Need advice on how to leverage my home equity for first rental property

Member since 2021 · 1 post · 0 votes

Hey BP family,

First time poster and real estate rookie here! Thank you all for your time. I really want to purchase my first rental property and I was seeking out advice.

Back in October of 2022, I purchased my first home in a suburb neighborhood from my mother/father-in-law for $160,000 and the home appraised for $220,000, which gives me around $60,000 of equity. I have learned about the 3 ways to get the equity out of my home: Cash out refi, home equity loan, and HLOC.

I was looking into purchasing a rental property or a fix and flip for around the $80,000-$100,000 mark.

1) Which loan type seems the most appropriate for my circumstance?

2) For someone with no experience, should I focus on fix and flip, or short term rental and my model for my first property?

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Brittany MinocchiBusiness Member
Lender · Massillon, OH · Member since 2022 · 1k+ posts · 486 votes
3y
What sort of rate do you have on your first mortgage? If you do a cash out refi, you'll lose that rate. If you do a HELOC or a HELOAN, those are second position so they won't affect your first mortgage. Downside to those is because they're second position, they're higher risk for the lender and your rate will be higher…but even so, it might make more sense than refinancing your first mortgage. Also worth noting is that you may not have access to the full $60k in equity.
You could use a debt service loan that uses the income from the property to qualify you as opposed to your personal income/employment, or conventional financing if you qualify. Conventional has more paperwork involved but better rates/terms. Fix and flip loan if you decide to go that route, and then refi into a DSCR.

For your first property, a long term rental would probably be the safest bet. Fix and flips can be risky if the rehab ends up being more than you plan or if you can’t sell the property for as much as you need to before the balloon.
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Bryce JamisonPro Member
Rental Property Investor · Mebane, NC · Member since 2015 · 494 posts · 439 votes
3y
If you're just starting out (no experience) you're putting the cart in front of the horse.
I'd recommend educating yourself as much as possible on the REI strategy you want to deploy through websites like this and it's family of podcast, YouTube, and your library. Since you don't know what strategy you want to pursue doing this will help you find one. Simultaneously, attend all of your local REI meetups to start building relationships and learning your market.

Then select a market you want to invest in and start looking for properties. That's when you'll want to consider financing.
I'm financial conservative, so I'm not a proponent of using leverage in my primary residence to fund investments, but that's my personal risk tolerance. For some people it's a great option. Keep in mind the bank will only lead up to 80% of the home value though, so .8 X $220,000= $176,000. $176,000-$160,000= $16,000. After the appraisal fees and closing cost you might come out with ~$12,500.
If I were you I'd save up cash for my first investment using a traditional 20-25% down mortgage.
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