How to Get a HELOC on Investment Property: Use Your Equity! (Rookie Reply)

Ashley:
Today we’re answering your questions on how much time real estate investing really takes, how to tap into your property’s equity if it’s a rental, and what to do when you win a tax lien bid. But suddenly you’ve realized you might have stepped into a tricky situation.Yeah, these are all real raw rookie scenarios and the kind of stuff we won’t find in a textbook. We’ll share what’s worked for us, what to watch out for and what we wish we knew started.Welcome to the Real Estate Rookie podcast. I’m Ashley Kehr.And I’m Tony j Robinson. And with that, let’s jump into today’s first question. So our first question comes from Marissa and she posted this in the BiggerPockets forum and she says, I’m new to this space, but was looking for some advice on obtaining a HELOC on a home that I’m currently renting out. I own the home but do not live there as my primary residence. I live with my parents and still have a mortgage on the home. I’m quickly learning that many banks do not give HELOCs on rental properties. I’ve called a couple of local banks, including the one that the mortgage is through, as well as larger banks like Bank of America and Rocket Mortgage. None offer HELOCs on rental properties that still have a mortgage. There is nothing I want to purchase right now and I will have tenants in the home at least until the end of this year.I still wanted to pursue a HELOC in case any opportunities come up in the future. I was wondering if anyone would be able to give me advice on if there is a chance of getting a HELOC in my current situation. Does anyone know of any lenders or programs that might be open to a HELOC on a rental property? Any advice would be greatly appreciated. Thanks so much. Yeah, I think and Ash, lemme know if you’ve had a different experience, but yeah, typically HELOC is something that is more predominant on a primary residence and what you’ll see a lot of investors do is if they know that they want to get a HELOC on a property that was a previous primary residence, they’ll get the HELOC before they move out and turn it into a rental because once you’ve got the heloc, it’s yours obviously maybe check with the stipulations of your specific heloc, but if you get the HELOC when it’s your primary residence and you move out at some point Thereafterwards while the line is still open, typically that’s okay.We attempted to get a line of credit on one of our Airbnbs because we have a good amount of equity and we didn’t want to sell the property. And even for us, we probably had, I dunno, close to $400,000 in equity on this property and we had a hard time trying to find a line of credit and we actually went with the bank. We were almost at the finish line on getting this commercial line of credit and then it ended up falling apart at the last minute because of some zoning issue. We just haven’t attempted it yet. So Ashton, what’s your experience been? I know you’ve used lots of lines of credits, but were they HELOCs or were they different types of loan products?Yeah, I’ve actually never done a HELOC on my primary residence, but I have done them on rental properties and they were the same that you had went after was the commercial line of credit, and this was through a small local bank. So sometimes in these small local banks, they don’t even a commercial loan officer in that branch, like when the bank is so small and has maybe five to 10 branches, there may be just one person that does all the commercial lending and they may be at a different branch or whatever. So it’s finding out who that person is by looking on the website and talking to them directly. Not the residential lender but the commercial lender. And I’ve done it on three different properties and each of those though they didn’t have a mortgage on them, so I’ve never done it when there was currently a mortgage on the property already.And then securing the line of credit, one thing that I think that if someone is listening and they’re thinking of turning their primary residence into a home is to get the line of credit while it is still your primary and then move out. Tyler Madden, who’s been on the podcast a bunch, helped out with BiggerPockets for different educational things. He did this where when he was in his primary residence, he had his mortgage on it and then he went and got a HELOC before he decided to turn it into a rental and move into its next property. And he used that HELOC from the first property to go ahead and go and fund the rehab on the next property that he purchased. So that’s obviously not a choice for this person since they’ve already moved out of the property and it’s not their primary anymore. I’m curious as to what refinancing would look like.I’m assuming they probably have a better interest rate since it was their primary residence, a nice 30 year fixed rate loan and if they were to go and refinance it, they probably have to get a higher interest rate. But I would look at that comparison as if you went to do a cash out refinance, what could you do with that chunk of money that you’re getting compared to what the closing costs would be compared to what your new monthly payment is? And maybe it’s actually worth it to still tap into that equity and go ahead and refinance the property, but you also have to look at what your goals are of the property. Do you have an exit strategy in place? Do you already know that you’re going to sell the property in three years or are you going to hold it for the next 20 years? Because that can also play into the decision that you make on this property.Yeah, and the person asking this question isn’t in a rush, right? She said that I don’t have any specific properties identified, just want the cash kind of waiting just in case. But then she also mentioned that the tenants will be moving out at the end of the year. And I wonder, again, to Ashley’s point, depending on what your lifestyle looks like, could you move back into the property for six months, pull the HELOC and then put tenants back into it? So now you’ve kind of been able to sidestep that issue. Now again, I’ve never pulled the HELOC either, so I think it’d be important for you to understand from the lender, are there any limitations on once I pull the HELOC and how long do I have to stay there and are there any stipulations around that? But I think once you have an answer to that, if you’re not in a rush, that might be the simplest path forward because even with a HELOC versus a commercial line of credit, typically you’ll get better terms when it’s your primary residence. Just like most debt in general in real estate is better for primary residences than it is for investment properties. So that might be an option for you.And you could also find a private lender too that would maybe take second position on the home that if you have enough equity, say for example you have a hundred thousand dollars equity and you offer them, you just want a HELOC for 2030, maybe $50,000, maybe there’s somebody that’s willing to do that, they may charge you 12% interest for that HELOC they’re giving you. But that’s also another option that has been done by a lot of investors is going and getting a private money lender who will actually lend as your bankAnd Ash. I think it might be beneficial if we break down the repayment process on the commercial lines of credit that you have just so Ricks understand what that looks like. So when you pull your line of credit, and I guess for all of our rookies that are listening, there’s two kind of different ways that this could work. You could have it in a way where you pull the line of credit and it almost operates like a credit card, I guess you swipe, you make some purchase using that line of credit and then you make monthly payments back to the line of credit or I’ve seen it done in different ways. It can be like, Hey, we’re going to release the funds to you and then there’s more of a fixed payment principle and interest gets applied to that. When you use your lines of credits, I guess what does that repayment model look like?Yeah, mine is interest only. For example, I have a line of credit, one of them is $108,000. It’s a very small local bank, so the process isn’t super savvy, but I basically just send an email and say, Hey, can you take $10,000 and deposit it into this bank account with the bank account number? And they usually process it same day. My other line of credit, it’s a form I fill out. I emailed them the form and they usually process it as long as it’s sent by 2:00 PM it’s processed the same day, money’s in whatever account I ask them to put it into. And then after that time period, after I draw money off of it, I get a monthly statement with the interest only payment. So the day that I drew that money out, how much interest has accrued and I think one is at 8% right now and the other one at 8.5% with their interest rates. And then I make those monthly interest payments and then if you pay any additional that’s just coming off of your principal payment until the whole thing is paid back off. So when it is back to $0 pulled off of the credit and you’re back to $108,000 available, then you are just getting a statement that says nothing is due and you have $108,000 available. So that’s the reason I like the lines of credit is because if you’re not using the money, you don’t have a payment and you’re not paying any interest in anythingAsh, how much time do you have to repay those funds? Let’s say you pulled your full line and just for simple numbers sake, let’s say that you pulled $120,000. Do they give you 24 months to pay it back so you you’ve got to be paying back two grand a month or is it you have a decade to pay this money back?Honestly, I have no idea because I only use it for short term purposes. I’m very strict about that. I have a plan in place that I’m either refinancing or I’m going to sell the property and I’m going to do it. So I’ve never used the line of credit for a down payment or anything where I have to pay it over time or I don’t have a plan already as to how I’m going to repay it in a short amount of time. Usually three to six months it’s paid off. Where it does get more complicated is if I’m doing two different projects at once as to, okay, breaking out. So this property pulled 50,000, this property paid 20,000 and then allocating the interest to each property. And that’s why I do like having the two different lines of credit. So I can use them both simultaneously but for different projects and it makes the bookkeeping so much easier.But I guess to answer that question though, my one business partner, he took a line of credit on his house for our second property we purchased and he got a HELOC on it and he, after, I don’t know the timeframe or whatever, but it probably was a year or two years, the bank came to him and said, we’re actually going to turn this into a loan and it’s going to be amortized over 15 years at this interest rate because he had only made those interest payments over the year, the two years and not paid any of the principal. So they stepped in and said, we’re going to change this into a payment plan. We were paying interest and principal and then he couldn’t draw off of it anymore because it did turn into a home equity loan instead of a heloc.Yeah, and I think that was the point of me asking that question is because I want rookies to understand that there sometimes is a difference. And I think the way you framed it, home equity line of credit versus a home equity loan, the lines of credit are reusable and the loans have a fixed payment where you’re paying down principal interest, there’s an amortization period, et cetera, et cetera.On that too is you can get the home equity loan right out of the gate too. Basically that’s getting a second mortgage on your property too. So if you feel like that would be a better fit for you, then you can also do that too instead of the line of credit.I love your point, and I agree with you on this, that leveraging the home equity line of credit or really any line of credit in a short term basis, I think is less risky than dumping it into a down payment because now you’ve got to figure out, okay, how much time do I have to repay this line and will I generate enough cashflow from this deal to pay back that line and that amount of time or will I have to supplement those payments with my own cash? But if you’re doing it on a short-term basis where you’re flipping a property or you’re doing a burr where in the next six or 12 months you’ll be able to repay that line when now you’ve got a way to recycle that capital a little bit more quickly. And guys, I know investors who have built their entire portfolios with one home equity line of credit and they go out there, they get a big line because they built up a lot of equity in their primary home and just recycle that capital into less expensive markets over and over and over and over and over again. So it is a path that works. I just got to make sure the math works outOkay. We’re going to take a short break, but we’ll be right to back to hear from an investor who bought a property at auction but has got themselves into a sticky situation. We’ll be right back. Okay. Thank you guys so much for checking out our show sponsors. So next up we have a question from Margaret. I want to bid for a tax lien sale in Pulaski at Tennessee. I was over the moon at first. I drove by the property a few times and it looked fine. I did my research on what it was worth, but what I did not do was research the properties around it. It seems though surrounding plots are all owned by the same family since the sale. The house seems to have been tagged with spray paint. Someone was still living there. As I noticed, sometimes there is a truck in the driveway and sometimes there isn’t. I know there is a year redemption period, and that time will be up in March, 2026. So I have some time to prepare. What should I be doing if anything right now? Okay. So I guess to clarify on this, it looks like Margaret does now own the property and it doesn’t seem like Margaret has gone to the property at all, does it?Not inside at least.Yeah, that there’s still somebody living there from just driving by. So my first thing would be to start an eviction process. If you’ve won it and you now have the deed and you’re now owner of the property is starting the eviction process to whoever is in there and you just, I would recommend getting an attorney like we’ve talked about on a previous rookie reply and having the attorney do the process. But they would just put, since you obviously don’t know any information about this person, they would just put any occupants of the property. And anytime you do an eviction, you should be including that anyways. So say I have a lease with Tony and he is in there, but I know there’s other people living in there. The eviction would state Tony Robinson and any other occupants and then the address of the property too. But that would be my first step is talking to an attorney to start that process. NowI don’t really know much of anything about the tax lien sell process, so I dunno if I can add a whole heck of a lot here. Have you ever bought tax lien?No,Because I actually didn’t know that there was a,Okay, so after going through that, we’re going to assume that she does not have access to the property because the redemption period won’t be up until March, 2026. So she has some time to prepare. So she’s thinking of things that she should be doing before she can actually take ownership of the property. And I guess we should maybe start off with saying what a redemption period is, and this is when property could be a foreclosure, it could be a tax lie, whatever. And I think there’s different rules for different states that I’ve read. I’ve never done a property from auction, a tax lien property. I have bought a property from foreclosure, but it wasn’t at an auction, it was up on the MLS. But with this property, the redemption period it says is one year. And this is when the owner of the property could come to I guess the court or whoever’s selling the property and pay the back taxes, the interest on the money that they haven’t paid, that it has accumulated and any other fees, and then they’re able to take back the property based on that. So Tony, you haven’t done an auction either?Yeah, I haven’t either, but it’s an interesting question making us both do a little bit of research here. And it actually, the redemption period varies depending on how delinquent the original property owner is. And I’m looking for Tennessee and guys quote me and Ashley, check us if we’re wrong here, right? Because doing some research on the fly, but it says that if you’re less than five years delinquent, then the redemption period is one year. If you’re between five and eight years, it’s 180 days it you’re more than eight years, it’s 90 days. And if it’s vacant or an abandoned property, it’s only 30 days. So I guess the first thing that this person would really want to go and figure out is how long have they been delinquent? And maybe don’t assume that it’s 12 months because if it’s been vacant for however long, then maybe they’ll only have 30 days to do this.So I think that’s the first thing that I would do during the redemption period, it seems like whoever is the actual owner has a right to again file, but there’s some paperwork they have to go through and actually file with the courts. But I think what I would do and talk to a real estate attorney, but I think my first thing would be like, Hey, do a really thorough title search on this. That way if someone does come and say, Hey, I’m John and I own this property, there should be some paper trail with the title search that shows this person actually has a claim to this property and it’s not someone who’s just trying to jump in and maybe take ownership from you. So I think preparing yourself legally that way would also be the smart move. But I definitely wouldn’t, and I don’t even know if legally you can start the eviction process, right? Because it’s like you don’t actually have true ownership of the property yet, so you’ve got to wait for this whole redemption period to kind of shake out.Yeah, I think that’s a great point as to you need to get yourself ready, but you can’t actually send them a notice until you are the actual owner of the property, which would be when the redemption period is over and you officially have ownership and title deed to the property.It might be cool. Ash, I feel like we should maybe bring someone on who’s a tax lien expert and just give us the full breakdown of this, because I do know that there are people who have built their portfolios going to auction, doing the tax lien piece, but it might be an interesting episode for us to have.I feel like it would be so fun. I did actually go to the Buffalo, the Erie County tax Auction, and it was like they do it every year in September, and I went and I bid on another property for someone else, but it wasn’t actually me doing it, but it was just like the room was packed. I couldn’t believe how many people were there. And it started off with this list that came out in the spring and I went through, I mean just thousands of homes, thousands. And I went through and looked at the areas that I was interested in, highlighted, literally printed out 500 pages. And I’m highlighting, well, at the time I did not realize that they update the list every two weeks because people come in and pay their back taxes and then they’re no longer on the list and the list would get lowered lower.And here I’d sent all this time, and so I learned my lesson to wait until it gets closer to the auction, then actually look the list. But I’ve never gone back again. My dad has purchased some land at auction that bordered other land he had because they sent out a notice to the neighboring landowners. And then this investor that I worked for, me and him went to a US Marshalls auction before where they had seized this property from somebody and put it up for auction, and we were the only people bidding on it. So that was exciting. But those are really my only experiences. So I think that’d be really cool. So if you are a tax lien expert and you’re watching this on YouTube or head on over to YouTube at realestate Rookie and let us know in the comments so we can get you on the show to teach us and the listeners more about tax auction. Okay, we’re going to take our last break and we’ll be right back after this.Alright guys, we are back with our final question and this one says, I’m curious to hear from people at different stages of their real estate investing journey. How much time per week do you personally dedicate to finding deals, doing due diligence, managing properties, networking, et cetera. In your experience, how much time does someone really need to put in to start seeing results for a complete beginner? What do you think is a realistic first year goal in terms of number of deals, cashflow, or even just learning milestones? Are there any big surprises you wish you knew before starting? I’m looking for honest experience-based answers, not just hustle 24 7 advice. Thanks in advance for sharing.I actually really like this question. I think it’s difficult to answer, but let’s just throw out a number, Tony, you think of the number in your head that you think a rookie investor should spend each week on all of this stuff. Let’s just say they have one property, a rental property, they’re also trying to grow their portfolio. How much should they spend a week on that one property? And also expanding their knowledge, setting up their systems and processes, things like that.I’d say 10 to 15 hours a week I think is reasonable for someone who’s just getting started, still working a day job, still balancing spouse, kids, whatever it may be. I think 10 to 15 dedicated hours per week is a good starting spot.I was going to say 10, that was the number in my head. I think that too, it can vary and that’s the hard part is like if you’re on vacation, you may not have to do anything for the property and not have to spend the time doing additional research or things like that. But I think if you are able to dedicate some time throughout your week to actually build your business, and real estate investing is a business to research how to get your next deal to analyze deals, to look at deals, even if you know you’re six months out from actually making offers, just that repetition of building these properties because you’ll actually get faster and quicker. I did a show yesterday with Dave Meyer that will come out soon, and I got a deal and I waited to analyze it and we analyzed it live.But in my head I had done, just back of my head math, not back of the napkin math, I guess because I didn’t even write it out, knowing that just because I’ve analyzed so many deals in this market, I knew that it was not going to pencil out at the purchase price. And it was like funny to see because Dave thought he looked at it, hit basically the 1% rule pretty close, and he’s like, wow, this is pretty good. We don’t usually see this, but I know in that market, property taxes are super high and that basically cuts out the one, they don’t meet the 50% rule at all because the property taxes are so high. So I think as you get to know deals in your market things, you’ll be faster too. So the actual time spent on your one rental is going to be very insignificant. Very insignificant. I mean, lease renewal each year, responding to their messages, your bookkeeping if you’re going to do that yourself, coordinating repairs and maintenance. So it also depends on if you’re self-managing or you’re having a property manager too, as to how much time you’ll put into it. But honestly, I felt like there was more time I had to put into the property when I had a property manager than self-managing too.I agree with you completely, Ashley, and I was rereading the question. And to your point, I don’t think that there’s a magic number, and I think it is going to vary dramatically depending on the person, depending on your chosen market, depending on your strategy, depending on your skillset, depending on how well you retain information, depending on how good you are at taking action, depending on how good you are at facing rejection, there’s a lot of different variables that I think go into how much time does one need to invest and how efficient or effective can someone be with that time? I think maybe the more important question than how much time should I be investing? What are the most important things that I should be focusing on? And I think if we shift the conversation away from quantity of time invested and instead focused on quality of time invested, that’ll get you closer to your goal of getting your first deal.Now, obviously if you can combine those two things, you have a large quantity with very high quality, you’re going to get there even faster. But like I said, most of us are, I think, fighting against the other demands or demands on our time. So for the Ricky’s that are starting out, and Ash wrote a book that’s pretty good about the 90 day roadmap for Ricky Investors, but I think it’s decide on your why. What’s your motivation? That doesn’t take all that long. Figure out which strategy you want. And I think that does take a little bit more time because you’ve got to consume maybe different ideas from different podcasts and YouTube channels, and maybe even test some things out to see which strategy makes most sense for you. But once you’ve got that, then it’s just a matter of, okay, how many deals do I need to look at? How many deals can I analyze? How many offers can I get out? And that’s how you start scaling this business. So I think we oftentimes overcomplicated as rookie investors when in reality the process of getting your first deal is straightforward. It’s a very proven path to do that. It’s just, can you do it? Can you commence to actually doing the work to get there?Very well said, Tony. We need to turn that into a social clip to,There you go.Well, thank you guys so much for joining us. And today’s rookie reply. I’m Ashley. He’s Tony, and we’ll see you guys next time.