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I would be more than happy to explain to you how I got to where I am if you want, I haven't held a job outside managing my investments since 2009 all due to my real estate planning which started off with me working my ass off for the first 6 years out of high school.
thanks for your response, but i don't think i'll take advice from someone who says/thinks closing costs on a 350k house is 20k. You're clearly way off in pretty much every aspect. good night
ps. no, I couldn't care less about "...how you got to where you got at your age..." go share your made-up story in your own thread somewhere else.
Ok, maybe i'm missing something.....so maybe you or someone else can explain...
I have a paid off 550k house. I get a 400k HELOC on it. I use 350 to buy a rental that's worth 350k. 2 months down the line the interest rate goes up .5 percentage points and I decide to lock it in for a 30 year fixed and switch from the 2.75 variable rate. How will the bank take my house?
even worse (not worst) case scenario, housing craps out, and prices dip 15% overnight. my 350k rental is now worth only 300k. I can sell my rental at a 50k loss, and pay 300k towards my HELOC immediately, and have a 50k balance on the HELOC that i can pay off anytime i want with reserves or stocks i can sell, or just keep a 50k HELOC amount with a very low payment.
what am i missing here?
Your worse case scenario
350k original sale price
300k sale price (worse case) as you put it.
Commission at 6% 18,000
Net 282,000 paid to HELOC loan
Total loss 50+18=68,000
Balance on old house/HELOC 68,000
(Houses will never drop that much overnight either. It would be a gradual drop if it does) and you seem financially stable enough to weather the storm.
It's easy to say you are ok with taking a loss of X. It's a lot different actually being faced with it. If you're going to go with the leveraging as you want the best thing I suggest is you make payments to principal. As long as you don't get financially silly you will be ok. If I leveraged such as you plan I would do a 50/50 half me half principal off the end profit
After I saved 6 months operating costs.
Any penalties or costs associated with refinancing the original HELOC?
As long as you can make the payments on the HELOC nobody will take your house. The problem comes when you start having cash flow issues due to some sort of calamity. Tenant not paying rent, job loss or illness divorce etc. And any of those things are possible either singularly or combination. But all I can say is a lot of people tried what you're about to do. And a lot of them got their ass handed to them by the market.
But
You're in a way better financial and mental position to do this than most that try to do as you want to. I hope it all works out. I'm just throwing out worse case stuff to give you some food for thought.
Your worse case scenario
350k original sale price
300k sale price (worse case) as you put it.
Commission at 6% 18,000
Net 282,000 paid to HELOC loan
Total loss 50+18=68,000
Balance on old house/HELOC 68,000
(Houses will never drop that much overnight either. It would be a gradual drop if it does) and you seem financially stable enough to weather the storm.
It's easy to say you are ok with taking a loss of X. It's a lot different actually being faced with it. If you're going to go with the leveraging as you want the best thing I suggest is you make payments to principal. As long as you don't get financially silly you will be ok. If I leveraged such as you plan I would do a 50/50 half me half principal off the end profit
After I saved 6 months operating costs.
Any penalties or costs associated with refinancing the original HELOC?
As long as you can make the payments on the HELOC nobody will take your house. The problem comes when you start having cash flow issues due to some sort of calamity. Tenant not paying rent, job loss or illness divorce etc. And any of those things are possible either singularly or combination. But all I can say is a lot of people tried what you're about to do. And a lot of them got their ass handed to them by the market.
But
You're in a way better financial and mental position to do this than most that try to do as you want to. I hope it all works out. I'm just throwing out worse case stuff to give you some food for thought.
Ps
I've never heard of 20k closing costs.
Thanks for the feedback....great as always.
first of all, to address those folks that suggest "...i'm gonna do what i want and that i don't listen to advice given here....etc. etc.", that's NOT true at all. I wouldn't be here if i didn't want different point of views. I would have no problem hearing someone out who thinks my proposal is stupid, as long as it's followed by sound reasoning and thoughts. But when you come here and say you shouldn't do it because your closing costs will be 20k on a 350k house, well....then you can't expect me to take you seriously.
Electrician,
I think most of the folks that "did in 2005-8 what i'm trying to do now" didn't have their houses paid off......they had bought a 300k house that was now "worth" 550k.....they had taken out sizable HELOCs on the equity....and with the interest rates creeping up, got into trouble.
There are no penalties/costs associated with switching between interest only and fixed....and you can do it as often as you want with the HELOC that i have.
My current plan (and it could change i guess), is to go with the purchase at around 350k with all closing costs covered by the seller as negotiated. I'd keep the 2.75 variable rate until and unless Prime goes up by half a point (currently at 3.25), at which point, i would fix to a 30 year fixed.
I'd be paying any monthly profits from the rental towards the principle as you had suggested, as well as any other remaining cash from salary, with the goal of paying off the HELOC in 10 years (Primary home was paid off in a little less than 6 years).
in a worst case scenario, where interest rates jump up, housing plummets, and no renters are to be found (the 2 latter are very unlikely in Northern VA in my opinion), i'd consider selling (even at a loss), or covering the expenses with our decent size emergency funds/other investments.
Your worse case scenario
350k original sale price
300k sale price (worse case) as you put it.
Commission at 6% 18,000 +the sellers side of closing costs
Net 282,000 paid to HELOC loan
Total loss 50+18=68,000
Balance on old house/HELOC 68,000
(Houses will never drop that much overnight either. It would be a gradual drop if it does) and you seem financially stable enough to weather the storm.
It's easy to say you are ok with taking a loss of X. It's a lot different actually being faced with it. If you're going to go with the leveraging as you want the best thing I suggest is you make payments to principal. As long as you don't get financially silly you will be ok. If I leveraged such as you plan I would do a 50/50 half me half principal off the end profit
After I saved 6 months operating costs.
Any penalties or costs associated with refinancing the original HELOC?
As long as you can make the payments on the HELOC nobody will take your house. The problem comes when you start having cash flow issues due to some sort of calamity. Tenant not paying rent, job loss or illness divorce etc. And any of those things are possible either singularly or combination. But all I can say is a lot of people tried what you're about to do. And a lot of them got their ass handed to them by the market.
But
You're in a way better financial and mental position to do this than most that try to do as you want to. I hope it all works out. I'm just throwing out worse case stuff to give you some food for thought.
Ps
I've never heard of 20k closing costs.
Lawyer or title costs, depending on state we have title here in AZ, are $3000 (includes all transfer fees and expenses)
Prepay insurance for the year, he gave us taxes and insurance together so I added them together, $6000 = $9000
Title insurance, not mandatory but foolish to skip, $1500 = $10500
Repayment of HOA dues to seller and prepayment for next 2 months depends on the fees and if you have a special assessment pending it could be really high but my personal home I just paid cash for was $500 = $12000+
The bank could mandate an appraisal on his HELOC because he has no mortgage on it and has owned it for so long $500+ = $12500+
Making the unit rent ready, replace flooring and paint as well as fix any problems $5000 bare minimum unless you are buying a new home which has much higher expenses in general and are the worst investment properties in my experience = $17500+
If the market is a hot one you can expect to add HOA transfer fees and other seller stuff on top. His cost to close and make the place rent ready is what my numbers were and they weren't that far off but if you want to just talk about buying a personal home with the HELOC for you to live in it is a totally different situation.
Your total costs to turn an illiquid asset into a liquid asset, back into an illiquid asset and then liquid once more will easily exceed 20K.
So, disregard all the advice you want - the fact that you've posed the exact same question over and over without taking any actual action shows that even you realize that what you propose is risky at best, and possibly foolish.
But scared money don't make money.
lol of course i realize it's risky. Are you kidding? you're just realizing that now?
would you rather have someone just do something like this on the fly, or take their time and think about the pros and cons, and maybe even ask a bunch of monkeys on CD for advice?
I've made my position pretty clear. I've made my reasoning pretty clear as well. I've heard some great advice against the decision, and that's exactly what i came here for.
The move is risky, yes....but I have several mitigation strategies that i think can make this work. I'm just in the process of working it out in my head before pulling the trigger. You can either be a contributor to this decision (and point out the reasoning behind your position) or keep pointing out that my decision is stupid and that i don't listen to anyone. your choice either way of course, but i wish you'd choose the former.
Wasting close to 10% of your principle investment amount over the course of the investment period is a flawed investment model. If you need me to spell out how that comes about, find a new screen name.
Total closing costs for all three ends of a transaction of the type that you are discussing.
Heloc costs. Minimal, possibly just appraisal.
Buyers closing costs on property. Probably more substantial than you think, considering that you're using a Zestimate for a property value.
Sellers costs converting property back to cash.
Those three easily amount to more than 10% of your invested $$. It. Is. Math.
Throwing invested dollars away on carrying costs weighs on the total return on your investment. I won't even get into the whole paying interest to invest piece, since rates are so low.
That said, invest cash - not credit. Spend credit, not cash.
Ok, i'll address each of your points in order:
- Heloc was completely free. ZERO costs.
- buyer is paying my closing costs. around 2k is allocated for it, and it's actually more than my closing costs. I'm also not using a zestimate for the property value. i'm not an idiot. I'll be doing a home inspection and an appraisal, and won't offer more than the appraised value (unless it's like a couple of thousands more at most). I'm looking at zestimates in my search....but that's where that ends. appraisal is a must. I work with a guy who charges 300 per appraisal, so yes, there's that cost.
- my plan is to do FSBO (with max 2 percent to buyer agent) when i'm getting ready to sell the property. that may be tough in a down market (worst case scenario)....and it may take longer to sell.....so yes, this is a cost that i may not be able to get away from, depending on the circumstances and the market behavior. If it's a HOT market when i'm try to sell however, i won't have this issue...
- You're missing the "gains" potential. if.it.is.math, then you have to account for all angles, and not be selective. At 1100 a month (initially at least) interest/tax/hoa, i'm left with around 1200 a month in "profits" (about 2300 rent), translating to about 14,500 annually in profit (minus income tax, repairs, renter issues, etc.). and of course there's the very real potential of property appreciation in the northern VA area over the next few years.
Obviously you're against the idea....and i can respect that. But are there any alternatives that you can suggest? I'm already heavily invested in the market, and am continuing on that path (about 7k-8k a month goes into 401k/ira/mutual funds). This "venture" is supposed to be sort of a on-the-side action, requiring little to no 'actual income' to generate money. If i don't do this, is there a better alternative?
Your worse case scenario
350k original sale price
300k sale price (worse case) as you put it.
Commission at 6% 18,000
Net 282,000 paid to HELOC loan
Total loss 50+18=68,000
Balance on old house/HELOC 68,000
( --------> Houses will never drop that much overnight either. It would be a gradual drop if it does<--------- ) // snip //
Um.. you really think that?
Where waz u in 2008-2011?
Lots of people in all the high priced markets in the US found out different, just a few years ago.
I personally bought a few of the /formerly/ $300k +- homes here in Phoenix for between $60-$75k (and on one $60k deal, the bank paid a 6% sales commission + 6% towards closing costs + back taxes & other fees, so their "net" on a $300k investment was in the $50- something range).
The homes I bought sold new for $80-$90k in 1985-1987~ish.
I wouldn't assume the "most" you could lose on any $350k investment is $70k.
Nor would I assume any drop would be "gradual", giving you time to get out. <------- everyone in Phoenix thought the same thoughts, said the same things you're saying in your post.. so did people in LA, Detroit, Atlanta, Vegas, New Mexico, on the coast of Florida, etc..
your "worst case" isn't the worst anyone has seen in the past 10 years, not even close.
Lots of people in all the high priced markets in the US found out different, just a few years ago.
I personally bought a few of the /formerly/ $300k +- homes here in Phoenix for between $60-$75k (and on one $60k deal, the bank paid a 6% sales commission + 6% towards closing costs + back taxes & other fees, so their "net" on a $300k investment was in the $50- something range).
The homes I bought sold new for $80-$90k in 1985-1987~ish.
I wouldn't assume the "most" you could lose on any $350k investment is $70k.
Nor would I assume any drop would be "gradual", giving you time to get out. <------- everyone in Phoenix thought the same thoughts, said the same things you're saying in your post.. so did people in LA, Detroit, Atlanta, Vegas, New Mexico, on the coast of Florida, etc..
your "worst case" isn't the worst anyone has seen in the past 10 years, not even close.
You can't compare those areas to northern Virginia. Please look it up and you'll see the way market reacted in 08 and the way it differs from Detroit, vegas, phoenix, and other cities you mentioned.
OP, where is your target area ? $350K for a NOVA home is not that much. Homes and townhomes in remote suburbs have not been great investments and interest rates in the near term (this year) are expected to rise. Traffic is of course a huge consideration to renters. I agree the housing market in NOVA is very stable but it has dropped fast before (try 1992, 2000, 2008). Also there is a lot of very poorly built properties in the area.
I have rented my home for the previous 4 years @$3K/month. The going rate has not changed during that period but it has sat empty for up to 4 months while I waited for the right renter (I am very picky).
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