HELOC or Cash Out Refinance?

Question

Hello BP'ers!

I am looking for some advice on my first investment.  I am a real estate agent/investor in the Northwest Arkansas area, and back in July, I bought a SFH with plans to rehab and then later move out and rent it.  I live in this home and originally planned to house hack, however life events happened and I had to pivot.  I have currently passed the 6 month mark, so I am exploring options of either cash-out refinance or HELOC.  I pay a pretty penny for PMI, and I thought it might be a good idea to pull cash out and start looking for another deal and take advantage of the equity since I extensively remodeled the home. Below are some of the investment details:

3 bed- 2ba, 1430 SQFT.  Purchase price $137k (around $95 PSF). Rehab $25k (my own money).

3.5% down CONV at 2.75% over 30 years.  Mortgage payment is about $780 including PMI.

Several houses around me have sold recently from anywhere in the $130-175PSF range. A particular house on my street sold for $175 PSF about 3 months ago.  It is a 3bed/2ba home as well (around 1350 sq ft) and a very good comparable in my opinion.  My home is a little nicer with the rehab, but does not have a new roof or fenced in backyard like the other home.  With this being said, I think my home is worth around $170ish PSF, but of course it all comes down to what an appraiser thinks.  I would assume I could get 80% LTV on a cash out refi, and at $150-$170 PSF, I could easily recoup all of my rehab cash.  However, I don't like the idea of being stuck in this house for another year if I cash out refi based on the primary residence loan requirements because I would like to be able to use that cash for another REI.  I have a duplex house-hack in mind for my next venture.

What are you opinions/suggestions, Cash out refi or HELOC? Maybe I should consider something else?

Jacob Haskins · Answer

@Jaron Walling I’ve done some research, and I believe my home would rent for $1350-$1400.

I currently have PMI, but I believe that my bank will let me eliminate mortgage insurance if I pay for another appraisal (hopefully). This will make my mortgage payment more like $550 per month, so I am aiming for about $700 in monthly cash flow. Of course I plan to use this cash flow to build up reserves first (probably $5k).

Ryan Blackstone · Answer

Your loan is freaking amazing! Your loan may require you to live in the home for a year so it seems like you have 6 more months. If that is the case, then I would do a heloc if you have a deal on the hook. I wouldn't refinance and then be stuck living there if you want to grow. HELOC and FHA loan on a house-hack duplex will let you scale up fast. The banks hit me with having to bring 15% down on my second deal, because the properties weren't 50 miles away. I would check your lender that they wont ding you for getting another personal loan. However, it seems like you have enough equity to maybe put 20% down on your next deal. No matter how wrong it is, I have been seeing lenders use the zestimate as the value of your house for a HELOC without getting an official appraisal.

Jaron Walling · Answer

@Jacob Haskins Regardless of what the other properties sell for are you running the numbers on this property as a flip or rental? What are comparable SFH renting for? What's the cash-flow? Correct me if I'm wrong but it would need to rent for at least $1100-1200 to break even with a 3.2% interest rate.