Leveraging Primary Residence Equity for First Rental Investment

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Leveraging Primary Residence Equity for First Rental Investment

Jeremy F.
New to Real Estate · VA · Member since 2021 · 6 posts · 6 votes

For a first time real estate rental investor, is it a good idea to pull out equity from your primary residence in the form of a refinance, HELOC, or home equity loan based on today's current rates to fund your first purchase? If so, what would be the preferred method given today's terms and rates while still trying to protect the liability of your primary residence; what are the pros and cons of each?

This question reflects my current status as a new investor learning the ropes. Last year we refinanced our primary SFH of five years, originally purchased at $385k from a 30yr fixed rate of 4.25% to a 15yr 2.15%; today's market price is close to $550k. We have about $320k left on the mortgage leaving us about $230k in equity. My wife and I are deciding which is the best way to tap into this equity based on current rates and our plan for investing in small multifamily properties in the near future.

I love the vast experience and knowledge base of investors in the BP forums and appreciate all the feedback. Thanks!

Jeremy of VA

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Matthew CrivelliBusiness Member
Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
5y

Sound like you have a good amount of money to get started! I would use a HELOC. That way you will only borrow the amount you actually need and can leave the rest of your equity alone. You can take this line of credit and use it for the down payment and all other costs associated with private money. Find a Brrr and pull the trigger. Hopefully you have created enough equity in the first project to not only start paying down the line of credit but also enough cash to stat Brrr number two! it sounds like you're in an expensive area, it might be wise to invest in other parts where home prices are a little lower!

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  • Matthew CrivelliBusiness Member
    Lender · MA · Member since 2021 · 1k+ posts · 1k+ votes
    5y

    Sound like you have a good amount of money to get started! I would use a HELOC. That way you will only borrow the amount you actually need and can leave the rest of your equity alone. You can take this line of credit and use it for the down payment and all other costs associated with private money. Find a Brrr and pull the trigger. Hopefully you have created enough equity in the first project to not only start paying down the line of credit but also enough cash to stat Brrr number two! it sounds like you're in an expensive area, it might be wise to invest in other parts where home prices are a little lower!

    [email protected]413-348-8346
    Freedom Capital Funding, LLC523 Reviews
    WebsiteView Page
    1Reply
  • Jeremy F.
    OP
    New to Real Estate · VA · Member since 2021 · 6 posts · 6 votes
    5y

    @Matthew Crivelli

    You hit the head on the nail. We do live in a more expensive market in northern Virginia and are looking for small multifamily purchases below $125k to BRRRR so we will beed to look at outside markets. I was leaning towards the cash out refinance because of the low rates and because id like to vhabge from our 15yr to a 30yr to lower our payments... but the HELOC does offer an easier means for accessing the equity withought hving to apply closing costs and fees. HELOC does seem like a preferred method method for BRRR strategy?

    2Reply
  • Jacob SloopBusiness Member
    Rental Property Investor · Virginia Beach, VA · Member since 2020 · 274 posts · 111 votes
    5y

    I chose the cash out refi route just because cash is king, you only get access to a smaller amount of your equity being the downside, 75% LTV, so about 120k in your case. And I just don't like the idea of having the variable rate HELOC attached to a rental, which sounds like your plan. Unless you BRRRR like mentioned, the pay down would be too slow. Just my thoughts

    [email protected]757-235-0369
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  • David OechsleinPro Member
    Rental Property Investor · Alexandria, VA · Member since 2018 · 22 posts · 17 votes
    5y

    A HELOC is a good option because it's a revolving line of credit (like a credit card) that you can use over and over again for the duration of the draw period (usually 10 years). Interest rates for HELOCs on owner occupied homes are pretty low (3.75%) and you only pay interest on your balance. Monthly payments are interest only. You just have to make sure you are confident in your analysis and have reserves for the investment to ensure you don't put your primary residence at risk.

    0Reply
  • Jillian KemmererPro Member
    Real Estate Agent · Scranton, PA · Member since 2021 · 55 posts · 25 votes
    5y

    I am curious - no one had mentioned a Home equity loan as opposed to a Heloc.

    I tend to try to stay away variable rates. I am curious what people's thoughts are to a HELOC as opposed to the lump sum of a regular loan?

    0Reply
  • David OechsleinPro Member
    Rental Property Investor · Alexandria, VA · Member since 2018 · 22 posts · 17 votes
    5y

    You start paying principal and interest payments on a home equity loan on day one whether you use the cash or not. Also it’s a closed loan so you can’t keep accessing the equity over and over. People like to make a big fuss over variable interest rates but there are HELOCs that have overall interest rate ceilings (rate can never be higher than X%) and yearly limits on the rate increase. So it’s not like your rate is going to skyrocket over night or even a few years. 

    1Reply
  • Marian Smith
    Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
    5y

    @Jeremy Faulhaber there's a thread on Twitter talking about new home builders in Texas and one of the builder said it was of some concern selling too many homes too far in the future because when prices "go down" those contracts are at risk of being walked away from. point being the professionals are leery of this market. it's a very hot market with newly high prices and putting your Homestead at risk is just that, risky. I would rather see family or friends downsize to get seed capital rather than leverage up their home.

    0Reply
  • Alex Waite
    Richmond, VA · Member since 2018 · 26 posts · 3 votes
    5y

    I'm curious would you be able to use a heloc with a buy and hold strategy? BRRR is a perfect for a heloc but I am focused on the buy and hold strategy. I've seen other posts about using a heloc for buy and hold.

    My question is why would someone use a heloc for buy and hold rather than getting a mortgage on the investment property?

    0Reply
  • Robert Williams
    New to Real Estate · Joliet, IL · Member since 2021 · 89 posts · 135 votes
    5y

    @Jillian Kemmerer getting another loan increases your D to I. Unless you can find a lender willing to use your future rent payments as income, have enough saved , or make enough w-2 income, it’s a no go. I think a 203K loan does factor in future income, but I was just introduced to it today.

    0Reply
  • Peter Bales
    Rental Property Investor · Sullivan, IN · Member since 2020 · 1 post · 0 votes
    5y

    @Alex Waite. My understanding is that you use the Heloc to purchase an investment because you can get better terms as a cash buyer. Then after some rehab you can refinance it based on the renovated value and pull out the cash to pay back your heloc or do it again. Many properties will not qualify for conventional financing so using the heloc helps us get the property- fix it, then get a loan on it after it will qualify.

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  • Mike Lee
    Investor · Tampa, FL · Member since 2017 · 123 posts · 109 votes
    5y

    Another vote for a Heloc. Once you get the first deal under your belt, you can go back to this established credit line and rinse/repeat. A cash out refi or HELOAN don't offer those options. 

    0Reply
  • Chris Levarek
    Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
    5y

    @Jeremy F. I chose the HELOC route back in 2018. I've since used to scale up to 46 units in small multifamily. I completed 4 BRRR's using the same $50-100k HELOC. The rate has note varied over two years by more then .25. In fact it actually got better. Home Equity Loan's are not as efficient in my book, because once you pay it back you have to go get another loan and doesn't allow as much flexibility. I also feel cashout-refi forces your monthly mortgage payment up for the future, regardless if you in a deal or not, so again not as much flexibility in my book.

    Untapped equity, is untapped potential wealth creation. So tap it! :)

    1Reply
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