I'm a bit overwhelmed at financing options and timelines

12 Replies

First time investor here. I'm looking to buy a long term rental property about 1.5 hours away from where I live. I'm wanting to buy this summer, so about 2 months from now, and I'm trying to explore my financing options now so that I can jump on a deal if/when I find one. I own my current home outright, which has a value of around $250k, and I have $25k cash saved up. Here are the options that have been presented to me.

1) Some lenders I'm talking to are trying to convince me of a HELOC, but I don't really like the variable interest rate. I don't like the idea of of take a roughly $125k loan on a variable interest rate.

2) I asked about a traditional/conventional loan, in which I put down the $25k of my own money, and then financed the remaining amount on a traditional mortgage. One lender tried to tell me that my interest rate would be higher by doing this, and that I should try option 3.

3) Some lenders are trying to convince me of a cash out refi / home equity loan (I'm still fuzzy on what the difference is between them). The benefit of this is that I would have the money in my account, and it would allow me to make a cash offer on a house. However, I don't like the potential scenario in which I take out the loan, start shopping for houses, and don't really find any good deals. Then, I have this $125k loan that I'm just paying for every month out of pocket.

I'm leaning towards option 3, but how can I do the timeline here? How long roughly does it take to close a home equity loan/cash out refi? Could I go "make a cash offer," then immediately run to my bank and secure the loan (because I will be preapproved)? What is the timeline on that?

Is there any other advice that yall have for me in how I approach this?

@Tom Horn The lenders are giving you good advice. #3 is the lowest interest rate because that’s your primary home and it is locked in long term. That’s going to be a better rate compared to a loan on an investment property. I’m not sure on the exact numbers but let’s say that investment properties will be 1% higher for interest rate.

Another thing to consider is the tax breaks for the investment property. Talk to a tax pro, but it’s possible that taking a 4% interest rate on the investment property will be better than 3% on the primary home if you can write off the interest instead of getting no tax break on the primary. (All of that is just a possibility, I’m not saying that’s your exact situation)

@Tom Horn The refi cash out is money out of the property (takes about a month to do a cash out Refi) and once you get that money it's in your account to do anything with once you close.

HELOC, this is a loan on the house, the interest rate can be variable and the money stays in the home until you pull the money out to use it. The payment gets triggered on the money payback once you start to use the loan.


You can make a cash offer then finance the property, sometimes the lenders will want a 6 month seasoning period after purchase to make sure it was not a fire sale for the property. This is typically with financed BRRRR deals though, not cash deals like you are talking about.

I would go cash out refi if I were picking and option, just make sure the rate is good (rates on cash out are higher than R&T refis).   

@Tom Horn The refinance option isn't a bad one and to minimize your risk of taking a loan you cant use just start the refinance process but wait until you have the investment property you want to buy under agreement before close on the refinance. We do this a lot with our investors. They'll get the paperwork to the bank for the refinance we'll schedule it to close 45-60 days out then start aggressively shopping for the investment property. If they find something and get it under contract with the "CASH" that is coming (still a CASH offer in my book), boom go ahead and move forward with the refinance. If you get a good attorney involved they could even do a double closing. If you don't get something under agreement then just try to push the closing date of the refinance out as far as you can without incurring additional fee's. Be open an honest with your lender about this so they don't do an aggressive rate lock to help you out and actually end up screwing you by mistake. 

Full Disclosure you could end up in a situation where you incur some significant sunk costs (appraisal, loan origination, etc) have to make a decision to close on the refinance or kill it and pay the sunk costs and you don't have anything under agreement.  It's up to you if that's an acceptable risk or not. 

The other thing I'd suggest considering is buying the property as a vacation home. You can get 10% conventional financing on a vacation home with Fannie or Freddie as long as it's in a vacation destination and more than 100 miles from your primary residence. There is no rule about you renting it out to short term rentals when you're not using. Again we do this pretty regularly with investors we work with in Greater Boston who are looking for a vacation rental on Cape Cod or the Beach in Maine, or up in the Mountains or NH or VT. They use the property as a short term rental 48 weeks out of the year and use it for themselves the other 4 weeks. In my opinion it's the best of both worlds.

I hope this helps,

Best,

Jon

@Tom Horn I personally like the HELOC option. It is truly challenging to get a home under contract these days so having the funds still in your home while you look for a property is better than having it sit in your bank account as cash via a refinance. Honestly, you don't want to be rushed into a bad purchase as a result of your cash just losing value. It should be more of a calculated purchase, which sometimes takes patience. If you are concerned about the variable interest rate, you could always refinance the balance from the HELOC onto your primary residence at a fixed rate once things are settled. The fantastic thing about a HELOC is you have access to a large amount of capital in seconds, no questions asked, but do not have to access it unless you want to.

@Andrew Freed Somebody else brought up this same idea to me - using the flexibility of a HELOC (and ability to make a cash offer) to secure the property, and then later paying off the HELOC with a fixed rate mortgage at a later date.

Could I be upfront with my bank that that's my plan? Is that frowned upon? I really like what you're presenting, because it seems to be the best of both worlds. I just want to make sure there aren't going to be any hiccups or unforeseen challenges of switching it over to the fixed rate mortgage.

@Tom Horn As long as you have the equity and the desire to find the right loan officer, this is absolutely possible. I am not sure if I would get the HELOC and the refinance from the same organization though. At the end of the day, it is your equity. You can use it as you like if you are creative enough and don't take the first no you hear at face value.

@Tom Horn regarding number 1, we have a 4% fixed rate 10 year HELOC with a local credit union here in central Florida. You might find a similar product if you call around enough.

I understand the dilemma.  How many lenders are you talking to? - seems like a lot. :)

I think you do a mixture of using your $25k (assuming they won't require you to have reserves) and ALSO get a HELOC. We utilized our HELOC to quickly build a portfolio in which the lender can use your HELOC as equity. When we found a house, we used the HELOC to put as the down payment on the home, paid it off as quickly as possible - rinse, wash, repeat. Get as many traditional loans as you can.

Using all cash on a home in the amount of $125k doesn't make that much sense to me.  It would be much better used on a larger deal if that's your route of getting a refi.  Try and use that for a 4-plex or something (assuming you're in a lower priced market) where you're getting a return off of a larger property and you're cash flow will be better.  Worrying about a slight increase in your interest rate is pretty negligible at this point in my opinion.  Yes, it can be higher because it's a rental property, but for how long everything is right now, it should be fine.  Also, if you have the money pulled out and it's sitting there, you'll be that much more motivated to find something quickly and sitting there for only a couple/few months in the grand scheme of things isn't bad.

@Justin Hoggatt That's great info; thanks for the feedback. I understand I could go after something bigger (like a 4-plex), but with this being my first investment property purchase, I want to play it safe and just get a single family. 

So, you just used your HELOC for the down payment? Did you get your traditional loan through the same bank? I'm assuming it was a different one...

@Justin Hoggatt - Super great points. You seem like you've done your fair share of big deals. Congrats on your success!

@Tom Horn - Apologies if my advice was not too clear. I meant use the HELOC for the downpayment on a traditional fixed rate loan and refinance out of that amount if you are not comfortable paying a variable rate. I personally used a HELOC as the downpayment on two investment property (one @ 5% and the other @ 25%) and got the rest covered via a traditional loan. I also did not pay for any of the purchase in cash so I would have very good reserves in case anything unexpected happened. I would recommend that you talk to a few more loan officers and have a clear understanding of DTI before moving forward. The HELOC is a great tool but it does add to your DTI calculation hence reducing your loan capabilities. You may want to watch a few youtube videos on DTI and how loan officers determine eligibility so you have clear understanding of the implications.

Originally posted by @Tom Horn :

@Justin Hoggatt That's great info; thanks for the feedback. I understand I could go after something bigger (like a 4-plex), but with this being my first investment property purchase, I want to play it safe and just get a single family. 

So, you just used your HELOC for the down payment? Did you get your traditional loan through the same bank? I'm assuming it was a different one...

 

The lender will be able to help you with your leverage ratio's and whether you have enough lending power/cushion. Yes, I used my HELOC for many different down payments and then just didn't keep the balance if I could help it - pay that off as quickly as possible. I got conventional loans through the same lender - not a banker. The lender will be able to turn them out faster and will know your situation for each property and help you move forward. The more lenders you have, the more confusing it gets, not to mention, the more paperwork you have to submit.

As far as "safe", I would argue that it's safer to have a 4-plex that a single family home as your first. It still falls under a residential property and if you can swing it, the cash flow from 1-2 units will pay for the property and the next 2 will be the cash flow. If you have a single family house open and vacant, you're not getting any cash flow. Plus, I'm assuming the returns and cash flow will be much better on the 4-plex and you'll pay that HELOC off (or add to savings) quicker too.

Good luck!