Today’s guest writer is Houston Neal who works with City Light Financial. He has a few basic ideas for expanding with your investment properties and the financial basics of getting started.

HELOC For Investment Property

There has never been a better time to be a homeowner. From continued performance in the housing market to the availability of online mortgage resources, you now have the upper hand and are in a good position to cash in on the value of your home.

Many homeowners and investors have taken advantage of market performance by taking out a home equity loan to finance other property investments. Specifically, a HELOC or home equity line of credit, provides a way to ‘cash in’ on the value of your home and it allows you to borrow money against home equity.

So why not put your home equity to work? With a home equity line of credit you can use the capital from your home to begin earning returns from two properties instead of one.

Understanding Equity

An important consideration for any homeowner in the home equity loan process, is to understand how to build equity in your home. Equity is simply the difference between your remaining mortgage balance and the value of your property. So, as your property value increases and your mortgage balance is reduced, your home equity increases.

Equity is a significant source of net worth for many homeowners and it continues to provide new sources of revenue. Housing prices have appreciated over the past years and the national market has seen considerable growth. Certainly some states have witnessed greater gains than others and an extreme example is the ongoing increase in California property value. The state jumped 27.18 percent in home value during the third quarter of 2003 alone while the national housing market reported 12.97 percent growth over the same period. Overall, home prices are still up and homeowners have an opportunity to use equity for other investments.

HELOC vs Home Equity Loan

A home equity line of credit is very similar to a home equity loan and shouldn’t be confused for the latter. The main difference between a heloc vs home equity loan or mortgage refinancing is the way you are able to access the line of credit. A home equity loan or closed-end home equity loan differs in that the loan is typically set for a fixed amount of time and a specific amount. Mortgage refinancing is similar and gives you the equity in a single check. A HELOC, on the other hand, provides you with an open-ended line of credit or a revolving line of credit. Similar to a credit card, you are able to borrow an amount whenever you need to as long as that amount does not go over the credit limit. A home equity line of credit only requires you to pay back the amount you borrowed and is a practical and flexible type of mortgage loan.

Overall, a HELOC is a great resource to utilize for investment opportunities and other financial ventures. It helps you establish what you can afford first and provides the opportunity to manage your investment by reducing the line of credit. It can open new sources of revenue and allows you the flexibility you need for investing in property.

An elderly man once told me that every person should hold a real estate license. “Sure,” I answered, feeling quite indifferent.

Several years later, I am here about to earn a real estate license. I finally understand what the man meant (or should have meant). Every intelligent person needs to take the time to understand real estate. Getting a real estate license is one method, though not the only strategy. Read books, blogs (hint hint), talk to people, and jump into the market yourself. A real estate license will teach you the rules; the license won’t teach you a thing about real estate investing.

The reason you need to know about real estate investing is that it usually comes through. Around 30 years ago, the federal government started tracking average home prices. Some areas have experienced a downfall here and there, though these spots are rare. Average home prices have yet to demonstrate a year-to-year decline.

People sell for money, and people buy with emotion. If you know nothing else about real estate, know this fact. Of course, you buy and sell just about everything with the same feelings. But a house holds far more impact than a candy bar that’ll disappear before the next stoplight, anyway. Every property is unique.

In a recent post, how to purchase a rental property, a frequent contributor, Danielle, reminded me of her father’s experience. The real estate agent pushed him to forgo the home inspection so that he wouldn’t miss the hot deal. He took her advice, bought the house, and found himself over his head with maintenance and structural problems. Some things can be fixed; many things can’t.

Know when an ugly property holds potential.

As you purchase properties, start with easy projects. Buy a property that needs a fresh coat of paint, new flooring, and a bit of scrubbing. I can’t stress this point enough: it’s easy to get yourself into more than you can handle, but you have to start simple. Ever see those property flipping shows? The people who always go over budget and over their estimated time are the people who haven’t been in the game for a while; they’re the people who can only envision the quick buck. Focus more on what you’re capable of doing.

As you purchase more properties, you can become more comfortable with bigger projects—fixing a porch, redoing drywall and roofs, updating the electrical. Sweat equity is the way you make money in this business; hiring subcontractors to do projects for you is a huge expense. The liability and workers’ comp insurance alone are out of most restoration budgets.

But is the expense worth it to hire these guys? I guess that’s something you have to calculate for yourself. We’ve hired subcontractors to dig sewer lines, put gas lines in, and install windows. Of course, we’ve also done all of those same projects ourselves once we gained the experience.

Know when an ugly property means you run.

If your first property has too many projects, you’ll get discouraged. You won’t want to be in the business any longer. Projects as simple as cleaning the bathroom sink take five times as long as they do in your own home… that’s why these properties are so cheap. I spent over eight hours scrubbing a claw bathtub once. If every project in the first house is of that magnitude, your “quick project” will be nothing but speedy. Months will roll by… and roll by… and roll by. You’ll start to wonder when you’ll ever be done. And worse, everyone will always be bitter and quick to yell.

I’d never advise someone to skip the home inspection unless that person has enough skill to be a home inspector himself. If you read plumbing handbooks and electrical code books for fun, then you might be on your way to going without the home inspector. We’ve hired a home inspector who did a very thorough job. But like I mentioned in my last post on real estate investing, you’ve got to crawl through the attic and wiggle through the crawlspace yourself, too. (Or have your partner do it! My next point…) My husband found a bit of mold growing in the depths of our crawlspace. Did the home inspector do a poor job? No—our discovery was above and beyond the requirements of his report. Should you perform your own thorough inspection? Absolutely.

Have a partner

As a girl sponsoring poetry contests, you can guess that I’m not one to slip into a one-foot deep crawlspace. Luckily, I have a partner who will. I’ve got someone to carry my 5 gallon bucket of plaster and open jammed windows. But more than anything, I have someone who equally invests himself in the work that interests me. The support system of having someone working with you in your nasty looking property often makes the difference between wanting to work and not wanting to work. A blasting radio while you paint isn’t enough.

The perfect partner has a different skill set than you. But more importantly, the partner has to be as equally committed. Buy those easy-to-do properties first. Your team will grow together before getting stressed out (or divorced!).

Seems like a lot of people are making money through becoming landlords. Thinking of taking the plunge yourself? Landlords have to put up with a lot of crap… yet I’m finding that the crap may very well be worth the effort if you’re smart and know how to work the numbers. I’ve also written several pieces about how to buy your first house and what to do when considering real estate investments that may be useful to you.

What to look for in a good deal

The best piece of real estate that you can buy follows the rule of tens:

Don’t put down more than 10% on the property

Don’t pay more than 10% interest

Buy at least 10% below the market price

1. Don’t put down more than 10% on the property
The coolest thing about being a landlord is that tenants pay off your property. The entire mortgage is tax deductible. If you don’t have a lot of cash sitting around, use leverage—let the bank’s money make you money. The less money you invest in the house, the more banks carry and tenants pay off.

2. Don’t pay more than 10% interest
Investment properties hold higher interest rates with banks because they’re a bigger risk. Investments don’t hold much sentimental value. If you’re in a pinch, banks know that you’d rather pay off something that matters to you personally—like your own home.

3. Buy at least 10% below the market price.
Rental homes don’t need to be the nicest on the block. And the misfortune of leasing your property is that it’ll probably be in worse shape than when you started. As I said in the point before, you take better care of things that you are emotionally attached to. Since tenants don’t own your property, they’re less likely to be as meticulous about the home’s care. Plus buying undervalue property means that when you sell at value, a few extra dollars will come your way.

When you’re ready to make an offer

The person with the highest offer isn’t necessarily the person who the owners want to sell to. Sellers are interested in the extras. A few of those brownie points that I have found helpful are:

Keep your offer simple

Offer a quick closing

Buy “as is”

1. Keep your offer simple
You can line up a lot of contingencies on a property purchase: home inspection, mold inspection, lead-based paint inspection, bank financing… The list goes on and on. Owners get nervous when you start checking off that list of contingencies. They just want to sell the property! Keep the number of check points smaller; it equals a quicker sale in the minds of an owner

2. Offer a quick closing
Sometimes, a closing can drag on forever. It can take months. Owners have already detached themselves from the home, and they’re ready to move on. They want the money. You know that phrase: a hen in the hand is worth two in the bush? Why’d that line come about? Because we’d rather have less now than wait for more later. People are impatient, which is great for you. Offer less, but offer it now.

3. Buy “as is”
Owners want to sell. But what if the house is filled with problems? The electrical needs some work, the carpet is stained, the windows in the back bedroom are cracked from baseball games. Say you’ll take the house as is! (With a lower price, of course) Be sure to have a home inspector evaluate the severity of the home’s faults if you’re not well experienced. The last thing a seller wants to think about is making all those minor repairs.

Along with food and clothing, shelter is an absolute requirement for human survival. And you’re going to reach a point where renting an apartment doesn’t suit you. You want something you can claim as your own. Homeownership is the American Dream! But where do you start?

Decide what you want

Your first house isn’t your dream house, so don’t expect to find something as nice as the house you grew up in. People rarely live in the same house for the rest of their lives any more. I think that your first house is a starter house. It’s modest.

Your greatest asset isn’t your money right now; time is. Use that sweat equity to remove those metal cabinets from 1970, paint the place, and save the yard.

When we went house hunting last year, my husband led me into a house. I looked around and almost died–the place smelled like cat pee. The walls and carpets looked disgusting, and in our case, we didn’t have to remove the antiquated cabinets. The previous owner already did!

Imagine what you would want for the next three or four years: number of bedrooms, yard, general location. You can upgrade to a newer, more expensive house in a few years. I think that the first goal is to get a house.

Set a budget

The coolest things about buying a house are:

Leverage means that you get to use someone else’s money to invest. The goal is to sell your first house for more than you bought it. To determine your purchase budget, use the standard mortgage formula, the 20/28/36 rule:

A lender will offer you more leverage… don’t take it. We all like to think that we can get by for a year without an entertainment budget or new clothes and household goods. But we can’t. What’s the point of a great new house if all you can do is sit around in it with no money because all of your money goes to your monthly mortgage payments?

The second cool thing about homeownership is the tax advantage. The interest you pay on a mortgage is tax-deductible. You can claim a deduction for your property tax. And after you’ve lived in your house for two years, you can defer the capital-gains tax if you buy another house worth at least the same amount of money. Keep track of all home improvement expenses like cabinets because you can use them to reduce your capital-gains upon sale. How cool is all that? Plus you get to pick the colors of your walls when you own the house.

Find someone to help you

Get in touch with a local real estate agency. From what I’ve seen, “For Sale By Owner” tends to mean “over-priced and under-experienced”; I’d keep clear. You want to find an agent who represents you. He will be the guy that shows you houses around town. Do NOT contact the agent selling a particular house and ask to see it; she can’t help but have a priority other than your personal needs. If she can convince you to buy a falling apart, over-priced place, I hate to say it, but she might! She gets her percentage off the top of the sale.

Yes, the agent that represents you might be tempted to do the same, but I have three theories to prevent this scenario:

1. Hire the dumb guy. The top agents want to make money from the top houses. You’re more of a hassle with your small budget. But the dumb guy? He’s not making as many sales. He wants to work for you (especially if he knows you want to upgrade in a few years and will need someone to sell your house and take you out to find a new house). Yet the greatest reason for hiring the dumb guy? He’ll have the inside story on everything. He’s made it to where he is through his people skills. Other agents don’t take him as a serious threat; they look at him as a friendly guy. He’s the one to share a beer with. He’ll joke about beating up cops. Other agents tell him anything. Sure, his words might embarrass the heck out of you. Yet your agent could be the one who accidentally took the key to the new house with him on vacation, so no one else could view your prospective house. Other agents will just laugh at his slip. What a silly guy! Then they might give him some hot tips because “what’s he gonna do?”

2. Make him work for the money. Ask to see gobs of houses. (Make sure he is a member of the local Multiple Listing Service, “MLS”, where other salespeople list their properties.) Get the statistics on houses from him. A tycoon once told me, “Get on them, and get on them often.” It’s true. Call for new listings. Call for information. Heck, keep calling.

3. Don’t YOU be the dumb guy. A lot of people get pushed around by real estate agents because people don’t know any better. Why let the agent pick where you’re going to live, though? First know how to interpet property descriptions. I’ve written about how disgusting homes suddenly sound “charming” or “cozy”. Know the market. A local broker posts information online. I get e-mail updates of houses in my price range even though I’m not his client. Know about the local economy. Your goal is to know enough about the housing market that when you find the house you want, you know exactly how much its worth. The asking price will be merely the seller’s perspective. You bid what you know is right. The best ways to learn? Read the paper, check out many houses, and see what’s selling and what’s not.

Examine the house

Don’t be afraid to take a flashlight with you on house tours. Poke into the crawlspace. Shimmy into the attic. You’ll find it hard to examine a house beyond the stains in the carpet or the broken light fixtures and cute doll collection. Those things can be changed. In fact, their furniture won’t be your furniture, so don’t waste your time looking there. You can fix almost anything. But you can’t fix the actual structure. Is the add-on sagging? Do you see huge cracks in the foundation? How’s the roof–a horrendously expensive repair if you find troubles.

Hire a home inspector to take a look. He’ll test every plug in the house and present a detailed report of every flaw. The inspector we hired even included photos of a ripped screen window. Most people stop at the report. Don’t! You’re paying your home inspector upwards of a week’s salary at our age. Talk to him. Ask him about crucial areas that he has noted, thing he doesn’t see as a problem, and most importantly, how much repairs will cost.

Now I jumped the gun a wee bit here. Before you can hire a home inspector, you have to put a bid on the house. A bid is pretty self-explanatory. Your elated agent will walk you through the process. The cool thing? Your home inspector found something bad about the house. Repairs will cost thousands.

What do you do? Ask for a reduction in your bid. The inspection resulted in a loss of value to you. The seller might try to haggle a little. Though the truth is that this problem is going to decrease any prospective buyer’s interest and price. Nothing is cooler than getting the house AND getting a chunk of the price knocked off, especially if you can do the major repair yourself for less.

When people have to cut a few bucks on their construction budget, the number one answer is always the same: spend less on the exterior.

I’m not only talking about crappy landscaping jobs. I’m talking about the money invested into the building itself. Cheaper bricks, stucco spaces as shortcuts, fake brick and stones, vinyl siding… the list goes on, and the appearance shows.

Curb appeal has huge influence. If two accounting firms build side-by-side, my guess is that more potential clients will walk into the more attractive building. It’s human nature; we like nice stuff!

Have you ever seen a real estate advertisement that only shows the picture of a lobby? There’s a reason the image is the storefront.

Drive through new commercial areas, and you can see what I mean. Sure some business types don’t need an elaborate exterior. But would you go to a homebuilder who works from a shack and ask him to build your dream home?

The companies that invest an additional $5,000 to the exterior of their buildings will increase their mortgage around $14.00/month in a 30 year loan. If you’re the more attractive accounting firm, I wonder how much extra business your exterior attracts. More than $14.00/month?

Either way, the resale value is much higher.

Now think in terms of your own home. Click here for a potentially useful site that really shows how much a bit of fresh paint and other outdoor details can spice your place up. Don’t forget landscaping. This summer, Money magazine reported that attractive landscaping can allow you to recover 100 to 200 percent of your investment when you sell.