After buying two rental properties in quick succession– the culmination of several years of saving and a fortuitous stock sale— I had a nice steady stream of passive income to put toward our goal of retiring early. It wasn’t enough to live off of, but the potential was there. When I was searching for those newest rental properties there were so many opportunities: tiny little houses for next to nothing, and some of them were already rented! There was just one teeny tiny little problem.
I’d spent all our money.
Not one to let a little thing like that get in the way of a good idea, I put my thinking cap on. We have always maintained excellent credit, but the houses I wanted to buy were too inexpensive or needed too much work to qualify for a traditional mortgage. Investment loans generally require a 20-25% down payment (which I didn’t have) and wouldn’t be appropriate for the little houses I was looking for anyway. I could see that the improvement in the local economy (this was early 2015) was leading to the inevitable rise in home prices, and I didn’t want to miss out on my chance to buy more rentals at incredibly low prices.
I realized that the little house we’d downsized into at the beginning of this process had been climbing in value the whole time, and was now worth nearly double what we paid for it! I had no interest in selling, but I knew there had to be some lending options available to me. I went to the local credit union and opened a home equity line of credit (HELOC). Because I was borrowing against our residence, it was a relatively simple process. I felt comfortable doing this for a few reasons:
1. Our mortgage payment on our little house was initially really low, so adding in the payment from the HELOC was not a financial burden.
Even if we somehow managed to spend the money we borrowed without making any money off of it, we would still be able to make the mortgage and HELOC payment easily.
2. I knew we would easily make the money back from the rentals.
Because I had already bought two rental properties and felt comfortable with the process, I had a good idea of what I wanted to buy and the return I would earn from them. Because of the tremendous rate of return from my rinky-dink little houses, I couldn’t come up with a scenario where we lost money.
3. I wasn’t borrowing money for fun, but as an investment.
This was more of a moral argument I made with myself. I have always been wary of acquiring debt, but this was an investment, not frivolity, dammit!
Moral high ground (and funds) safely claimed, I went a-hunting. With the $60k I borrowed against the value of our home (plus a little more I’d managed to save in the few months I was filling out paperwork and looking for houses), I was able to buy three more rentals.
- Gastonia, NC: (2bed/1bath, 750sqft) $13k purchase price+ $7k repairs. Rents for $500/mo
- Rock Hill, SC: (2bed/1bath, 800sqft) $26k+ $4k repairs. Rents for $650/mo
- Gastonia, NC: (3beds/2baths, 1200sqft) $16k+$25k repairs (this one was in bad shape). Rents for $800/mo
So– to clarify– I turned a HELOC with a $400 monthly payment into nearly $2000 monthly rental income. The rent from the smallest, cheapest house I bought covers the payment all by itself!
So by the end of 2015 we were up to six rental properties and I had more than replaced my paltry teaching income. It was time to start gearing up for the final phase of my plan: world domination. (Or, buying a few more properties so my husband could quit his job and start traveling.)