All Forum Posts by: Josh Edelman

What's up BiggerPockets! First post here. I have a question for you folks.

In 2020 I bought a duplex for $300,000 with my VA loan at 100% LTV. Last year I refinanced it with the IRRRL at 2.25%. In the last few months there have been comparable sales that have closed in my county at $549,000. Assuming my home would also appraise for $549K, that would leave about $255K in equity.

I am looking to take out a HELOC so that I can create some options to buy more real estate with. I have many ideas and several paths I could go, but the first step is to open up a HELOC.

I spoke with a local bank, First Citizens Bank to open up a HELOC. The draw to them was the 89% LTV. When I spoke with them, they said they could not open up the HELOC because it is not solely a primary residence. They wouldn't loan because I receive long term and short term rental income from the property.

The second bank I spoke to was United Federal Credit Union. I had heard they did HELOCs on rental property at 80% LTV so I started the conversation with them. They also would not approve the HELOC because even though my long term tenant covers all but $25 and I received STR income when I am away from my primary home, they wouldn't open the HELOC because I live there.

These responses seemed like a Catch 22 and I am not sure how to proceed.

Which leads to my questions:

1. What Lenders might approve a HELOC on a primary residence receiving rental income?

2. If I can't find one that will do it, should I shift my focus to just buy another primary residence with the remaining VA eligibility then apply for the HELOC again?

3. Or should I refinance the duplex at a higher interest rate and pull out my equity and buy other real estate with a 20% down payment on more than one property? I think this would free up my VA loan to make another purchase, as well as a higher return on equity.

4. Or a combination of #2 and #3?

5. Just hang tight and continue to pay the mortgage?

Thank you for reading these semi complex questions. I am open to any and all feedback as I get clear on a game plan moving forward. 

Onward and Upward. 

 Correct. 

Again, remember, you didn't have the down for the most recent property purchase, you borrowed for that, so now that property is way over leveraged. It's very important to NOT move forward until what you have, is stable. As you pointed out, it's deep-deep in the red. So, you need to clear that borrowed down, to get stabilized. 

Picture this, say you said F-it, it's all about just getting more. Now the next one is going to be probably a DSCR, because your running in the red on previous so that's not a great look for conventional. Now interest rate is going to be very high, your going to have to use ever liquid penny to get it to approval to close, and at end of day it's most likely to have little to no cash-flow.

So what you have then is 3 properties, and near to 0 cash-flow with all but 0 contingency funds. That's 3 properties that can have a roof issue, plumbing issue, HVAC issues. That's 2 properties that can have vacancy issues, tenant damage, etc.. And you have nothing to fall back on for unforeseen. 

Everything has to go right, for many many months, or else things can get very very ugly in the blink of an eye. And then your coming to someone like me, needing the cash infusion to survive, and I and others like me are not a charity, it will cost, dearly, that's just the reality of it. 

Or, you clear this HELOC, get the leverage into a healthy zone before growing. Growing when it's healthy growth.

Yes, I am saying use that "parked $" that inflation is eating, to pay down/off that HELOC, with 1 exception, you do need to keep enough liquid $ for working capital, that's regular potential expenses in the short term. Because it's a HELOC, that means if need be you have ready access to pull $ if any big unforeseen expense happens, right, so working capital does not need to be a massive amount at this moment long as you have HELOC backup.

Look, you can't think of this as a "loss". Keep in mind what you did, was taking out a loan on future earnings, borrowed from your other property. If it were a bank vs your property loaning the $, you'd have no question on it right, you'd be all-about getting rid of that loan. You need to treat yourself with the same respect. Because it's an over-leverage position, we know that because if refi into a singular it would be WAY into the red, so we need to deleverage that property. 

Maybe that's the most important mindset for this, think on how you took a loan on FUTURE earnings, so now, you need to pay off that loan taken. 

I know it sucks exercising the additional patience but it will breed good things to come, you will be very happy for having done it going forward. 

 Ok Josh, understand what I am advising from has a basis in 2 different foundation points. The first is market cycles, the second is investor psychology. 

I would say you need to pay-off that heloc, full-stop. Not interrelated to a purchase, just pay that off. Because think, that was your down payment on a property. You borrowed that down, so you must have that as priority #1 of paying for that down. A down is supposed to be cash in hand. 

I get what your thinking, but this is not the market cycle for that. Your looking at using maximum leverage, and this is NOT the time for maximum leverage, it is time for being DE-leveraged. 

And on the investor psychology side of things, you gotta keep in mind that down $, that's cash-in-hand. $ used to secure a property, and borrowing for it is "cheating". So, you need to feel a kind of anxiety associated with that, and a burning desire to get that paid and cleared ASAP. 

When one thinks like this, it helps align the mind to keep a focus on proper production of property. It put's you in a mindset to keep driving at delivering cash-flow, in general. 

We are in STAGFLATION tail-spin, with powers that be pressing for recession to prevent stagflation. Many bad things can result from such for the heavily leveraged person. My #2 money-maker in last tight economic cycle, was buying out failed investors. All of them had same story, the leveraged tight as a nats-azz, and then something happened, something they did not have a buffer to fall back upon, and next thing there deep in the red with no way to turn. Don't be that guy. 

Todays market is about VERY smart acquisition, with ample margins, contingency funds, contingency for contingency. 

I know your licking those chops at #3, but what's most important is to keep going vs pumping unit count to just loose it all, or any, right. 

The #'s are clear, you gotta take a step back, clear that borrowed down $. Now your way better set to convert mortgages when do AND have a contingency fund when/if need in the interim. 

Keep in mind, cash in hand is dyeing at about 8% right now (inflation). Paying off heloc removes that interest charge AND loss of $ via inflation. So if heloc is say 6%, that's a 14% saving your affecting. Because Real Estate moves with inflation, right, so $ in real estate is at net 0 to inflation. That's 0 vs -8. So paying off heloc should be viewed as a 14% ROI. That's smart $, is it not.

So take it in smart steps. Stop thinking about #3, think about stabilizing what you got, to be best set to jump on #3. 

Is the $1,100 difference from wrapping the heloc in and new conventional rate? 

If you have that heloc with a balance, your not ready for the next one. You need to clear that acquisition $. 

@Josh Edelman

Hi Josh, I am an agent in Cincinnati, OH and I think Cincinnati has what you need! Cash flow AND appreciation, low purchase price, etc. Let me know what you think, I would love to answer any question you may have!

Refi #1 into a conventional. Yes, rates are higher BUT given you have a strong equity position, that should help mitigate that rate a touch. And it unlocks VA for #3.

What rates have you been seeing on your DSCR quotes? The market has been quite volatile and if you are putting 25% down then if your credit is solid a lot of deals are cash flowing again on DSCR, especially if you pick the right market

How much equity do you have in the current properties?