AMA - What to Do With HELOC Proceeds

Today's show is part 2 of a question from yesterday's show. 

Anthony and Julia from Brooklyn ask.

Hi Victor.

I’ve been listening to your podcast for about a year now and appreciate what you’re doing!  I have my wife, who is an architect, listening in now too! We want to invest in other real estate but with two young boys we don’t have a lot of disposable income to work with.

We own and live in a double duplex in Brooklyn. We bought in 2013 and after significant work and neighborhood development its has more than doubled in value. On our block alone there is a lot of studio and one bedroom apartment development going on.  We’d like to access some of the equity we have built up in our property.  We’ve been renting the lower unit short term for about 4 years, but that business is getting less attractive.  We are considering condominium conversion and selling half to capture money to buy other property or renting out both units and taking out a HELOC or do a Cash Out Refi. Ideally we’d like to hold because the neighborhood has a lot of growing yet to do.  Our interest rate seems kind of high at 4.875%.

What are your opinions of Helocs vs Home Equity Loans for less experienced eager to grow investors?

Thanks for taking the time and we look forward to learning more from your show!

Anthony and Julia

On yesterday’s show we talked about the differences between the types of debt offerings that could be used to invest in more income properties. On today’s show, we’re going to focus on what to do with the money when you have it.

You’re probably thinking the same way that most DIY investors do, save up some money for a downpayment, put down 20% in equity, borrow 80% and add one more property to the portfolio. That’s definitely one way to do it, and in one sense there’s nothing wrong with it, depending on what your goals are.

In this context I”m going to speak directly to your wife Julia. Julia, you’re an architect. My mom was the second woman in history to graduate in architecture from Cornell University back in 1945. She has her stamp on several landmark buildings in NYC. You entered university to get your degree in architecture, knowing that it would be a huge commitment of both time and money in order to get that degree enabling you to practice as an architect. You didn’t say to yourself, I want to be an architect, but it’s hard so I’ll take a small step and get a degree in drafting. Just like someone wanting to be a doctor doesn’t say, that’s hard so I’ll go to nursing school instead.

So I want you both to look at your investment goals with a longer view. If you truly only want to own a handful of apartments in the NY market and you are willing to get there slowly over the next 20 years, then the approach you’re taking is perfectly fine.

The number one mistake I see rookie investors make is to run their project with too little capital. You want to make sure that in addition to raising the money to purchase the property, you maintain a healthy reserve fund to handle any surprise that the market might throw at you. You might have a water heater fail, or an air-conditioner fail and all of a sudden you’re digging deep into your pocket for a capital repair that wasn’t in the budget. Spend time with other experienced investors in your area and learn from their mistakes, rather than going and making the rookie mistakes yourself. It’s much cheaper that way. Like I said, investing in small properties is a perfectly viable strategy, if that’s in line with your ultimate goal.

But if you want to create a stream of residual income that can provide multi-generational wealth for you and your family, then you may want to think bigger.

If you’re thinking bigger, then you may want to jump to the next level and skip the time wasted on small stuff.