A HELOC to Purchase A Multifamily Building... Are There More Creative Options?
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[{"id": "i4mmz3d", "text": "Typically if the lender will lend on it it\u2019s not a bad deal. Make sure if your goal is $1,500/month, what your son needs to net and have at least that plus reserves (4% annualized) after expenses.", "replies": [{"id": "i4n4gir", "text": "&gt;Typically if the lender will lend on it it\u2019s not a bad deal.\n\nDemonstrably false", "replies": [{"id": "i4ofn2r", "text": "Lmao there\u2019s a reason lenders run the debt yield", "replies": [{"id": "i4ov4e8", "text": "They won\u2019t on a HELOC because it\u2019s not connected to the property to be purchased.", "replies": [{"id": "i4pz3g5", "text": "Lenders will factor in the HELOC payment when they buy the investment property, so everything does get considered in the end.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i4pnqfn", "text": "lol..2007 is calling...", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i4n5w1m", "text": "I'm not condoning this, but out of curiosity, what is the cost of the 4-unit building and what is the current net operating income if your goal is to increase it to $1.5k/mo.? Also, what is your exit strategy on the HELOC balance if you succeed? Do you have a mortgage on the same property that collateralizes your HELOC?", "replies": [{"id": "i4psouk", "text": "Looking at 4plexes between 300-450k. Keep in mind, it could have more units than 4. And there is no mortgage on the collateralized property. Exit strategy on the HELOC is null since my son will inherit the properties and debt.", "replies": [], "depth": 2}], "depth": 1}, {"id": "i4ou1mn", "text": "What you describe is a tried and true approach for building wealth, as long as your analysis is realistic and you have cash reserves. Shop around for great HELOC rates and terms, and make sure you know what happens to your payments if/when rates go up.", "replies": [], "depth": 1}, {"id": "i4p8rp9", "text": " This is done quite often, but with rising inflation and rates along with a possible recession on the horizon, most look to de-leverage and increase equity in order to absorb shocks. The current market has glossed over many mistakes owners might have made with crazy sale profits, but there are no geniuses right now. It's the frothy market, FOMO and too much liquidity. But multifamily can be the best asset class to buy even now. Some things to consider though:\n\nEven though the new loan may be above 4 units and considered \"commercial\", you may be forced into a recourse bank loan where you and your son's global credit is considered. That will include sourcing the HELOC as down-payment funds. Some lenders may want you to cross collateralize the other property as well which increases your default risk exponentially.\n\nA small multifamily will not be as passive as we might think. The breakpoint for 3rd party management is around 30+ units. And even then the quality of management doesn't get better until you are above at least 50 units. 3rd party Management helps make the deal passive. Unless your son is up for the job. Consider rising inflation, supply chain issues on appliance and HVAC and the labor shortage which will all make him or you a very active landlord.\n\nSmall landlords got murdered during COVID. Make sure you have reserves to float interest or repairs in times of need! That's typically what wise small landlords keep a HELOC handy for, not generally for down payment money unless the risk is worth it. Also make sure you get current delinquency numbers AND the 2020-2021 actual income statements. You want to see how the property did during COVID. I wouldn't do any deal without knowing the tenants. Don't trust the broker or seller here. They will lie to you.\n\nLastly, depending on the size it sounds like you'll be above 80% on the debt side. That's one thing. Another is I don't know details of the deal but you are buying at the top of the market(in most places) so assuming you are overpaying a little. Consider if you are buying a stabilized 4 or 5 unit, and you buy at a 4%cap, yet your blended interest is 5%+, will that continue to be a good deal? \n\nChoose the deal wisely considering your debt load and buy right! At the very least check that you are truly buying on real current numbers at a cap rate that is above your blended interest rate. Then make sure that the property DSCRs healthily (1.10+) with the combined loans (fully loaded, not interest only), realistic expenses, capital reserves above the NOI line and hopefully with some sort of management fee in there.\n\nIf you want a truly passive deal I've seen HELOCs used to buy mortgage notes, where the rates are arbitrage with actual yields. Your amount may be too small unless you are comfortable with 2nd position liens, fractionalized with other investors on the mortgage or notes on homes on lower income areas.\n\nLastly, if the HELOC is on an investment property, I'd get it while considering all if the above, as banks may be pulling back on those soon. If it's on your primary home, I wouldn't do this deal. Don't risk your home for an investment going into a recession.\n\nGood luck!!", "replies": [], "depth": 1}, {"id": "i4qoqca", "text": "you lost me at I'm also looking at a place in Mexico. You can do both once you start making income from the 4 plex but do you want to be in mexico now? your retired and have good income. I think your trying to squeeze more money that you dont need. Mexico is relatively cheap. I would say get the place in mexico and forget about a new 4 plex", "replies": [], "depth": 1}]