All Forum Posts by: Kevin Clayton

Great question. I think it all comes down to the numbers….expected ROI based on time and personal preference, experience. If the expected rise in monthly NOI and equity is better then build. Buying with the ADU, yes, pay more….If the ROI is still what you're looking for… great. Some people don't want to deal with construction. Other people have the team and see the benefits. I'm currently in process of building one on my property. Costs vary depending on the construction and your team, financing, etc. Huge benefit to building ADU is you don't have to pay for the land. In LA that is a huge benefit. If you can get good rent compared to the build cost and expenses it's a win in my opinion. I guess I don't have a preference it depends on the person, their expectations, their team and preferences.

Quote from @Alex Hunt:

This is a good debate here, but have to consider other financing options as well. Consider a bridge option as well, it will allow you pay interest only and have the funds set in a construction reserve and to be released on a scope of work/ draw schedule of your choosing. Also not paying interest on any unused amounts. On a 6-24 month term which can be done under the business. Touching on the comment regarding the loan being higher if you decided to cashout, depending on where you get the loan it can be as little as 0.25% higher 

Thank you Alex. I have very little knowledge in this area. Would love to learn more.  I like all the construction friendly nuances and the fact it can be done under a business.   I have heard some people say releasing funds based on scope of work was not always as fluid as they’d like. I like what I’m hearing. 

Quote from @Robert Reynolds:

I recently just pulled money out of my house using the HELOC to build an ADU in Los Angeles. I prefer the HELOC for short term needs, like building ADUs, and I like that you can just keep paying it back and reusing it as you want. With the refi you will be paying it back for the next 30 years, unless you pay extra towards the principal. I recommend talking to an investment friendly loan broker, I have some recommendations if you'd like.

My only regret in building the ADU, is I hired a bad contractor who has taken a whole year to finish my ADU. Please vet your contractor, and if you have a good one please send him my way! I could have used that $150k to put 20% down on a $750k investment property that would have appreciated a ton, brought me cashflow and loan buy down this past year. That's one thing to consider when thinking of building an ADU vs buying an investment property.

Great points. I love the idea of using a HELOC. Would like to hear the good, bad and ugly about the he ADU. I do have a great contractor just walked through and ADU he’s finishing in West Hollywood. Great work and he connected me with a great architect. 

yes I thought it would make sense to use a portion the HELOC as a down for a loan to build the ADU instead of using the entire HELOC to build it. Remaining money could be used as down for an investment property. Would love the investment loan broker info.

Quote from @Nicole Heasley Beitenman:

Quote from @Kevin Clayton:

In an adjustable rate scenario, I advise running the numbers at the highest possible rate the HELOC can reach; there's a cap on these, to my knowledge. If the deal still works at the worst rate possible, it's a green light.

That's a great point. I didn't realize there may be a cap on the HELOC interest rate. Love that idea of running numbers for worst case scenario.

Quote from @Greg Scott:

The best debt will be agency debt and Fannie won't lend on single family property in an LLC. (Quads, Tris, Duplexes are all financed and appraised the same as single family)

So, if you don't want the property in your name, you will be be dealing with a bank loan. Think of lending from the bank's perspective. If you make $100K with low debt, and have good credit, and are signing a recourse loan, does the bank feel comfortable? Very. How comfortable are they lending to an LLC that has 50K in revenue and few other assets? Much less comfortable.

The loan amounts and terms you can get will be in relation to the comfort level the bank has.

Thank you Greg. Makes perfect sense. 

I've been a member for a while but haven't taken as much time as I should get answers to the questions that have me in a holding pattern. I don't know if I am correct but from an investment standpoint you'd like to borrow the cheapest money you can find right? Or I guess it depends on the scenario, timing of the deal etc. Currently, I own a 4 plex and primary residence. As I look to leverage one of the properties for my next investment I've found it easier, because I have a great credit score, to use my personal credit and equity in my primary residence.....However, I am currently moving the rental into its own LLC and I like the idea of the LLC building its own credit and using the LLC to make the next purchase.

Any advice or thoughts. Now that interest rates are up moving toward using a HELOC on my primary residence but I'm concerned about the interest rate on the refi of the investment to pay off the HELOC.

Quote from @Nicole Heasley Beitenman:

Because a HELOC can be used over and over again and has no payment when it isn't being utilized, it typically gets my vote.

That makes sense. I used a HELOC years ago and was not thinking as an investor. Some of my not so great decisions are sneaking into my future thoughts about using a HELOC. Namely, the adjustable rate.... In this case, it's for an investment that will provide enough return to pay down or paid off the HELOC for reuse at a later date. Hopefully 6-8 months down the road.

Quote from @Scott E.:

This question comes up a lot. It comes down to personal preference. Plus a big factor is how quick you'll be able to pay down that HELOC if you use a HELOC.

My preference would be to use the HELOC at a lower rate, pay it off as fast as possible, then deploy those HELOC funds into another deal.

Great point, paying down the HELOC is key and I don’t have that answer at the moment. I need to take a harder look at how I could do that. I’m guessing on once the investment is maid and the equity in the property goes higher the property could be refinanced to payoff the HELOC. Freeing up the money for the next investment. What would you suggest as a strategy for paying off the HELOC as fast as possible? 

Quote from @Rodney Sums:

Quote from @Kevin Clayton:

Looking at finance options to leverage an investment property. Creating an LLC to transfer the property into and looking to build credit/ establish the loan via the LLC. As rates rise I'm wondering if it makes more sense to refi and pull the entire amount for future projects (around 200k) or setup at HELOC. From my understanding the loan will be fixed and but points will be added because Its an investment property and money is being pulled out. This brings up the monthly considerably as the project will be a year or so till cashflow come from the investment Vs the HELOC - only pay on money being used could potentially have a lower interest rate but more of a hassle if the HELOC is paid off/rolled into loan later or rates rise.

Two projects (ADUs) will take 6 months to a year to complete. 

I’ve been a. Member foe a while. Looking to engage more with the community as I work on
my next investment goals.

Thank you. 

What are the exact terms of the HELOC you qualified for, especially as it relates to the rate and it rising?

Also from your perspective and research, what made the two ADUs better than buying a resale, especially with that kind of money?  This is not saying the ADUs aren't better, just curious what made them better.

Great question. At this point I have not sought financing so I don’t know the specific terms. In the past I have used a HELOC and recently pulled money out of my house to invest. Both have advantages and disadvantages. I wanted to put the question out to get investor/ finance perspectives and I prepare to make the move.

Great question about resale. It came from one of the bigger pockets podcasts. Using the 1 percent rule as a guide for investment……in Los Angeles the rule doesn’t work because property is so expensive, however, ADU’s, create the opportunity to building on existing land (if someone owns an investment property or home). In this case, applying the 1 percent rule works. From my limited experience and vantage point this option provides the best ROI. 

there are are great opportunities on the purchase side that would require a bit more tine and money. With the effects from the moratorium, rent control, and other pieces that aren’t advantageous for owners, finding the right property could take more time and effort. I’m the meantime, two ADU opportunity’s seem like the best best move for my current situation. 

Looking at finance options to leverage an investment property. Creating an LLC to transfer the property into and looking to build credit/ establish the loan via the LLC. As rates rise I'm wondering if it makes more sense to refi and pull the entire amount for future projects (around 200k) or setup at HELOC. From my understanding the loan will be fixed and but points will be added because Its an investment property and money is being pulled out. This brings up the monthly considerably as the project will be a year or so till cashflow come from the investment Vs the HELOC - only pay on money being used could potentially have a lower interest rate but more of a hassle if the HELOC is paid off/rolled into loan later or rates rise.

Two projects (ADUs) will take 6 months to a year to complete. 

I’ve been a. Member foe a while. Looking to engage more with the community as I work on
my next investment goals.

Thank you.