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Old 06-19-2015, 11:09 PM
 
16,534 posts, read 17,604,809 times
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Quote:
Originally Posted by Thinking-man View Post
HAH!
well, that's one gloomy image you just painted! lol but i asked for it! so thank you!
So, here are a couple of points that i'll try to make to perhaps counter some of the great arguments you've made:

- We have about 50k cash reserves in case things go south (ie. no renters, job loss, etc.). Our 'current' annual spending is about 25k so that's about 2 years of reserves.

- We have another 100k-120k in funds we can liquidate if needed. (these are stocks and such. not including about $275k in retirement accounts)

- We are in our early 30s, so plenty of time for 'errors'/'mistakes'?

- The housing market in northern VA is pretty solid. I manage 3 rental properties, and in the past 6 years, only 3 months (in the winter) did i have one of the rentals stay empty. the rest of the time, all three rentals have been rented to professionals in the area with no issues.

- I think this house is a good deal, as in, it's a well kept property with pretty nice curb appeal in case of having to sell.

-The variable rate is my biggest concern too...but the loan allows for 'fixing' the rate at any time and continuing like a regular mortgage. although that rate is about 4.5% right now. so if the rates shoot up, i will fix it (at 5 or 6%) in a worst case scenario.

-i've looked into getting a regular loan. with the rates offered now, and the 20% or 80k or so that i have put down, i would just about break even with the rent at best! (no profits monthly)


Thoughts?
Well my wife sometimes does call me Harbinger of Doom and Gloom. Personally I don't see it. It's crazy talk.

Ok I'm getting a better picture. You have money, savings , reserves and experience in renting/LL


Well if you're looking at long term RE investment
The problem with this HELOC is you're not paying anything off on the loan amount. I really don't like that at all. It possibly can bite you back at some point. I'm just not really big fan on the type of leverage you are looking to do, and I understand lots of people leverage to buy. But that's just my personal opinion on that. But the thing you have going for you is what I listed previously which believe it or not is a good thing to have if you plan on doing RE investing.

Can you make a payment to principal if you choose with no penalty incurred? If you can I would personally take 200 bucks of your profit and add to principal. In the long run it will help you out.

what I would do is set 6 months of operating costs in a account. Have all your transactions for the rental coming out of that account. Receivables and payables. It will give you a better cost analysis/P & L. That's how my rentals are set up. Our personal income is never mixed with the properties income. Totally separate. Good luck man.

Last edited by Electrician4you; 06-19-2015 at 11:17 PM..
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Old 06-19-2015, 11:21 PM
 
Location: Phoenix, AZ area
2,937 posts, read 2,409,058 times
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Converting assets into liabilities isn't ever really a good idea. If you want the rental then I would liquidate some of the "stocks and such" to use for the purchase. Real estate can be one of the worst investments you can make in your life and I say this as a 30 year old who has 7 homes and a 12 unit complex. I would never leverage my own home to purchase another investment when I have other investments I can use for that purpose. Remember real estate investing isn't about the monthly income it is all about the appreciation and the monthly income is just a nice afterthought.

If you didn't learn that adjustable rates are the devil from what happened in '08 then you weren't paying attention very well. Fixed rate or don't bother, besides the interest is tax deductible who cares how much you are paying you are going to beg for more deductions at the end of the year.
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Old 06-19-2015, 11:24 PM
 
3,483 posts, read 4,626,723 times
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Quote:
Originally Posted by Electrician4you View Post
Well my wife sometimes does call me Harbinger of Doom and Gloom. Personally I don't see it. It's crazy talk.

Ok I'm getting a better picture. You have money, savings , reserves and experience in renting/LL


Well if you're looking at long term RE investment
The problem with this HELOC is you're not paying anything off on the loan amount. I really don't like that at all. It possibly can bite you back at some point. I'm just not really big fan on the type of leverage you are looking to do, and I understand lots of people leverage to buy. But that's just my personal opinion on that. But the thing you have going for you is what I listed previously which believe it or not is a good thing to have if you plan on doing RE investing.

Can you make a payment to principal if you choose with no penalty incurred? If you can I would personally take 200 bucks of your profit and add to principal. In the long run it will help you out.

what I would do is set 6 months of operating costs in a account. Have all your transactions for the rental coming out of that account. Receivables and payables. It will give you a better cost analysis/P & L. That's how my rentals are set up. Our personal income is never mixed with the properties income. Totally separate. Good luck man.
Yeah, I mean, i don't really 'need' the 1000 or so that's going to come in...so i was planning on paying that towards principle. (no prepayment penalty).
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Old 06-19-2015, 11:32 PM
 
3,483 posts, read 4,626,723 times
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Quote:
Originally Posted by Electrician4you View Post
what I would do is set 6 months of operating costs in a account. Have all your transactions for the rental coming out of that account. Receivables and payables. It will give you a better cost analysis/P & L. That's how my rentals are set up. Our personal income is never mixed with the properties income. Totally separate. Good luck man.
Thanks very much for all your feedback and the well wishes. :-)

Quote:
Originally Posted by AZ Manager View Post
Converting assets into liabilities isn't ever really a good idea. If you want the rental then I would liquidate some of the "stocks and such" to use for the purchase. Real estate can be one of the worst investments you can make in your life and I say this as a 30 year old who has 7 homes and a 12 unit complex. I would never leverage my own home to purchase another investment when I have other investments I can use for that purpose. Remember real estate investing isn't about the monthly income it is all about the appreciation and the monthly income is just a nice afterthought.

If you didn't learn that adjustable rates are the devil from what happened in '08 then you weren't paying attention very well. Fixed rate or don't bother, besides the interest is tax deductible who cares how much you are paying you are going to beg for more deductions at the end of the year.
good points; liquidating the stocks isn't something i'm prepared to do.....too much mess....taxes, etc. and plus, it's not enough to cover the 350k rental. i don't know what market you're in with your 19 properties (at 30?), but in northern VA, houses have done pretty well....(condos, not so much!). I guess there's risk in pretty much everything you do or invest in.......i'm not sure i would put "appreciation of the property" at a huge risk given the area....but it is indeed there.

I'm not counting on the deductions although it's a 'nice to have'. our effective overall tax rate is low, so i'm not too worried about that. I could put the 1000 a month in a savings or put it towards the principle....if i'm able to get the house at a decent price (the owner is currently asking for more than the Zestimate value from Zillow....which makes me think the listing price is higher than the appraisal will come in at....in which case i will not be offering more than a couple of grand more than the appraisal (if that)

if i can get the house at a decent price, resale shouldn't be an issue given the area....at least i hope!

Any other points/thoughts/ideas welcome!
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Old 06-20-2015, 12:15 AM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
20,853 posts, read 37,553,019 times
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not being able to use the HELOC interest expense as a direct write down against rental income.
risk of personal residence going into default.
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Old 06-20-2015, 01:01 AM
 
Location: Phoenix, AZ area
2,937 posts, read 2,409,058 times
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I use a cap rate formula to determine which properties are the best to invest in for rental purposes. I haven't checked rates since April and I set the rate high when I do check them but in April it was 4.5% as my guideline. It costs you $60k to get that interest only HELOC and pay ZERO principal, you still owe the $350k at the end of 10 years. If you want to invest I suggest getting a 30 yr fixed with 20% down ($70k at a $350k purchase). My cap rate calculation, using your taxes and interest without HOA dues looks like this:

Estimated Value - $350,000.00
Mortgage Balance - $280,000.00
Mortgage - $1,918.72

5% Vacancy - Rent - ROI
1) $2,100.00 - 5.8714%
2) $2,200.00 - 6.2786%
3) $2,300.00 - 6.6857%

10% Vacancy - Rent - ROI
1) $2,100.00 - 5.4214%
2) $2,200.00 - 5.8071%
3) $2,300.00 - 6.1929%

I don't include mortgage servicing in my calculations and I rarely invest below 6%, personal preference, and I always put 20% down and mortgage the rest on every property I own.
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Old 06-20-2015, 07:14 AM
 
3,483 posts, read 4,626,723 times
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Quote:
Originally Posted by AZ Manager View Post
I use a cap rate formula to determine which properties are the best to invest in for rental purposes. I haven't checked rates since April and I set the rate high when I do check them but in April it was 4.5% as my guideline. It costs you $60k to get that interest only HELOC and pay ZERO principal, you still owe the $350k at the end of 10 years. If you want to invest I suggest getting a 30 yr fixed with 20% down ($70k at a $350k purchase). My cap rate calculation, using your taxes and interest without HOA dues looks like this:

Estimated Value - $350,000.00
Mortgage Balance - $280,000.00
Mortgage - $1,918.72

5% Vacancy - Rent - ROI
1) $2,100.00 - 5.8714%
2) $2,200.00 - 6.2786%
3) $2,300.00 - 6.6857%

10% Vacancy - Rent - ROI
1) $2,100.00 - 5.4214%
2) $2,200.00 - 5.8071%
3) $2,300.00 - 6.1929%

I don't include mortgage servicing in my calculations and I rarely invest below 6%, personal preference, and I always put 20% down and mortgage the rest on every property I own.
what do you mean by the bold sentence above? If you mean the cost of interest, you also have to count the 120k I'd be making in profits, not including property appreciations. (More likely than not)
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Old 06-20-2015, 11:00 AM
 
Location: Phoenix AZ
5,920 posts, read 10,467,112 times
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Quote:
Originally Posted by Thinking-man View Post
Yeah, I mean, i don't really 'need' the 1000 or so that's going to come in...so i was planning on paying that towards principle. (no prepayment penalty).
if it isn't a compelling enough "investment" to use *your* money for, then why would it be a good investment if you're using (and paying interest on) someone else's money?

I see this alot with people renting their old home instead of selling it - and it makes a tiny bit more sense in that situation than it does in yours.

Put another way - if you had $350k in cash - looking for a place to park it, would you do this deal?

And if the answer is no, what makes it "better" by adding more costs to the equation?

You're *hoping* for appreciation and you aren't truly convinced there will actually be appreciation.

If you aren't able to even convince yourself this is the best place to park your cash, then it isn't the best place to park your cash.

When I bought my rentals, I knew *unequivocally*, and with no doubt anywhere in my soul that the market at the time was completely & totally wrong and irrational, and the values would rebound. I also knew my monthly nut (payment, taxes, insurance & maintenance) was less than half of the then-current rents were. The short-term plan was to collect that sweet cash-flow, and the long-term plan was to suck up some sweet capital gains. I'm not buying any more properties today, because I don't want to make a "job" for myself, I want money - and current pricing in my market barely breaks even, and appreciation is likely, but not guaranteed.

A wise man once said, "if you find yourself in a "fair" fight, you're doing it wrong". As a "professional" investor, you're in the business of making money. You want a big-pile of cash as a goal, but you'll accept a smaller pile in the end. You shouldn't even be playing at that particular "table" if there's even a remote possibility you'll lose money.

I'd be looking for 20% + on any future rentals, because your net is *always* going to be less than you expect. You can make 10% pretty easily managing other people's rentals, without investing hundreds of thousands into the "product".. buying a rental that barely covers the payment means the only person making any money is your property manager. And if you're the property manager *and* the money-man, you're doing a lot of work for very little gain.
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Old 06-20-2015, 11:28 AM
 
Location: Phoenix, AZ area
2,937 posts, read 2,409,058 times
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Quote:
Originally Posted by Thinking-man View Post
what do you mean by the bold sentence above? If you mean the cost of interest, you also have to count the 120k I'd be making in profits, not including property appreciations. (More likely than not)
That is your straight cost in interest paid, go nothing no principal reduction and I'm low on that figure. Plus you either owe the $350k at the end of 10 years or you refi and have to put a full mortgage on it then anyway. You are looking at that $120k profit and forgetting you just lost your house when the bank comes to collect in 10 years and the rates are above 8%.

Edit: Sure was off at 2.75% interest only for 10 years your cost is $96k in interest only is and your payment for the next 10 years would be about $3400 a month totaling $408k and a total loan cost of about $504k. Assuming that interest rate doesn't go up, it will. At the terms I gave you before for a 30 year with 20% down your total loan cost (P&I no closing costs) is $512k and you don't have to worry about interest rates going up or losing your home. I wouldn't do a HELOC and it's certainly not how I got to where I am.

Last edited by AZ Manager; 06-20-2015 at 11:51 AM..
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Old 06-20-2015, 12:36 PM
 
Location: MID ATLANTIC
7,606 posts, read 17,664,631 times
Reputation: 8102
I live in the area the OP is referring to - we are a highly transitional region, churning every four years, with high income, high scores, and a very high percentage of residents with security clearances (which renewal requires continued excellent credit). Rentals are in high demand, where buying is cheaper (at current rate levels). We enjoy one of the lowest vacancy rates in the nation.

Investment 101 is all about leverage, but there is risk using your primary home as that leverage. As long as the OP has sufficient reserves, somewhere, so he can pay off the heloc if needed, I don't see a great risk, provided he's not penny stupid. Meaning, no shortcuts on title insurance, home inspections, and so on.....do your due diligence, don't purchase a money pit in a flood zone or speculate on a possible up and coming area.

I've found buyers of investment homes far more level headed than when buying their primary residence. They probably are able to check their emotions, I don't know. I've owned one investment home and personally did not care for the added responsibility. But I was not emotionally invested.
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