I was on a Zoom call recently with a few investor friends, talking shop. One friend was celebrating a one-year anniversary of renting out a home in Bensonhurst. She asked if there was anything better than having an investment property that brings in steady income. I replied, “how about two (or more) properties?”
If you have an investment property that you’re renting out, you’re familiar with building passive income. But, if you’re looking to build more by investing in multiple properties, you may run into a few challenges, especially when it comes to raising capital to buy and repair them. One way investors obtain capital is through the benefits of homeownership.
Here, we’ll explore the pros and cons of getting a home equity line of credit, or HELOC, on an investment property in New York, as well as other options to explore.
Thinking About Another Investment Property?
I’m based here in New York City but I’m a part of investment groups located all over the state that mostly have the same thing to say: Between all the colleges and universities and all the people coming to “live the New York life,” the rental market is almost always hot.
So, if you’ve already started your real estate investment business in New York, you might be looking to expand. Double the properties are twice as nice, right? There are a few benefits of having multiple properties.
- Bringing in multiple sources of passive income can help you keep one property afloat that may be taking a while to rent out.
- Having multiple properties can help you build equity.
- Multiple properties help expand the possibilities of your investment business.
There are a few caveats, of course. I always tell people that more properties mean more than double the work. Managing the physical and bureaucratic aspects of having multiple properties means a lot of time and effort (especially if you have to drive to different properties in New York traffic). You can also pay a management company to do so, of course, if that fits your budget.
Another thing to remember is that there are different rental rules and regulations in different cities and counties in New York (and indeed, in different boroughs in the city). While the conscientious investor has no problem following all the statutes, having several sets of regulations to follow can be confusing.
That said, if you believe you can make multiple properties work, you may want to explore if a HELOC is the best way to raise the capital you need to buy another investment property in New York.
Understanding HELOCs: The Pros and Cons
One of the biggest perks of owning a home is the ability to build equity over time. That equity can be used to secure low-cost funds—oftentimes referred to as a second mortgage which can either be a one-time loan or a home equity line of credit (HELOC).
Much like a credit card, a HELOC is a revolving source of funds that you can access as you choose. But also like any other line of credit, you should weigh the pros and cons before making a decision.
The Pros of Getting a HELOC
As someone who has taken out a HELOC on a property, I can tell you that there are some genuine benefits to it.
- It’s fast. Once you have a HELOC, you are able to draw funds when you need them. You know as well as I do how fast properties get snatched up in New York. If you have fast cash when you need it, without having to do a lot of paperwork, it’s a real bonus.
- You pay interest only on the amount you draw. If you have a $150,000 line of credit, but have only drawn $50,000 you’re only paying interest on that. That makes it a lot different than a standard home equity loan.
- It’s flexible. You can use a HELOC to pay down credit cards (super important in this business), buy property, repair property, even make a purchase outside of your immediate business needs. In this way, it’s like a standard line of credit, only it is backed by your property.
That said, there are some genuine drawbacks to HELOCs.
The Cons of Getting a HELOC
I enjoyed getting a HELOC, but it did come with some serious downsides that made me question whether it was worth it.
- Ballooning payments. The first 10 years of the draw period was great, but then the repayment period gave me a bit of sticker shock. In my case, I went from paying back around $400 a month to nearly $850. Luckily, I was at a point in my business where I could swing it, but it was still a dramatic change. That kind of jump can severely limit your flexibility.
- Interest rates can soar. The great thing about adjustable rates is that they can go down. But of course, they can go up. You might not really have a sense of what your payments will be at any given time; that’s too much room for uncertainty for me.
- They are a temptation. You know how I said you could use this purchase for anything? Well, that can be a problem. Having what seems like a great rate and an easy source of money leads a lot of people to spend it. Knowing that you can afford the highest-end countertops for your new property is great, but that doesn’t mean you should put them in.
- The bank partially owns your property. You don’t get a loan because the bank likes the cut of your jib. You get a loan because the bank knows they can’t lose. Pay back the interest, they make a profit. If you don’t, they likely get your property. The bank can place a second lien on your property and have a claim over it.
So even though I found a HELOC to be helpful, in the long run, it wasn’t ideal for my business. The initial flexibility became a restraint. The costs were not predictable, which can be dangerous in this business.
The temptation was probably the hardest part. I know too many people who miscalculated due to HELOCs. They knew the costs of renting a house or apartment, they knew the upper limit of what rentals could bring in the neighborhood, but they still poured too much money into a place, making it harder to recoup their costs.
And of course, this is doubly true when you have multiple investment properties. There might be a stretch when you have trouble renting out a place. You might need to do some work on it between tenants. Or there could be times when tenants aren’t paying at all and you aren’t getting any relief. Staring at a suddenly huge payment adds a lot more risk to your business.
I know HELOCs have value. But I also know there is a much better financial tool out there. It’s called a hard money loan.
Why Hard Money Loans Can Be Better Than HELOCs for an Investment Property in New York
Hard money loans are a tool designed for real estate investors. A hard money lending company loans out cash to investors quickly, without all the hacky bureaucracy of a big bank, where there can be multiple layers of approval and someone eventually signing off (or not) on a loan.
When you apply for a loan through reputable hard money lenders in New York, they base their terms and rates on a few things.
- Your available cash
- Your line of credit
- Your history of success buying properties in the field
- The actual property/neighborhood/etc.
The loan you get comes with a fixed interest rate and a fixed term. It can cover up to 100% of the initial purchase cost and the repair. Of course, if you are just starting out, you will likely have a down payment, steeper rates and shorter terms, but that’s to be expected.
Why I really like these kinds of loans is that they are fast. In the past, I’ve been able to get cash in as little as two weeks. And because hard money lenders know real estate, they understand that my cash might be short or my credit cards might be creeping toward the max. They have a different set of calculations than banks.
And the best part is that I don’t have to put a lien on my existing property. I’m taking a loan based on the property I’m buying. I’m getting a loan based on the work I’m going to do. My existing property is still mine. That’s peace of mind.
There are a lot of hard money lenders in New York. Luckily, there’s a good way to find the right one.
How to Find the Best Hard Money Lenders in New York
The thing about hard money lenders is that they all have their own way of setting rates. One might look at work history more strongly, one might look at credit. Regardless, your goal is to receive the most amount at the lowest rate. That can be hard to find, but for me, it became much easier when I became an independently owned and operated HomeVestors® franchisee.
HomeVestors has this awesome proprietary hard money lending portal. When I find an investment property here in New York to buy, I just put the details of the deal into the tool. That information is sent to multiple lenders and then they’re able to offer me rates based on their standards. I get to pick the one that works best for me. This saves me a ton of time and I get the best deal.
New York real estate is all about competition. You have to be fast, you have to be smart, and you have to make sure your finances are in order. HELOCs might be a tempting way to purchase another property, but they may not be the best option. For me, hard money loans give me the flexibility and certainty I need to make passive income truly work.
If you’re interested in hard money, and want to find the best way to get the best rates, request information about becoming a franchisee. Make finding hard money easier.
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