Hello BiggerPockets, I have a property that I purchased outright and repaired. I want to start my brrrr path and was wondering would be the best strategy: should I just refinance and use that money for my next purchase; should I go for a HELOC and use those funds; or should I cash out and keep those funds in the bank and use hard money for no more than my cash out? I am new to this strategy and have concerns about over leveraging. I also am worried about getting stuck after one or two properties with a dti too high to cash out again. Please help.
Hah! You are where I was a year ago. Plow ahead and figure it out as you go. HELOC? Haven't found a bank that would give me one.... The terms are great, and the ability to pay the money back and then re-borrow when needed is an awesome tool for an investor. Cash-out? I've been able to continue to run these through my mortgage broker... I've done 3 cash-outs, in the last 2 years, using the funds from the first 2 to buy another 4plex, and now I have the funds to go after a 7plex. Benefits of this are even better rates... and the fact that it was a tool I could use.
Hard money? Only use hard money if it's the only option you have. I've used it before a couple times, and was able to make a little money doing so, but I would have made so much more if I had been able to use my own cash. The biggest reason to use your own cash instead of using a hard money loan is that it gives you more exit strategies. If you do a flip or a rehab and for some reason it won't sell or refi.... then you don't have crazy interest rates. I know you mentioned not borrowing more than you could cover, but think about it... if you have 100k in the bank that you are paying 5% on, then borrow 100k from a hard money guy at 15%.... you are paying 20% on that money... instead of the 5% if you used what you have.
Over leverage? This is a concern. My advice.... don't think of your purchases in percentage of debt or LTV... rather look at the debt to income. So what if you owe 95% On a million dollar portfolio... if your income is 40% above your expenses... you can be secure in an inflation proof investment that has a margin large enough to cover any market adjustment.
As far as refinancing the 3rd or 4th time? Unless you are measuring your real estate goals in months instead of years, there are too many changes to the financial institution's requirements to make long term plans. 10 years ago, you could get properties with 10% down and no PMI... If I could do that now, things would be way different. DTI and LTV, as well as interest rates are going to shift up and down over the years, so I say take the best rates and terms you can get that make you money and move onto the next project. Develop the experience and network to take down the next deal when you come to it.
Thanks Sam, that really seems like sound advice. I appreciate it.
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