Cash out refinance primary residence to buy another

Clay SmithBusiness Member

Investor · Louisville, KY · Member since 2013 · 419 posts · 244 votes

2y

Go with the HELOC. A line of credit won't commit you to a monthly payment unless you use the money, so you can avoid paying interest when it's not in use. Refinancing will change your mortgage rate, and if it's worse than your current rate, it's not worth it unless you're getting a great deal. When going for a HELOC, aim high on your home's value — let the appraiser bring it down to what it's actually worth rather than underestimating it yourself.

Cash is king. Buy your next property with all cash, fix it up with cash, and then do a cash-out refinance afterward. This approach will help preserve your operating capital. Don't worry about setting up an LLC right now. Start by using a land trust and transfer the deed to your LLC later, once you've acquired a few more properties.

If you’re willing to move and remodel, consider getting a 30-year loan on your next property. In this case, buy something that needs very little work so you don’t deplete all your cash. The objective is to keep as much of your operating capital intact as possible.

The goal is to buy, fix, finance, and avoid leaving cash in the deal, so you always have liquidity for future projects. Look for a local credit union that can offer a cash-out refinance once the work is done, ideally with minimal seasoning. It's a bonus if the bank offering the HELOC also handles BRRR loans — they'll be more flexible and accommodating when it's time to pay off the HELOC with a new loan!

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Remington LymanBusiness Member

Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes

2y

Quote from @Vanja Dimitrijevic:

Hello, I've been researching BP podcast and resources and am looking into buying another property to downsize from the current one but wanted to use the equity in my current house to purchase a new house in the area. Here are the specifics: our current property is worth 360k roughly; we owe 120K on it. Our current lender is offering us 170K cash out refi ( I will be researching this in a greater detail ). We would like to use this to cash out the new property. We are looking into getting a fixer upper and plan to rent out our original residence ( Zillow says we can get $2700 median rent in our area ) while moving and fixing up the new house. Our long term plan is to ease into real estate investing or being a small landlord with minimal headaches or complications. We will both keep our W2 employment for the near future just looking into getting an extra income or make our retirement easier. So, if anyone can guide me in the right direction, I would like to know:

1. Is getting a cash out refinance a better way to do it instead of getting a HELOC? If so, where would I find good resources to get the best terms and do you think that going with our current lender would give us best terms and be less complicated paperwork? I am still unclear about everything I read on the tax benefits for getting the cash out refi, and would like to understand that better

2. In this situation, is it better to get a property through regular means, look what is on the market (through realestate agent), or maybe go through a sheriff sale? We are somewhat handy and would not mind fixing up the house while living in it.

3. What should I pay attention to if i was to get a property in this situation through an auction?

4. Is it better to get an LLC when I become a land lord to get some tax benefits?

If it makes any difference and will better guide your answers, we live in Ohio.

Thank you for any insight you can provide me. Best regards, Vanja Dimitrijevic.

1 - Opting for a cash-out refinance is a more permanent solution and generally offers better terms compared to a HELOC. It's best to reach out to multiple lenders to explore your options. Starting with local credit unions is a good idea.

2 - I recommend starting your search with a Realtor who specializes in working with investors. Then, you can consider looking into sheriff sales. However, it's important to be cautious, as sheriff sales can be risky for inexperienced individuals and may lead to significant financial losses.

3 - Referring to point 2.

4 - I can provide you with some recommendations for CPAs who are based in Ohio.

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Brittany MinocchiBusiness Member

Lender · Massillon, OH · Member since 2022 · 1k+ posts · 486 votes

2y

Hey Vanja -

I'm sticking to what I know here and offering the most insight with #1:

If you have an immediate use for all of the cash you're pulling, a cash out refi is a viable option. If you want to have access to that money "just in case", a HELOC may be better. The biggest difference here is that you'll pay P+I on the entire loan amount immediately with a cash out, but you'll only pay interest on what you draw on the HELOC during your draw period. HELOCs carry higher rates than cash out refis. If you want the least amount of paperwork, you could consider refinancing into a debt service loan. This is a business purpose loan and will have a prepayment penalty and possibly cost a bit more than conventional financing. You don't need to provide employment history, paystubs, w2s, tax returns, etc and DTI is not a factor. If you're looking for the cheapest route, conventional may be a better bet. There is more paperwork involved with that option.

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Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

2y

Cash-Out Refinance vs. HELOC: A cash-out refinance could be more beneficial if you're looking for a lump sum to purchase the new property outright, particularly because interest rates may be lower than a HELOC. A HELOC offers flexibility, as you only pay interest on what you use, but rates tend to be variable. It's worth comparing terms between your current lender and others to see who offers the best deal in terms of rates and fees.

Purchasing a Property: Whether you purchase through regular listings, an agent, or an auction depends on your risk tolerance and expertise. Buying through an agent may provide more transparency, while sheriff sales and auctions can offer deals but often come with risks, like limited property inspection or legal complications. Make sure you understand the auction process and are prepared for any unseen issues with the property.
Auction Considerations: With auctions, pay close attention to the condition of the property, title issues, and financing restrictions. Be sure to research the property thoroughly ahead of time, as there may be limited opportunity for inspection. Additionally, have a clear budget, factoring in potential repair costs, and ensure you understand the rules about earnest money deposits and closing deadlines.
LLC for Real Estate Investing: Forming an LLC for rental properties can offer liability protection and may provide tax advantages, though the tax benefits are non-existence for rentals.

*This post does not create a CPA-Client relationship. The information contained in this post is not to be relied upon. Readers should seek professional advice.

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Patrick DruryBusiness Member

Real Estate Agent · Columbus, OH & Cleveland OH · Member since 2021 · 1k+ posts · 2k+ votes

2y

@Vanja Dimitrijevic

1. Is getting a cash out refinance a better way to do it instead of getting a HELOC?
I think a cash out refi would be better. HELOC's are good if maybe you don't have a deal, but want to keep the money ready to use and the property has a low rate that you don't want to lose.

2. In this situation, is it better to get a property through regular means, look what is on the market (through realestate agent), or maybe go through a sheriff sale? We are somewhat handy and would not mind fixing up the house while living in it.
It doesn't matter where you find it as long as the numbers make sense. The better value add deals will typically be off-market.

3. What should I pay attention to if i was to get a property in this situation through an auction?
Most only accept offers with no contingencies so if you're newer it's not the best investment due to the higher risk associated. You can find some diamonds in the rough don't get me wrong but if you aren't experienced enough to see red flags in the property/ transaction they can be costly.

4. Is it better to get an LLC when I become a land lord to get some tax benefits?
I would just stick to buying them in your name. Don't get the cart in front of the wheel. Get a lot of rentals first then worry about it at a later date. If you buy in your name you can buy them with conventional loans as long as you qualify which have better loan terms

If it makes any difference and will better guide your answers, we live in Ohio.
Nice. What part of Ohio?

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Andrew SyriosPro Member

Moderator

Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

2y

I would probably go with a HELOC as you won't have to pay for what you're not using unless you've got a specific property you're going to be buying with that money so you know you won't just take out the loan and sit on it paying interest all the while.

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Vanja Dimitrijevic

OP

Member since 2024 · 3 posts · 4 votes

1y

Thank you all for the great advice, I have learned a great deal. I truly appreciate it. Cheers!

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Vanja Dimitrijevic

OP

Member since 2024 · 3 posts · 4 votes

1y

Hello all and thank you for the previous reply. I have talked to a few lenders and have a better idea of what would work best for us in this situation. It seems that Cash out refinance would make the most sense for us. Also, the forum concensus seems to be that at this time having an LLC would not provide any benefits and the lenders I have talked with so far are unwilling to do the deals with LLC. With that being said, I was wondering a few additional things and am hoping for some additional wisdom:

1. Being that the new property that we buy will become our primary residence and we are buying a fixer upper, how do we get the best tax breaks for the repairs and/or improvements?

2. Our current house will become a rental unit and will be turnkey for tenants. Are there some other ways I can offset the rental income so we do not have a big tax bill from the gains?

3. Does anyone know an investor friendly tax/attorney person that I can talk to and can guide me through this process?

4. Our friend is a realtor but I would rather work with an experienced realtor that has done this a few times. I keep monitoring the properties in the Cleveland Heights area (where we are looking to buy) on Zillow and other web sites but I am sure there are other ways of finding properties. Where else can I look?

Thank you again for all of your advice and wisdom.

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Cash out refinance primary residence to buy another

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