Tapping equity vs. traditional lending

[Tyler Anderson]

Hello all, I'm just joining after reading the BRRRR book and am looking forward to learning more! I'm currently looking for some advice on purchasing my first full time investment property.

I bought my first primary home (single family) in 2016 with a FHA. During my time living there I added a fair amount of value. This spring I moved for a new job (currently renting myself) but hung onto the house to rent out. I currently have great renters in there and am not interested in selling the property. Lately I have been looking into purchasing a second investment property but am looking for some advice as how to proceed with capital/using equity and or/lending. The stats on my current property are as follows:

I owe $170,000 on the original FHA and have a great rate at under 3% which I do not want to lose. The total expenses are approximately $1,200/mo and rent is $1,700/mo. The property currently cash flows a little over $500/mo. The current market value is approximately $370,000 giving me about $200k in equity.

My question is am I crazy to be thinking of a HELOC or second mortgage on this property to tap that equity to purchase a second investment? Or would a cash out refi at a higher rate still be worth it? Or would I be taking an unnecessary risk with this property that I'm already in such a good position on, considering current rates?

My alternative would be a conventional loan with 20% down where my budget would be about 200k or 40k down. 

Thanks in advance for the advice! 

[Kevin Sobilo]

@Tyler Anderson, a few comments:

1. You don't want to sell which I understand because you feel you have something worth holding onto. You see not only the property as a value but also the loan.

However, have you considered taxes? Since this was your primary residence 2 of the last 5 years you would be exempt from taxes on a sale up to $250k in profit ($500k if married filing jointly). So, if you have a potential profit of $200k that is a pretty significant tax savings if you sell now that you will eventually lose if you continue to rent.

2. Cash-flow. Most people look at cash-flow as rental income minus hard expenses. However, you have many soft expenses that need to be budgeted for. Vacancy, capital expenses, and repairs would be the big 3.

So, if your aren't counting them in your calculations here then your cashflow is probably $255 LESS (assuming 5% budgeted for each) for a new cashflow of $245. That is still a nice number but not the stellar $500 you were thinking about assuming my statement about not including those is true.

3. Did you purchase a new primary residence or are you renting? Have you considered a house hack where you buy a small multifamily and life in 1 unit yourself. You could get the down payment from a HELOC or by selling this property.

4. A HELOC is probably the most reasonable option other than selling to make some equity available since you would have control over how much and when its used and only pay interest on how much you actually use and when. With interest rates high that is a nice advantage alone. Keep in mind they aren't going to lend you up to 100% of the property value. Assuming a 80% LTV they might give you $126k.