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Accessing Equity: Opening a HELOC (Don’t Use a Big Name Bank!)

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As readers may be aware, I was fortunate enough to win two properties in the Bay Area — one last year in 2012, and another this past February 2013. As luck would have it, each property has appreciated close to $100,000/each. There’s a lot of equity tied up in these Bay Area properties (appreciation and downpayment), and I’ve been itching to pull some of this back out so that I can reinvest it.

Big Banks

The problem is, I elected to use one of the bigger banks for lending, and am now just realizing how painful it is trying to pull the equity out. I’m an investor, and it seems like the big name banks are more accustomed to dealing with owner occupied clients. This week, I’ve been working on trying to secure a home equity line of credit (HELOC) from Rental Property #1, and have been unsuccessful. It’s been a royal pain in the you know what… for the following reasons:

  • Lender will only allow 35% debt-to-income ratio.
  • Lender won’t count rental income for any of my properties (Rental Property #1 won’t clear 2 year seasoning requirement until 2013 tax returns are filed. Rental Property #2-4 don’t appear on ANY tax returns currently. So, my debt-to-income is way out of whack, and well exceeds 35%.)
  • Lender will only loan up to 65% of appraised value of property.

Example

Let’s use an example. Rental Property #1 was purchased for $315,000. Market value today is roughly $420,000. The lender will loan up to 65% of the appraised value, or $273,000. My remaining debt is roughly $229,000. Thus, I would have access to $44,000.

In this real world example, the final results aren’t too bad. Actually, $44,000 would go a long ways towards helping me secure another downpayment, so I would take it in a heartbeat. Still, being able to access ONLY $44,000, when I have over $80,000 in principal and $100,000 in appreciation seems a bit unfair.ย Now I’m questioning why any sane investor would want to get a loan through these investor-unfriendly banks.

Lesson Learned

Not only is it next to impossible to access the equity due to the seasoning requirement, but even had they let me open a line of credit, I would have been limited to only 65% of the appraised value. Again, the real world example works, luckily, because the local appreciation has been so insane. But suppose it wasn’t a Bay Area property, and one of my other rentals out-of-state… What choices would I have then? Using a big name bank, not many, unfortunately. Without insane appreciation to drive up the appraisal, 65% of the home’s value minus the remaining debt service leaves you with… close to zero.

Let’s use Rental Property #3 as an example. It was purchased for roughly $160,000. Let’s say market value shot up to $190,000. After subtracting out the ~$118,000 debt service, the line of credit available would be a measly $5500 or so. Definitely not much to get excited about.

For those considering buying rental properties, make sure you work with an investor-friendly lender. I’m learning my lesson the hard way… I want my equity back!

p.s. I’m going to attempt to reach out to some small, local lenders this week. Hopefully, someone will be nice enough to lend to me. ๐Ÿ™‚

{ 9 comments… add one }
  • The Fast WeeklyNo Gravatar November 19, 2013, 2:47 am

    I’ve always gotten much better terms and interest rates from my local institutions. The thing that drives me nuts about the mega banks is you can’t seem to get to the decision makers. After an hour on the phone, you still won’t have the problem solved. The local outfit I use only has 10 branches. You walk in and talk to the branch manager. In the rare instance they can’t take care of it themselves, they get the person who can on speaker phone…………..and walla!

    I am really enjoying hearing about various property pursuits. It reminds me of the first time I read Rich Dad, Poor Dad. Thanks for sharing.
    -Bryan

    • FI FighterNo Gravatar November 19, 2013, 8:37 pm

      Bryan,

      Definitely isn’t easy going through the big banks. Lots of hoops to jump through, which I’m learning.

      I’m going to try some smaller, local banks and see if I can get some help. Hopefully, I’ll find something.

      Thanks for stopping by!

    • rogerNo Gravatar July 30, 2018, 3:48 pm

      Yes how big is “big bank here”mean?

  • Retire Before DadNo Gravatar November 19, 2013, 3:23 am

    FI Fighter,

    I had talked to Wells Fargo about a HELOC on my condo at one point. They were helpful to talk to, but I think there were similar ratio restrictions. It made more sense to borrow against my home. Will a local bank offer better ratios? Have you had any luck? There are a few I could try near my home. Still unsure how I want to proceed with my next investment property.

    -RBD

    • FI FighterNo Gravatar November 19, 2013, 8:39 pm

      RBD,

      Yeah, most of the big banks have the same guidelines. Not really sure if the smaller banks have to follow them as well, but I hear they are a bit more flexible and creative.

      I’m trying to get to 10 asap. If I can tap into equity from #1 and #2, I’m almost certain I can get there without any extra help/income.

      It’s like playing chess right now. Just trying to strategize my moves to get to check mate.

      Cheers!

  • MartinNo Gravatar November 19, 2013, 7:14 pm

    It was my original plan too to take an equity out of my property when I was buying it in 2008 but since then I have no equity anymore ๐Ÿ™ so I do not have that problem for now ๐Ÿ™‚
    I can imagine how frustrating it is, when you can see all your numbers aligned and presenting them to those banksters and yet they look at you with the idiotic look and saying now and you know that a few years ago they were lending recklessly.

    • FI FighterNo Gravatar November 19, 2013, 8:40 pm

      Martin,

      Sorry to hear about the lost in equity, but I’m sure it’ll bounce back in time. Real estate has been on fire this year.

      Yeah, it can get frustrating at times, but I don’t dwell on it too much. I’m always working on plan A, B, C, and D. Even E if I have to…

      Cheers!

  • EvanNo Gravatar November 21, 2013, 10:01 am

    How Applicable I just called my TBTF Banking buddy for info on HELOC. He told me his rates were going to be a bit higher than a local credit union but they have hidden fees so the math has to be done.

    Makes you wonder why rush to pay off the loan if you can’t access principal lol

    • FI FighterNo Gravatar November 21, 2013, 11:46 pm

      Evan,

      Definitely have no rush to pay off any loans, and actually want to pull money out so I can borrow even more money ๐Ÿ™‚

      I’m a fan of leverage since I believe it will set me free. It’s higher risk, and I’m sure a lot of people don’t agree with my investment strategies. But if you’re able to find cash flow deals that earn more than the interest rates on loans…

      Take care!

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