Here is The Deal – Skyline Purchase Breakdown 

Is buying a house with negative equity a bad idea?

Let’s see

Skyline aka Flea House is one of my favorite properties. (I know, I say this every time). We bought this property in April 2021 right after Magnolia & Cottage House. We borrowed more than we needed so we had extra cash available. We could have returned the loans, but it didn’t make sense to have worked to get all that capital just to give it back.

It took a few weeks to find anything else worth it within our price range. When I saw this property and fell in love with it because it had a garage and it was in a decent neighborhood. Although, I was not thrilled with the bright green color! it was nothing a little paint wouldn’t fix. 

We sent an offer and crickets ????… no response. This is typical in our market. Therefore, we moved on to make several unsuccessful offers.

In the meantime, the property remained on the market. The offer never got officially rejected. It was just ignored.

We had offered to buy at the asking price of $49,000, cash, 5-day inspection, and quick close.

After two weeks of no luck, we noticed the property remained in the market. I asked our realtor to try to figure out what the seller wanted to accept our offer. The realtor comes back saying that the seller wanted $45,000 and cash…

It did not make any sense that the seller rejected our higher offer and accepted a lower offer. We didn’t complain and FINALLYYY got under contract.

The idea was to follow the usual strategy: buy cash and then refinance into a conventional loan. However, after we closed on the loan for the Cottage House, we decided it was best to hold off on a conventional mortgage. The loan costs were really high for such a small loan. Paying 13% interest for 1 year was less than the loan closing costs for the mortgage. We felt comfortable that we would be able to pay off the $40,000 within a year (if needed).

Deal Details

Closed on April 16th, 2021. This property is a 3 Bedroom and 1 Bath property with an attached garage located in Macon, GA. The final purchase price was $45,000. It came with a pre-existing tenant paying $750 monthly rent.

We had driven by the area prior to going under contract. However, we never got a chance to go inside or inspect within the diligence period. We were already contractually obligated by the time we were able to go inside.

We were feeling risky at the time, so we went with it. Luckily, it turned out alright. We knew it would need some work eventually, so we budgeted for it. I would NOT recommend this unless you know the market well and have a really good understanding of repair costs.

The Financing

This property was purchase as an all-cash deal using private money loan from one of our friends. The loans with this specific private lender are not attached to the property. There is no lien, no mortgage. They send the funds to our business bank account  and we can use to buy any property.

We decided to hold off on a mortgage because we wanted to bundle a couple of houses in a portfolio loan. Instead, we got a HELOC (Home Equity Line of Credit) from Figure.com.

If you don’t know what a HELOC is (Home Equity Line of Credit), check this blog post by Investopedia (https://www.investopedia.com/mortgage/heloc/).

I did a ton of research and I was having a hard time finding a lender that would give us a HELOC on an investment property. I found there are several restrictions and limitations on equity lines for investment properties: ownership length, minimum loan amount, the maximum number of properties owned, etc.

I browsed through BiggerPockets forums and I found a long list of lenders that work with investment properties. I went one by one until I landed on Figure.com.

I was really skeptical about this company because it seemed too good to be true. However, it worked out and I have no complaints.

Initially, we got denied because we needed to have owned the property for a minimum of 90 days. They just told me to try again once we hit the minimum ownership days, so that’s what I did.

I applied while we were on our Hawaii vacation. The process was so ridiculously easy that I honestly thought it was a scam. It didn’t take more than 30 minutes to apply and we got same-day conditional approval. They didn’t even have to do an appraisal.

Their algorithm is truly amazing.

Property Valuation: They have an automated system that assigns a value based on comparable sales and they allocate a confidence score. Based on that score, it is determined whether an appraisal is needed. Our property valuation report came in right on point and no appraisal was required. This was a plus because I didn’t want to deal with coordinating appraisal.

Documentation: The only documents we had to submit were a copy of property insurance, title insurance, and evidence of ownership. The company scheduled a mobile notary and we closed on this loan from the comfort of our home.

Closing & Funding: The closing was a week and 1/2 after applying. The loan amount was $29,000. No closing fees and 5% interest. We could have chosen to pay upfront interest points and obtained a lower interest rate, but on a small loan like this, it didn’t make a huge difference.

In June 2021, we closed on the Figure.com HELOC and used the proceeds to partially pay off our private lender. Used our W2 income to pay the remainder.

In February 2022, we added this property to a portfolio loan and used the refinance proceeds to pay the HELOC. The current lender is Synovus Bank in Georgia.

Rehab and Maintenance

This property required quite some work. We had to replace the HVAC unit within the first month of owning it. There was a tenant in place, so we waited until the tenant moved out before doing any interior rehab. We started with the exterior by removing the bright green color for a more modern gray.

When the inherited tenants moved out, they left the house in pretty bad shape, dog poop included. We had to label it the flea house for a while because it was pretty bad.

We purchased it in April, the tenant moved out in July, started rehab in October and it was rented by the end of December.

You may have noticed that there was a gap of 3 months before we started any rehab work. This was on purpose. This was a bigger job compared to the others and the contractors we had hired previously had been expensive, unreliable, and low quality. I wanted to take my time to get the right contractor for the job. The holding costs were pretty low, so we could afford to do so.

This house ended up being the first project my dad worked on as our full-time handyman. I convinced him to move from South Florida to Georgia just to work with me. Given that I’m his favorite (and only daughter), I get preferred maintenance and repair pricing which helps with the bottom line ????.

We ended up installing all new LVP flooring, all new kitchen cabinets, refinished the tub, installed new toilet and flooring, replaced doors, and finished the garage walls.

The total spent on materials and labor was $27k including the new HVAC.

Here are the numbers:

• All in Cost: $72,000
• Appraised Value: $53,000
• Equity: -$19,000
• Loan: $37,000 (30% of appraised value)
• Cash in the deal: $35,000
• Gross Rent: $950
• Monthly Net Cash Flow $250 (includes Capex, Maintenance, Vacancy and Property Management Reserves. 
• Cash-on-Cash: 7%

If you don’t follow me or have read my blog before, you are likely shocked about the negative equity and likely telling yourself “ WTH, this girl has no idea what she is doing. What a terrible deal!”. Let me clarify our strategy:

We buy fixer-upper properties in bad neighborhoods that show signs of improvement within the next few years. Meaning, that the city is putting money into improving the area or there is a lot of activity from investors. Our goal is to help improve the neighborhoods we invest in one house at a time. We are here to stay long-term. We buy and we wait for the market to catch up to the area shift. Most of our neighboring properties are abandoned houses or properties being rehabbed by flippers or other fix-and-hold investors. This means appraisers don’t have good comparable properties to use until a new cycle of sales begin to occur in the area. We invest for cash flow now, appreciation later. Therefore, temporary negative equity is not a deal-breaker for us.

Why do I share this with you?

Lots of people are afraid to invest in real estate because they worry about a crash and having negative equity. Negative equity doesn’t always have to be bad. Is it risky? Yes. If you plan to sell the property in a short period, then yes. TERRIBLE idea because you are leaving money on the table. What you need to realize is that these are paper losses and real estate has proven to appreciate over time. Even after a crash, it comes back up. If you are buying a good deal that can still cash flow during a recession, then you ride it out.

For the majority of our deals, we end up leaving money in our deals for a year or two. It’s part of our strategy. Mind you, we buy $40k houses, so we are not talking huge numbers. Now, I’m NOT recommending you go out and buy deals with negative equity.

This just goes to say that as long as you have a specific strategy and your investment checks all the boxes, you shouldn’t let the fear of paper losses stop you.

I talked to an aspiring investor whose goal was to build cash flow so she could retire her 9-5 pm. She had found a great deal that would have amazing cashflow, but couldn’t pull the trigger because she was afraid that the market would crash and her property wouldn’t be worth as much. I asked her…

• Are you looking to keep this long-term? She said “Yes”.
• Is your goal cash flow or appreciation? She said “Cash flow”.
• Would the property still cash flow if the value dropped? She said “yes”.

“Then what’s the problem?” I said.

Assuming her fear came true and home prices dropped, her goals would still be met. Since she’s investing long-term, prices will catch up again and do what it does best over time… APPRECIATE.

I truly believe in our investment strategy and we have proven the concept, so I don’t worry about those paper losses anymore.

This goes back to my blog post on why setting your own criteria and investing strategy is KEY.

Link to Blog Post – Set Your Criteria 

It’s okay to think about the worst-case scenario, but while you do that, start looking for possible solutions or ways that you can offset that worst-case scenario. I will say, the worst thing you can do is not take action for fear of the unknown.

Lessons Learned/Takeaways

No big lesson with this property, but it started something. We got dedicated maintenance help and it has been a game-changer since. Finding the right team to do rehabs is key in any market. Sometimes you just have to wait for the right one, rather than rush into the first one you find. It might end up costing you more than you think.

There you have it, Skyline House. The pictures below show before and after.

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If you want to connect further, you can always reach out to me via Instagram at @beyondjustnumbers or via email: beyondjustnumbers@gmail.com