager).  You should have no problem finding a starter house that cashflows at least $300 per month, meaning you'd make more cashflow in the first year with a property that costs $10k more so long as it would have taken an extra two months or more to have found the bargain property.  

However, who knows how long the inventory will be replenished again to allow more bargain opportunities.  It could be six months or over a year from now, and each month you wait you are losing out on the opportunity cost of a property that cashflows now.

However, I absolutely understand the desire to still seek the hidden gem, and I don't doubt there are still great bargains available even now if you look hard enough.

@Tesho Akindele

Your rental income for that year will still be taxed, and you would be able to deduct the tax deductible rental expenses as you would do any year whether you sell it or not.

@Ethan Brown

My number one goal is always cash flow (preferably with a property that I believe will still have modest appreciation) as it allows me to buy more properties, and since I make steady rent increases each year, my good cash flowing properties turn into extremely good cash flowing properties after a couple years or more which is incredible when you have a lot of properties.  If I was to focus on appreciation, I would likely still have all my eggs in one basket, and it would take me a very long time to save up to purchase another property, and the combination of many small rent increases usually far surpasses the small increase of one more expensive property.  

In regards to your second question on whether it matters if you pay top dollar in a 2021 market, it does matter quite a bit if you are planning to sell or refinance the property in the future if prices were to become stagnant or decrease once supply goes back up and/or interest rates rise quite a bit, but it shouldn't matter so much if you plan on keeping it for the long haul.  The main reason the cashflow is still there during 2021 prices is due to the extremely low interest rates.  This causes the principal and interest portion of expenses to be pretty similar to when prices were lower while interest rates were a little higher.  The cashflow should continue to work, particularly if there is higher than normal inflation which should cause rent prices to increase.

I personally see buying for appreciation a lot more risky now due to the fact that appreciation relies on you to either sell or refinance in the future at higher prices to get the benefits.

@Kyle Ferguson

I recommend making a list of as many local banks and credit unions within your area and and call each one of them about loan options and estimated rates and closing costs and writing down each of their loan terms so you can revisit the best one later (many will email them to you).  You can usually complete each call within ten to fifteen minutes, but doing this could be the difference of saving thousands of dollars.  In most areas there is usually one lender (usually a credit union) that offers mortgages with only 20% down, great rates, and usually very low closing costs.  The trick is finding who that lender is.

@Lilach A. Scratch my last post I see you are talking about not having a mortgage with another property. :)

Yes, the insurance of having another property certainly helps.  It would take a drastic turn for the worst to wipe out $500-600 monthly cashflow.  Also, if all goes well, I'd recommend making small increases to the rent amount each year to ensure the cashflow continues to grow next year and beyond.

@Lilach A.

If I understand you correctly, you are only paying rent and expenses without a mortgage (similar to a rent to own deal).  If that is the case, this makes calculating cash on cash much different as you will be paying cash every year instead of the majority of it being paid in a lump sum on the front end.  Mathematically, it sounds like a great deal so long as you can keep it rented out with minimal vacancies and minimal expenses.  The good thing is you should already have a clear understanding of the expected vacancy rate and annual expenses costs based on your history with the other rental.

I missed this post when I wrote earlier.  I can see this is more of a combination of both cash flow and appreciation deal.  I would just make sure you're mindful that the prices were still recovering from a recession 8 years ago, and I wouldn't expect the same appreciation at the same level within the next 8 years unless there was something else driving up the appreciation.  That being said, if you feel confident there is good appreciation to be made, I would much rather buy a property that is already cashflowing $500-600 per month with the hopes of great appreciation than one with very tight cash flow like many other appreciation minded investors do.  I would just make sure you have a clear exit strategy in mind of how you plan to reap the rewards of the appreciation aspects of the deal.