I am pretty new to investing with 2 rentals. We turned our first home into a rental and the property has around 200k in equity and the return is 9%. We are looking at investing as a long term investment for income when we retire. Generally we plan to mortgage the properties. Is it best to keep that first property as is and do nothing with the equity or refinance (which would probably lead to a higher interest rate since it’s currently 3.875) or sell the property for cash to buy more homes?
Lindsay, you could also use a HELOC (home equity line of credit). This way it wouldn't affect your interest rate and you could pull out the equity and continually pay it off as many times as you'd like to.
Thanks Benjamin. I thought about that, but ultimately I don’t want to have to pay the money back.
@Lindsay G. Ultimately, you will either have to finance (new mortgage, re-finance existing properties or HELOC) or raise capital from other investors. There is no getting around this unless you get seller financing. That is becoming harder and harder to do as the market is super hot and folks are becoming smarter.
In all cases, you will have to end up paying money back. Can't get something for nothing.
I know I’d be making payments on the new mortgages. I suppose another way of phrasing the question is wherher I should keep 1 property with a 9% return or sell it/re-fi and use the cash as down payments for two new properties that may not have as good of a return.
@Benjamin Seibert is right- and you can use this strategy to get 100% financing if you only buy great deals. I've done it several times and it's created financial freedom for my family and I. You aren't paying it back, your tenants are.
so what you’re suggesting is instead of using it to buy 2 properties with mortgages use it to buy one property outright and use the rent to pay it back?
@Lindsay G. you can still put mortgages down on the properties and use the HELOC for down payment, closing costs, rehab, etc... This may allow you to get into 2+ deals rather than just putting all of your available equity into one deal.
I really appreciate your patience with me everyone. I thought the rent from the new properties pays off the new mortgages. What pays off the HELOC? Again, thank you so much for responding.
Just some made up numbers for an example:
Original mortgage payment: $1000 month
HELOC payment: $500month
Now rental #1 cash flow $400 positive per month
Rental #2 cash flow $400 positive per month
=$800 - $500 = $300 more in your pocket per month than before.
Just going to have to find the deals the generate this example. As long as you’ve got more month coming in after paying the Mortgage & HELOC then your doing it right!!
Hope this helps to see it a bit better.