Author Topic: Rental Property with Home Equity Loan  (Read 459 times)

KBCB

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Rental Property with Home Equity Loan
« on: September 08, 2020, 07:12:17 AM »
I live in a great neighborhood that has perfect homes for rentals. They are basement free and in a great location (think walking distance to a shopping center and right in a village). Think small homes (700 square feet-ish) with not much to break. Many homes are already rentals and as soon as one goes up for sale it sells in a couple days. I was saving to buy one when an opportunity to buy one before it went on the market came and it was perfect. I bought the home for $72000 and I took out a home equity loan of $60000. The interest is 4.74% and the term is 20 years. Should I try to pay this off quickly or is there a tax benefit to keep this (like a conventional mortgage). In regards to the loan the payment is 466.08$ and this includes flood insurance. I get $850 for rent. My plan is to make a double payment every other month using the entire rent payment. Any advice out there?

Jon Bon

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Re: Rental Property with Home Equity Loan
« Reply #1 on: September 08, 2020, 07:35:09 AM »

You need to hang onto the cash for repairs, and your return, I would not do double payments. Paying extra is just burying money into the house.

Did you buy the house cash then get the loan? I believe home equity loans are more expensive than traditional loans. I would focus on raising the rent, your margins are pretty slim. I dont love houses under 100k. A new roof is going to wipe out your profit for a few years.

The power in RE is using the leverage to get a higher return on your own money, not paying back the leverage asap.






Fishindude

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Re: Rental Property with Home Equity Loan
« Reply #2 on: September 08, 2020, 07:40:33 AM »
The return doesn't sound like it's worth the risk to put your primary dwelling in debt for.
$4,608 Gross annual return, minus taxes and any other upkeep expenses doesn't leave much going into pocket.

KBCB

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Re: Rental Property with Home Equity Loan
« Reply #3 on: September 08, 2020, 07:54:19 AM »
To add a bit more information-
1. The home equity loan is my only outstanding debt.
2. I kept the same renters who are wonderful and I didn't want to price them out of the home, i did raise the rent when i bought the home but not bey much. Think fixed income/retired
3. I could potentially pay off the home in about 4 years or less. 
4. The flood insurance is required for the loan, but my property has never flooded from what i have researched and the demolition of the creeks waterfall close to my home changed the water level for the better. If I pay the loan early i could get rid of flood insurance.

« Last Edit: September 08, 2020, 08:06:49 AM by KBCB »

Jon Bon

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Re: Rental Property with Home Equity Loan
« Reply #4 on: September 08, 2020, 08:25:21 AM »
To add a bit more information-
1. The home equity loan is my only outstanding debt.
This is not really relevant.
2. I kept the same renters who are wonderful and I didn't want to price them out of the home, i did raise the rent when i bought the home but not bey much. Think fixed income/retired
You are in this to get a return right? Worry about your own financial situation not theirs
3. I could potentially pay off the home in about 4 years or less. 
And? Now you get to pay a higher tax rate, not to mention a worst return on your money.
4. The flood insurance is required for the loan, but my property has never flooded from what i have researched and the demolition of the creeks waterfall close to my home changed the water level for the better. If I pay the loan early i could get rid of flood insurance.
You don't pay into insurance to get your moneys worth



I think you need to focus on treating this like a business. The purpose of a business is to generate cash every single month. You understand what I am saying about paying down early right?

So super simple math.

100k house 80k loan.
Rent $1000, Expenses 700.
So return is 3600/20000 =18%


A Paid off house is
Rent $1000 expenses $300
8400/100000 = 8.4% return.

If you add taxes it goes to 14% and 7%. So by paying it off your return is cut in half. I realize I am leaving a ton out but my overall point stands. I made up all the numbers but leverage is a great thing.






KBCB

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Re: Rental Property with Home Equity Loan
« Reply #5 on: September 08, 2020, 08:59:44 AM »
To add a bit more information-
1. The home equity loan is my only outstanding debt.
This is not really relevant.
2. I kept the same renters who are wonderful and I didn't want to price them out of the home, i did raise the rent when i bought the home but not bey much. Think fixed income/retired
You are in this to get a return right? Worry about your own financial situation not theirs
3. I could potentially pay off the home in about 4 years or less. 
And? Now you get to pay a higher tax rate, not to mention a worst return on your money.
4. The flood insurance is required for the loan, but my property has never flooded from what i have researched and the demolition of the creeks waterfall close to my home changed the water level for the better. If I pay the loan early i could get rid of flood insurance.
You don't pay into insurance to get your moneys worth



I think you need to focus on treating this like a business. The purpose of a business is to generate cash every single month. You understand what I am saying about paying down early right?

So super simple math.

100k house 80k loan.
Rent $1000, Expenses 700.
So return is 3600/20000 =18%


A Paid off house is
Rent $1000 expenses $300
8400/100000 = 8.4% return.

If you add taxes it goes to 14% and 7%. So by paying it off your return is cut in half. I realize I am leaving a ton out but my overall point stands. I made up all the numbers but leverage is a great thing.

This might be a stupid question but what is the expenses in the above scenarios? This does seems super simple enough.

yachi

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Re: Rental Property with Home Equity Loan
« Reply #6 on: September 08, 2020, 10:06:50 AM »
This might be a stupid question but what is the expenses in the above scenarios? This does seems super simple enough.

Don't miss the point.  Paying off the loan reduces your expenses, but ties up so much money, that it reduces your return.

I would try, if you can, to obtain a mortgage on the rental property itself.  That way you can access your home equity for another property.

In scenario A, you have 20k invested in real estate.  In scenario B, you have 100k invested in real estate (but at a much lower return).  A scenario C would have you with 100K invested in real estate across 5 houses, all with financing, for a higher return.

Jon Bon

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Re: Rental Property with Home Equity Loan
« Reply #7 on: September 08, 2020, 10:17:40 AM »

This might be a stupid question but what is the expenses in the above scenarios? This does seems super simple enough.

By all means run your own numbers and report back to us what your returns are. That will helps us give you better information.


Papa bear

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Re: Rental Property with Home Equity Loan
« Reply #8 on: September 08, 2020, 02:00:43 PM »
You also should be able to get a conforming mortgage at around 3-3.5% on the rental.  I would definitely do that and pay off the home equity loan.   

And to add to the above posters.  I would NOT pay it off early.   If you want to grow your real estate portfolio, buy another place, donít pay down your debt on this.   


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