How can I leverage existing equity in my primary residence?

5 Replies

I'm looking into getting into real estate investing, or more specifically purchasing my first buy and hold rental. I currently do not have any savings I could dedicate to a down payment right now, but I do have about $300,000 equity in my primary residence.

I live in a HCOL area, so I'm looking into purchasing a rental out of state. Being new to real estate/rental property investing, and because I am looking at non-local markets, I was leaning towards more of a turnkey type rental property in LCOL area and hiring a property manager.

My primary goal is start building a rental property portfolio with a focus on cash-flow.

I refinanced my primary residence a few years ago and got a pretty good 30-year fix rate of 3.375%, so giving my current rate and the cost to refinance, doing a cash-out refinance for the rental property down payment doesn't seems like the best option. Another alternative I'm looking into is possibilities of using a HELOC or a combining the HELOC with whatever I can save in the next 6-12 months for the down payment and closing costs.

I've ran some rough estimates and it looks like if I use a HELOC for 100% of the down payment most properties would more or less break even on cash-flow for several years after factoring in payments to payoff the HELOC, but as I mention I've only done some pretty rough estimates.

So I was wondering what you guys have done to leverage your current equity to purchase rental properties. I've come across the BRRRR strategy, but as I mention this being my first rental property and it being out of state I feel like the extra risk associated to rehabbing and refinancing a property is something I'm not sure about and is why I'm leaning toward a more strait forward turnkey type rental. I know I would be give-up a little cash-flow by buying a turnkey and using a HELOC for some or all of the down payment, but I think I would be ok with that trade-off as long as the property would still be cash-flow positive and it would allow my feet wet and establish a remote team were I could eventually buy more rentals.

Any input or suggestion on my situation and thinking process, as well as other people's experiences doing something similar would be greatly appreciated.

@Dustin Brazeau

i live in OC as well. I would pull out the HELOC but invest in fully paid three $100k houses OOS. lot of reputable providers on BP.

that way you can pay off the HELOC from the cash flow of the rentals only and not be under cash flow issues if any deferred maintenance comes up.

You can look in riverside and san bernardino county and get a SFR or a duplex that will yield $1500 to $1700.. that should also take care of Heloc payment and return of principal.

your returns from OOS investing will certainly be higher than local areas for sure.

regardless you will be leveraged 100 percent on the principal house

@Dustin Brazeau I have been using and increasing my HELOC limit over the last 15 plus years. Dave Ramsay would clearly object, as at one point I owed $550k on two HELOCS interest only! Ouch, but I have it paid off and now have cash flowing properties around $12,000 per month. It has not been easy, and had to flip to pay down debt as well and use my cash flow, but at 52 years old I am beginning to see the light at the end of the tunnel.

Check Keybank, as that is where I secured a 90% LTV on my personal home with 15 draw period and prime minus .25% point for interest only rate. I love smart leverage and only buy sweet deals. My CAP rates no one would believe. Those 5-6% CAPS are not for me !

Dustin, I recently did a cash-out refi on my primary residence. There were a few reasons why I chose to refinance instead of using a HELOC.

1) I couldn't afford exposure to variable interest rates, knowing that I would not be in a position to pay off the loan for many years.
2) There was no point in having a line of credit, since my goal was to keep the borrowed capital working for 30 years, not pay it down early.
3) A refi on a primary residence is a lot cheaper than a HELOC, in the long run.

Like you, I was dismayed when I came to the realization that the cashflow would be close to zero, since both the debt and equity for the rentals would be borrowed (100% leverage). Another thing that is very discouraging is calculating how long it would take to pay back the equity, when you have minimal cashflow. Could be 10, 20 years, or even infinity, if there is no or negative cashflow.

For these reasons, I have decided turnkey rentals are not for me at this time. They can be good options for people with a high income, who can subsidize the investment with earned income. But for me, I am funding the my rental portfolio with a lump sum of borrowed capital. In my case, my overhead on this borrowed capital is $18,500/year. That's quite a headwind to fly into.

My conclusion is the only way I'll be able to reach my passive income goal is to use the bank's money to hatch some money of my own, then I can use my own money to buy rentals. This will reduce the overhead tremendously.

@Dustin Brazeau

We went with a HELOC, for the flexibility and for not wanting to refi the first on our home. In retrospect, should have done it like @Kevin Grove . Heloc just doesn't make sense for having the capital invested long term. I'd reconsider a cash out refi.