Financing my second rental

5 Replies

Hello everyone! Have a question and ill keep it as short and simple as possible. I have just purchased my first rental property (quad) 100% with money from my HELOC (primary home which is paid off). So my now owned quad has no mortgage/lien. Without getting into the numbers, (property is cash flowing very well) what is the best way to get my financing set up for my next investment? Another LOC? Cash out refi? NOTE: I am self employed and have been for years. Don't show all that much income on tax returns. In a perfect world I would keep getting HELOC's and purchasing houses with each new HELOC but I don't think that is a reality. Anyone from experience been in my shoes? Cash out refi probably will work for number 2 but after that my debt to income will look shot and I will most likely have trouble scaling from there. Any words of wisdom are much appreciated. Thanks!

Originally posted by @Robert Sapienza :

Hello everyone! Have a question and ill keep it as short and simple as possible. I have just purchased my first rental property (quad) 100% with money from my HELOC (primary home which is paid off). So my now owned quad has no mortgage/lien. Without getting into the numbers, (property is cash flowing very well) what is the best way to get my financing set up for my next investment? Another LOC? Cash out refi? NOTE: I am self employed and have been for years. Don't show all that much income on tax returns. In a perfect world I would keep getting HELOC's and purchasing houses with each new HELOC but I don't think that is a reality. Anyone from experience been in my shoes? Cash out refi probably will work for number 2 but after that my debt to income will look shot and I will most likely have trouble scaling from there. Any words of wisdom are much appreciated. Thanks!

As long your rental income is covering the P.I.T.I. (Principal, interest, taxes and Insurance) at 75% of the rental income your DTI should always be going down. Now this is based on you not obtaining any new monthly payments like a personal loan or car note.

Example:

(these numbers are just a scenario)

You buy a home for 200K cash and your renting it for 1K per month. Your P.I.T.I is $500 per month so at 75% of 1K you're looking at cash flowing $250 per month. If you repeat this exactly you'll be cash flowing at $500 per month.

At some point you won't have the cash on hand to keep multiplying so doing a cash out refinance will be crucial to your success. Just make sure when you do the cash out it doesn't turn your cash flow negative.

In the above scenario taking out approximately 50K would allow you to cash flow and repeat the process.

All the about number don't include your self-employment income nor does it include your monthly debts.

You just need to sit down with a broker or loan officer that has experience with investment loans and make a game plan and stick to it.

I hope this helps and have a great day.

Originally posted by @Robert Sapienza :

Hello everyone! Have a question and ill keep it as short and simple as possible. I have just purchased my first rental property (quad) 100% with money from my HELOC (primary home which is paid off). So my now owned quad has no mortgage/lien. Without getting into the numbers, (property is cash flowing very well) what is the best way to get my financing set up for my next investment? Another LOC? Cash out refi? NOTE: I am self employed and have been for years. Don't show all that much income on tax returns. In a perfect world I would keep getting HELOC's and purchasing houses with each new HELOC but I don't think that is a reality. Anyone from experience been in my shoes? Cash out refi probably will work for number 2 but after that my debt to income will look shot and I will most likely have trouble scaling from there. Any words of wisdom are much appreciated. Thanks!

Rental income 'counts' in mortgage math. DTI should be a non-issue if you are working with an REI friendly lender and buying cashflow positive real estate. If you could get that HELOC, there's a good chance you could cash out refinance the quad you just purchased, and use the proceeds to pay the HELOC back down.

And, oh look, now you're once again a cash buyer that will get your pick of the litter of homes & the cash buyer's discount!

@Shaun Weekes @Chris Mason

Thanks guys. I need to go out and talk to multiple lenders, because the lender that I am using for my original HELOC (PNC) claims that my rental income will not qualify for income until a set period of time. I believe they were claiming 2 years before it can be considered income in the "banks eyes". If there is any truth to that then my DTI would not look good. If that is not the case and all I need is positive cash flow to continue buying more properties with LOC's or cash out refi's, then all I need to do is grab my 70-80% LTV LOC or refi and come up with the rest of the remainder cash for my next purchase. And IF that is the case then scaling quickly will be totally feasible I guess with the right bank.

Originally posted by @Robert Sapienza :

@Shaun Weekes @Chris Mason

Thanks guys. I need to go out and talk to multiple lenders, because the lender that I am using for my original HELOC (PNC) claims that my rental income will not qualify for income until a set period of time. I believe they were claiming 2 years before it can be considered income in the "banks eyes". If there is any truth to that then my DTI would not look good. If that is not the case and all I need is positive cash flow to continue buying more properties with LOC's or cash out refi's, then all I need to do is grab my 70-80% LTV LOC or refi and come up with the rest of the remainder cash for my next purchase. And IF that is the case then scaling quickly will be totally feasible I guess with the right bank.

 Overlays ~~ https://www.investopedia.com/articles/pf/12/overlays-mortgages-prevention.asp?lgl=myfinance-layout

Robert,

First questions is how quickly do you want to grow? If 1-2 per year is good for you then stick with the heloc and refinance into a conventional mortgage every 6 months.  But, if you really want to build a cash flow machine, you could set up a acquisition and rehab revolving line of credit that is based on 5X your liquidity which includes your heloc, checking, savings and retirement accounts. Acquire foreclosed properties, rehab, rent and refinance into a portfolio loan every 90 days and cash out your original down payment funds to use for the next project. I've been using this strategy for years. 

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