Welcome back! One step closer to finishing up this rehab. We wanted to take quick look at our old numbers for 1220 S Delaware to see how factors have changed since we closed on the property in August. Until we get an appraisal to refinance and lease to our first tenants, our figures will continue to be best estimates. But what's changed? Mortgage rates have dropped more than 1% and rents continue to rise. That means greater cash flow! But if ARV decreases, so will the amount of equity in the property after we refinance. Though that return looks slim in the short term, we'll be able to cash out refinance in the future, again and again to capitalize on equity built by our tenants and property value appreciation over the long term.

WANT TO ACCESS YOUR EQUITY? As new investors join the team, we're also researching creative financing solutions to leverage assets we already own. This week we dive into HELOCs and Home Equity Loans. What are they? What's the difference? And would it be a good option for us and our next BRRRR? Let's dive in.

Stoked you're here,

Alex

PROJECT UPDATE

PREVIOUSLY

THE SKINNY

MARKET PULSE & THE "SO WHAT?"

Cooling Inflation Boosts Home Affordability REALTOR Magazine (25 Jan) Decelerating inflation is the key reason for forecasted 5.5% mortgage rate by July this year, with experts predicting rates as low as 4%. A key attributor to falling inflation is rent costs vs. equivalency in rent owners would have paid, with annual increases at 7.9% and 7.1% respectively. Check out this article from Chief Economist, Lawrence Yun at NAR - other factors contributing to the inflation slow-down, and insights specific to multifamily starts I hadn't seen before, and how that will surely flatten rents in the short term. Read more, here.

Why Today's Housing Market Isn't Headed for a Crash Keeping Current Matters (9 Feb) Today, mortgage standards are far more stringent with lending institutions taking on less risk when qualifying prospective home-buyers. Property inventory continues to experience a nation-wide shortage. With an annual decrease in new construction since the 2008 crash, tighter regulations and more qualified homeowners across the board, trends we see today resemble very little from the early 2000s. Read more, here.

Market Update: Jackson, Missouri Kansas City Regional Association of Realtors (1 Feb) Average sales prices are up 2% YoY in January, median sales prices are up 2.3%, days on market stretched from 32 to 42 days, inventory and supply are both up 35% and 66% respectively. Jackson, Missouri (home to our latest BRRRR) continues to mirror Heartland sales price increases YoY, but we'll keep our eye one that supply/inventory figure, as greater numbers would contribute to slower appreciation/depreciation in the future. Read more, here.

DEEP DIVE

Home Equity Line of Credit (HELOC) vs. Home Equity Loan?  BOTH are great options to access the equity in property you own, allowing investors to purchase additional real estate without pulling personal funds out of the bank to do so (until the payments start coming in). The only other way to access equity in the home is to sell it -- Let's not do that.

• A HELOC is a second mortgage utilized like a credit card, secured by the equity in your property. It's a revolving account requiring payments on the amount of credit you use, not on the total line of credit you've been approved for. Depending on the market, the interest rate ebbs and flows -- when the market's up, up goes the rate; when the market's down, so is the rate. HELOC's are offered with a draw period, where the funds can be withdrawn and payments are interest-only, and a repayment period , when the borrower no longer has access to the credit and begins making payments against the principal borrowed, with interest. For a 30-year loan, that might be 10 years and 20 years respectively. A HELOC is revokable, however. If the property's value declines or the lender's financial situation sours, the lender can cut it off.

• A Home Equity (HE) Loan is a lump sum borrowed amount, so whether you use half or all of it, you still owe the total borrowed on the loan, with interest. The equity is borrowed against at a fixed interest rate over the life of the loan.

SO WHAT SHOULD WE DO? Our rental property in Hawai'i currently has an estimated $170k in equity if appraised at $713k, meaning the current loan-to-value (LTV) is 75.9%. The acceptable max LTV ratio differs from lender to lender, but if we qualify, we'll be eligible to borrow up to $29k to use towards our next BRRRR. With today's average rates at 8.49% (average range of 6.49-8.77%), monthly interest payments for $29k borrowed up front would hover around $200/mo. Not too shabby, since we'd plan to off the principle borrowed between 4-8 months. We'll need to confirm before we agree to the HELOC that our lender allows principal repayment during that draw period. But also, as the property appreciates and the mortgage gets paid down, we'll also be able to increase that credit limit. A HE loan, borrowed at today's average rate of 5.6% for a 10-year term would require payment of $315/mo right away, and would require a refinance to access any additional equity in the property. Similarly, we could save a good chunk of change here if we pay off the loan early. If we access all $29k up front and pay back both principal and interest in 8 months, a HELOC would cost us $30600, and the HE Loan, $30,059 -- $541 less. Though the numbers point to option 2, the ability to reuse a HELOC over the draw period has me sold, especially with significant appreciation likely in those 10 years. MG The Mortgage Guy hosts a great discussion from a fellow investor, breaking down HELOCs and Home Equity Loans and why he prefers option 1. Watch it here.

HOW ARE WE DOING? 

If we shared something that blew you away, struck a nerve, or didn't quite make sense, SEND A REPLY!

If you're not yet invested, are thinking about it, want to learn more about passive income opportunities tied to projects like the ones above, LET'S TALK!

We look forward to the conversation.

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