Paying Cash vs Financing a rental property?

Question

Is it difficult to do a cash out refinance after buying an investment property cash and will the interest rate be higher than if i just got a conventional loan instead of paying cash?  Im thinking about buying the house cash but Ill need to refinance to get that money back within the next few months to buy another property.  Should i just get a conventional loan for the property?

Joshua D. · Answer

I am in the middle of a Refinance right now that are almost the exact numbers that @Joe Villeneuve talks about above.

We paid $49,000 for a ugly foreclosure,  six moths later we got the appraisal back for $82,000 we took a loan for $56,000 and are now looking for the next deal.

As Joe preaches regularly this stuff works!   and now I have a house with a great equity position.

Why would you take a HELOC vs owning just refinancing the hole thing?

Chris Kennedy · Answer

Like many things in this business and life in general, the answer is it depends.

Buying cash and refinancing could be the way to go if:

1. You are in a very competitive market at a price point where there are likely to be many competing offers

2. Your primary concern is the price you pay - it's usually easier to get a deal if you're paying cash

3. The seller needs to close fast (in less than 30 days)

4. The property is in significant disrepair and will not easily qualify for financing until repairs are made.

5. You have any concerns about your ability to obtain financing up front for a purchase. It is typically easier to refinance a property since the bank can see you already had enough cash to close on it.

6. You are okay tying up your cash for at least 6 months. Most lenders will not let you refinance within the first 6 months after purchase (there are some exceptions, but terms usually are not as good)

Buying with conventional financing up front could be the way to go if:

1. You have found an off-market property, or are in an area with low competition from other investors

2. Your primary concern is the interest rate you get on your financing as you will typically get slightly better rates when financing up front

3. You are certain the property is in good enough condition to qualify for financing

4. You are financially well qualified to obtain a loan (good credit, w-2 income, etc)

You typically pay higher interest and closing costs when refinancing than when getting a loan up front with a conventional lender.

Buying cash and refinancing is an excellent strategy when you can buy at a discount, make repairs to the property, and then refinance in 6-12 months based on the appraised value (instead of purchase price). A lot of times that allows you to walk away with little to no money out of pocket after the refi - if you bought right!

FYI - typical lenders will make you wait 12 months before allowing you to refi at appraised value, but just 6 months for a refi based on purchase price.

Hope that helps!

Joe Villeneuve · Answer

There are a number advantages to a refi loan...not the least of which is you could end up with more cash after you refi than when you started.

Buy a property for $50k.  It's worth at least $80k in 6 months when you can refi.  Most refi loans will do 75% of the ARV, which would be $60k.  At closing, you walk out with $10k more than you started with.

Account Closed · Answer

A conventional loan would be best it could take 6 months or longer to cash out

Brandon P. · Answer

how soon after purchasing the home can i do the heloc?

Joe Villeneuve · Answer

No.  The HELOC only gets you the "Cash Out" part.  Refinancing gets you the "Cash Out" patr AND all the cash you put in.

Arlen Chou · Answer

@Brandon P. I did what you just described 2 years ago in the Bay Area, bought in cash and the refinanced in less than a year.  You can refinance out before 1 year, BUT it will be based on your purchase price.  You will need wait 12 months the "season" the purchase before the bank will give you a higher appraisal value, even if you do upgrades in less time.  I did this because the market here is so hot and I want the "cash" advantage and secondly I needed to get cash to complete my renovations and pay off my private money lender.

As @Chris Kennedy has stated, if the potential property is not a highly visible target for competition, then you might have the time to get a loan in place.  However, the past 4 properties I looked at in Oakland all went to cash buyers way above asking...

-Arlen

Brandon P. · Answer

That way after i purchase the home with cash I can use the heloc money to purchase another property. Wouldnt the heloc be similar to the cash out refinance?

Brandon P. · Answer

Do home equity lines of credit also take about 6 months?

Paying Cash vs Financing a rental property?

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