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No Cash to buy, what to do?

C

Chadler

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Jan 11, 2010
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Hey everyone, I started investing in real estate about a year and half ago. I would like to buy more investment properties but currently do not have much in terms of cash. I am unfamiliar with home equity line of credit and refinancing. Can anyone shed some light as to what my options are if I wanted to purchase another investment property with no cash? I am still quite an unexperienced investor so your thoughts and suggestions would be greatly appreciated!



These are the 2 properties I currently own...


Apartment 1: purchased 1.5 years ago

$450,000 (current market value $500,000)

420,000 mortgage

30,000 equity

Expenses: 2060/month

Rent: 2440/month

Cashflow: $380/month


Apartment 2: purchased 5 months ago

$405,000 (current market value $415,000)

382,000 mortgage

23,000 equity

Expenses: 1650/month

Rent: 1750/month

Cashflow $100/month
 
You can only get a HELOC up to 80% of the assessed value of your property, so I think you may be out of luck in terms of cashing equity out of your existing properties.



Regards,



Michael
 
Find investors that have cash and/or can qualify for a mortgage. Show a track record, build a story about yourself and have sufficient details about the next deal to make it appealing for such a JV partner.



Or wait until you have more cash yourself through savings and a (better?) job.



Start your JVs with people that know you and think highly of you: co-workers, grannie, dad, uncle, brother-in-law, church choir members, soccer team buddies etc ...
 
Save lots. You're getting better than $5k/year in cashflow and I assume you've got a job. Save, network, and talk to family or very close friends about doing a JV.



I'm also a fan of lower-cost properties when you're starting out so you're in with less cash.
 
I would probably try to hold tight for 1-2 years and then sell both properties, hopefully with some profit, in order to invest in less expensive units that have a much better rent to value ratio.



Your present rents are extremely low, based on property values, and the likelihood is future expenses, if you hold very long, will drive you deep into negative territory.



Very risky situation in my opinion.
 
[quote user=invst4profit]I would probably try to hold tight for 1-2 years and then sell both properties, hopefully with some profit, in order to invest in less expensive units that have a much better rent to value ratio.



Your present rents are extremely low, based on property values, and the likelihood is future expenses, if you hold very long, will drive you deep into negative territory.



Very risky situation in my opinion.


I concur with this statement ! Both properties are too expensive for a rental, with income too low for its value. The only way to make money here is in equity appreciation and that hopefully happens in the next 1-3 years assuming it is in a decent area of Canada with upside !
 
Bizaro86, so if the assessed value is 450,000 then I can get a HELOC of 360,000? Sorry, I'm not understanding
 
Wow that is a weird post of all the above to come back on.



The loan you are referring to is correctly called a "Home Equity Line of Credit". It will provide up to 80% of the equity value in the property. If you have $30,000 in equity you could get up to $24,000 but in your case you may not get any. Hard to say.
 
^^ I was going to reply to the others as well.

Thank you everyone for your replies. It seems as though my properties are too expensive for the rent I'm earning. My question is, why is it smarter to buy an older property (higher rent to value ratio), than a newer property (lower rent to value ratio). I would earn greater cash flow on the older property, however, in the long run I would use up more of the cash flow on repairs and maintenance. No?
 
[quote user=Chadler] My question is, why is it smarter to buy an older property (higher rent to value ratio), than a newer property (lower rent to value ratio). I would earn greater cash flow on the older property, however, in the long run I would use up more of the cash flow on repairs and maintenance. No?




By spending 400k/door you are quite likely paying for amenities your tenants don't need. When tenants shop they are focused on two main criteria: size and location. So if your property has stuff like high end appliances, high ceilings, granite countertops, new hardwood flooring etc you have spent money you don't need to.



Repairs and maintenance (R&M) is important to consider but I suspect you have reduced your property risk so much as to not make any return. Most wear items in properties have very long service lives and if they are properly maintained it's actually less risky than you might think.



I'd also caution that higher end properties cost more to fix when they break and they need to be maintained to a higher standard than 'rental spec' properties. So spending more on a newer place to avoid R&M costs doesn't always accomplish the objective.
 
As Brett has suggested in the "long run" the higher end property could/would cost you more for repairs and upkeep costs. This would not necessarily be an issue if your properties were renting in the $3500/month range but at your rental rates it doesn't add up.

The only way to minimise your risk is to buy new and sell sooner to avoid repairs and maintenance but in your case the rents are still too low based on the risk level.



One interesting statistic studies show is that the cost of maintenance, over the long term, was a fairly constant percentage of rental income regardless of the value of the property. Keeping in mind this percentage was based on rental properties where in rental incomes reflected the value of the property. This percentage would not necessarily apply to your properties as your rents do not reflect the property value. The percentage was fairly consistent across all rental types and markets although the actual percentage is often in dispute. Therefore maintenance costs should not be a factor except in the very early years of a new property or any property that has not been properly maintained.

Keep in mind many maintenance costs have less to do with the age of a building such as taxes, insurance, utilities when vacant, evictions, vacancies, legal, accounting, etc. although many of these costs are proportionate to the value of a building.

So whether you buy a maintained older property or a high priced new property in many aspect they should work out similar if rents are reflective of value. No guarantees though.



Some advantages of lower priced is a larger tenant pool and the ability to own more properties thereby spreading out your risk. One vacancy in a $400,000 property is more financially damaging than one vacancy in two $200,000 properties in my opinion.
 
If you have a property valued at 500,000 you can have a total mortgage of up to 400,000. Since your mortgage currently exceeds that amount, you couldn't borrow more as a home equity line of credit.



In short, your options for buying more property appear to be saving more, selling one or more of your properties to cash out equity, or maybe doing a JV.



Regards,



Michael
 
Everyone brings up really good points, which is making me look at real estate investing in the different way.



What should a typical cashflow and rent to value ratio be?
 
The answer to that question really depends on the individual. Ask 5 people and you may well get 5 different answers.



Speaking for myself I am looking for the price of the property to be 5x gross annual rent or less. I know that I can cashflow with that. It also needs to be at that level in order to be competitive with alternative investments that I have.



Best regards.
 
[quote user=Rickson9]5x gross annual rent or less.


A worthwhile goal that exists in rural markets or the US .. not usually in healthy Canadian cities !!
 
[quote user=Chadler]What should a typical cashflow and rent to value ratio be?


That depends on the market !



What is a typical car worth ? Between $2,000 and $200,000 .. more specifically for a mid range 3 year old used car between $15,000 and $25,000 !!



Aim for no more than 10-12 times annual rent for the price !!



Cash-flow is a function of price, rent, expenses, upside and mortgage level !
 
I second this post

Except might be worthwhile to sell now and not wait 1-2 years

[quote user=invst4profit]I would probably try to hold tight for 1-2 years and then sell both properties, hopefully with some profit, in order to invest in less expensive units that have a much better rent to value ratio.



Your present rents are extremely low, based on property values, and the likelihood is future expenses, if you hold very long, will drive you deep into negative territory.



Very risky situation in my opinion.
 
Hi Chadler



I started with $0.00 bucks but did know the REIN system well and that gave me a leverage over others. It wasn't that I was the "established expert" but i did have skills and knowledge they didn't have. So I sold myself and the REIN system.



Became a Gold REIN member within 3 years but one special thing that definitely was a huge factor in rising that fast was that the Alberta boom was happening and many people wanted to get into the Alberta market.



So really, you've got experience and knowledge many people don't have. That's tons of value to people who've been getting 2%-6% a year for like EVER!



So take some sales courses if you feel that your sales skills are lacking and start buying!
 
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