Heloc or cash out refinance?

Question

I’m new to the investing world and am currently doing a house hack where my roommates pay most of the rent. I am in the process of refinancing so that my payment will be lower and roommates cover rent completely. I’d like to buy rental properties but I don’t know what the best option is for acquiring capital. Is it better to do a cash out refi or refinance and then get a heloc? Is this allowed? Can I do both? I’m very new to all of this so any insight is greatly appreciated.

James Holland · Answer

For me, HELOC is always my first option. For a few main reasons. You get to basically use it forever.. so to speak. apply once, use it, flip a property, pay it down, and use the money again. With a refi/cash out (I know you didn't mention) you use it once, and even if you pay it back down out of profits, if you want to use your equity again to purchase another property, you have to go through the whole process of applying, approval and all that comes after that all over again.I love HELOC's

Jaron Walling · Answer

Hey @Austin Webb! The best advice I have is to slow down and think about your strategy. How long do you plan to house hack the current property? Every time you get a lender involved it costs money. Sure you can ReFi and get a lower rate and maybe pull some cash, but they get you with closing costs, fees, etc. The fees add up if you're a small guy like myself.

If you plan to sell the property in 2 years the saving is NOT WORTH the ReFi. Hopefully that's an elementary statement to you. I'd also consider how you plan to redeploy the money from the first property. Having reserves and cash in a war chest is a great thing right now considering the prices in our markets and turbulence of our government forbearance policies.

Austin Webb · Answer

@James Holland great information, thanks! That makes perfect sense I guess I just was just too focused about getting a deal and not worried enough about what I'm going to do for future deals

Austin Webb · Answer

@Jaron Walling thanks for the response! My wife an I plan on living here for quite some time and we’d be going from a 4% interest rate to about a 2.65%. I guess what I should really ask is whether a refi is a good way to finance a deal or if using other people’s money is better for starting out