I currently own a rental property that is worth about $65k that is fully paid off. I would like to purchase another one for about $60k. I have $30k to put down and would like to use the equity in my current rental to fund the rest. What is the best way to accomplish this while limiting the expenses associated with accessing the equity?
@Michael Osborne Your Best options are A. HELOC (Home Equity Line Of Credit). Or B. Cash out Refinance. Both of these will keep your costs down for expenses and will enable you to get some cash to put down for your next investment. I would reach out to your CPA or if you don’t have one A CPA. So that you know what YOUR best option is for yourself.
A couple options are to either do a cash out refi or a HELOC on the paid off property and use the funds to purchase the new property. I've done both, and can tell you that there are pros and cons to each, but both can accomplish what you want. The biggest issue you'll face is finding a lender that will 1) do a cash out refi for such a low amount (most won't go less than $50k), and 2) do a HELOC on an investment property. There are lenders out there that will do both, but you'll have to call around to find them.
The cash out refi would give you a fixed rate for a longer term, but the HELOC would have lower upfront costs (usually none to a few hundred bucks).
Either way, the costs of obtaining either one would be tax deductible against the new rental you're buying.
@Michael Osborne If you plan on using the equity from your first property, your best option would be a 75% cash out refi - many lenders have a 50K minimum on this, so if you can get the property to appraise for only 2K more... you're right there at the 50K min. You can then use the 50K plus your 30K to purchase your next property at a discount in all cash, rehab to force appreciation, get it rented, then cash out refinance.
Another option would be to get a heloc on your rental property. Since you own the property free and clear, that shouldn't be an issue. Then use a hard money lender to purchase a heavily discounted property that needs lots of work. Many can fund 100% of purchase and repairs, but the norm would be 70% ARV up to 80-90% of total project cost. You can use your 30K for a down payment and cash reserves, and also your heloc to qualify for the hard money loan. So the plan looks like this:
1. Get Heloc for additional cash reserves / down payments
2. Find a a great deal (property probably needs rehab). Property should have ARV over 67K
3. Rehab property / Screen tenants at the same time
4. Shop for lenders to refinance the property / Get pre- approved with a local bank that requires 6 months title seasoning
4. Put a renter in
5. Cash out refinance out of the short term hard money loan after 6 months, and get 100% of your cash back.
Now, if you ran your numbers correctly with the new PITI payments and allowances for vacancy, repairs, and capex, then you should have a cash flowing rental property for no money out of pocket. Time to rinse and repeat!
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