Cash out Refi on primary vs conventional loan on duplex

11 Replies

Hi, everyone!

I'm looking at financing options for buying my first investment property.  In going through the financing options, I started a cash out refi on my primary residence.  I can get $45k out of it based on the appraisal we just did.  

I thought I'd be able to get $60k but that's not going to happen.  I planned to use the equity combined with cash to make a cash offer on a duplex.  Now, I won't have enough from the equity and cash ($20k) since it will only be $65k ($45k home equity + $20k cash) and that would be a duplex that needs quite a bit of repair in this area which I'm not really interested in doing.  And that would leave me with no cash left until I save more.  I wanted something that needs updating but not a whole house remodel.

I'm thinking I don't want to use the equity at this time because its not really enough for what I wanted to do.  I worry that if I go ahead with the cash out refi, then for whatever reason a bank doesn't qualify me for a duplex using the equity as down payment, I will end up stuck with a higher interest rate than I currently have on my mortgage, no duplex and a higher mortgage payment on my primary.

I wanted to get others opinions about what to do.  If I left any important info out, please let me know and I will clarify further.

You could look for a low interest rate HELOC and sit on it until you find the perfect deal. You won't have any additional payment until you actually draw funds from the HELOC.

Double check the language of any loan on your real estate and make sure it can be used to procure other real estate...some have restrictions.

@Jassem A. Thanks for the idea. The adjustable rate of a HELOC didn't appeal to me for buy and hold financing. I didn't want to have to count on a refi to get into a fixed rate later. Does that make sense?

@Joshua Springer   Good point!  The lender I'm using knows I'm buying investment property so it must be ok with them.

Thank you for the replies!  Does anyone else have any advice?

@Corie Bilotta  Based on your #, it looks like you are buying a $80K property. If that is the case, then why not just do a loan on the rental with 20% down? You have the cash for the down payment, so that's not an issue. With this approach, you keep the low interest rate you have on your primary home. And the loan is an expense against the rental, which brings down the tax. You can't write off the added mortgage payment or HELOC payment as expense against the rental.

Upen Patel, Mortgage Banker

Federal NMLS# 1374243

@Upen Patel   Thanks!  What you said is what I was thinking.  My lender is giving different advice.  

It seems safer to me to go with conventional financing since the cash out isn't really enough to do what I intended.  I can save the equity for later when the market here is better.  Where I live is rural/recreational and there is trouble finding comps since sales are slower in my area.  

I suggest whether you like the variable terms of the HELOC or not that you apply for the HELOC as they typically have very low fixed cost (often waived the first year) and no interest until you use the money. Think of it like an emergency fund or short-term fund for investing. The fixed cost of the HELOC is the cost of having these funds available.

If the killer deal comes your way maybe the cash from the HELOC can help you close. Then you can look to obtain other financing. Sometimes the deals are available to those that can bring some cash quickly. I have lost deals for not having enough cash during the negotiations.

If you do not end up needing the money from the HELOC the cost is very low but if you end up needing the money you will be glad you have the HELOC.

@Dan Heuschele   That's a good point.  I may decide to do that some time.  Thanks for your input!

@Corie Bilotta

You can get pre-qualified for the cash out refinance and a new purchase at the same time to ensure you will qualify for both. You can then apply for the HELOC after the refinance. I agree with you regarding the adjustable rate versus fixed rate....... 10-15 years down the road we don't know where rates are going to be, so I feel safer with as much of the money locked in a fixed rate versus an adjustable.

@Jerry Padilla Thanks for the advice! I sent you a PM. If I do the refi at 80% LTV, there won't be any equity left for a HELOC on my primary house. I'm thinking I need to save the equity in my home for later down the road and combine it with equity in another property that I buy with conventional financing. That way, when I pull the cash out of my house, I will have enough to offer cash on another property with the combined total of equity from my house and equity from an investment property. Does that seem reasonable?

It sounds like you are really close on the price of the duplex with your equity + cash. It depends on how fast you can amass cash, if you are doing any work yourself, etc. When starting out you can trade labor for equity by DIY means. 

If it were me, and you don't/can't go the HELOC route, if you are certain you are going to invest somewhere, I would take the cash out, make the cash offer on the duplex, and they may just take your lowball offer. If not, you have $65k waiting for your next deal. Yes, you will have carrying costs, but if you are going to invest in real estate you need to be ready to act when something worth acting upon comes your way. By cashing out now and sitting on your reserves (and adding to them, as it may be), you will be ready to fund a purchase when it comes available.

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