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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: wookumus on August 20, 2015, 04:07:42 PM

Title: Buy Rental Property with an Equity Line?
Post by: wookumus on August 20, 2015, 04:07:42 PM
We currently have a $65k mortgage on our primary residence with a comfy $350/mo payment.  We can and have put more towards the principal on a regular basis but we are very interested in obtaining a rental property in our town.  The real estate market is hot and prices are generally inflated but the rental market is even hotter, less than 1% vacancy in our town.  People are desperate to find places to live and a 4-year college will be opening up next year so it's not going to get any easier.  So first question, despite elevated prices, is it worth buying a rental property when you still have a mortgage on your primary residence?  Of note, in what I believe is a very Mustachian move, we are currently renting out 2 rooms in our house for $850/mo so we already more than cover our mortgage without our employment income.

The property is a tidy manufactured home with several important recent upgrades (roof, windows, flooring, furnace) on 0.25acre in a convenient neighborhood.  One problem, however, is the age of the home.  1972.  No banks will offer financing on a manuf home of that age.  So, we are considering using cash and a large portion of an equity line.  Is that a reasonable move?

Our goal would be to hold this property longterm.  With property tax/insurance/equity line payment, we would expect to clear $500/mo.

Would appreciate any and all input, positive/negative, let me have it!
Title: Re: Buy Rental Property with an Equity Line?
Post by: Zoot Allures on August 20, 2015, 09:20:37 PM
Can't speak to the particulars of your market and the property you're looking at, but you're talking about using leverage to invest in real estate, something done by a great many successful RE investors. One thing to keep in mind is that your equity line is likely to have a variable interest rate that will probably go up over time, so you may want to consider a cash-out refinance instead, so you can lock in an interest rate while rates are still low.
Title: Re: Buy Rental Property with an Equity Line?
Post by: Another Reader on August 20, 2015, 09:35:02 PM
Equity line is a good way to buy, but I question buying a 1972 mobile home.  Mobile homes tend to depreciate, not appreciate.  A 1972 coach is well beyond its useful life, even with upgrades.  That's why the banks won't loan on it.  Unless the lot value is higher than the price of the improved property (and that assumes the lot is buildable) I would not buy this property.

If you are saying the rent minus the taxes, insurance, and equity line payment yields a profit of $500, you do not yet understand the costs of owning rental properties.  Vacancy and collection loss, repairs and maintenance, utilities when vacant, and property management are all expenses that accrue to the property.  In addition, as the previous poster mentioned, your HELOC likely has a variable interest rate.  The cost of money could rise significantly, reducing any profit.
Title: Re: Buy Rental Property with an Equity Line?
Post by: lakemom on August 21, 2015, 09:07:11 AM
Since we did exactly this 18 months ago, Yes if the property cash flows nicely I would do it.  The one we bought is a 1986 on a permanent foundation with a "conversion record" on file (meaning the county allowed it to be converted from 'personal property' to 'real estate') but banks don't want to finance these past about 60% LTV.  We took out an equity loan on our paid off house to purchase the rental and for rehab costs.  After all expenses, we bank $550 per month.  One thing to keep in mind when looking at any type of manufactured housing is that most if not all fixtures are not a standard size.  We knew this living close to one of the areas of the country with a huge manufactured housing and RV/Trailer industry but still ran into several upgrades that we had to devise work arounds for since we could just do a remove and replace.  Still....we are very happy with our purchase since it overlooks our backyard and was in rough enough condition that the tenants the previous owner put in there were pretty sketchy!  I now have a young professional couple with one child living there and so far they have been model tenants.
Title: Re: Buy Rental Property with an Equity Line?
Post by: NoNonsenseLandlord on August 22, 2015, 07:11:40 AM
I have use my HELOC a lot.  It's a short term loan for me, 6 months or less.  Reset it again for the next emergency.
Title: Re: Buy Rental Property with an Equity Line?
Post by: wookumus on August 22, 2015, 09:51:27 PM
I agree about the other costs I am overlooking, working on the handy calculator provided in the evaluating rental properties post.  We have been ambivalent about the manuf home aspect but the reality of our town (like other popular tourist mountain towns) is that it is becoming a huge divide of super wealthy trust-funders buying up everything and the rest of the people who scrape by to barely survive here.  The manuf homes are not going away and provide a decent and often affordable living option for the working class who are struggling to find places to live right now.  The upside, if this home devolves into a mess that cannot be lived in, the replacement cost for a new smaller manuf home is minor.  On the property where we built a home, there was a single-wide 1960's trailer being rented for $700/mo and it was a mess!  That is not our goal but it really seems like a reasonable option in a town where basic 3bd/2ba homes are selling for $250k and up.

We've already talked to the bank about conversion to a fixed rate loan and there would be no fee in our case.  Curious if there are others out there with experience buying/renting out manuf homes?
Title: Re: Buy Rental Property with an Equity Line?
Post by: Seeking the Brass Ring on August 23, 2015, 06:41:11 AM
One of the first things I look at with a rental property is making sure I can get out of the property without getting burned.  As an example:

If you buy this place, keep it for 3 years and then have to sell due to unexpected life change, can you sell it for at least the amount of the outstanding loan?  This is the basic benchmark to make sure you don't end up 'underwater' on a property and will keep you out of trouble.  For a property like the manufactured home you are talking about, I'd want a wide enough margin on the purchase price to cover my butt.

It sounds like you are planning on borrowing the entire value of the property, which can be good but leaves you with a larger debt to cover if you need to sell.  $500/mo is not a bad cash flow number, depending on how high the 'operating costs' are.  This is where the 50% rule kicks in because if the property taxes go up significantly then it can really cut into the return on your investment.

Generally speaking the first 3-5 years of owning a property is the riskiest time because you have not earned back your initial investment.  Once you have earned that back, you can sit on your repair fund and be pretty confident that each following year will put more money in your pocket.     
Title: Re: Buy Rental Property with an Equity Line?
Post by: fishnfool on August 24, 2015, 07:16:35 PM
Beware of electrical wiring problems in older mobile/manufactured homes. They had a lot of issues especially if it is aluminum wiring. That is one of the reasons banks don't like to finance some of those older homes.

Other than that, if you can buy all the available real estate you can in your town before that college drives up the values you'll be sitting.
Good luck