Heloc or Cash for 2nd Property on SFH/Duplex. Refinance?

Question

Hello BP,

I am just looking for some advice on my 2nd investment property. I have some potential equity in my primary residence and have some cash on hand as well. Currently house hacking my current home with two roommates and it is under FHA loan. Quick question. Should I try to Refi into a conventional for possible no PMI for more cash flow to rent in the future? Or should I leave FHA loan and buy 2nd property conventional with cash or potential HELOC? I don't believe I have 20% equity in home just yet, but could be close. Mortgage with PITI is a total of 1520 and I could rent it out for 1750 in my area with looking at similar homes on Zillow, Craigslist, Rent-o-meter, Etc. Without the PMI it would be around 1375. But is it worth it to pay for appraisal go through the Refi process? It would be nice to buy next property with FHA and house hack a duplex locally but cannot have 2 FHA loans within a certain distance from one another. I am located 40 mins south of Seattle BTW.

Long description. Hope it makes sense. Just need a little guidance.

Thanks,

Ryan

Ryan Rogers · Answer

Thanks @Dave

@Dave Skow

Dave Skow · Answer

@ ryan - you have option ….you can make the new conv. loan the same as the payoff bal for the FHA loan or you can make it slightly higher if you want to roll in any loan fees / costs / prepaids so you don't have to bring cash to closing

Ryan Rogers · Answer

Interesting points,

I actually was just thinking the same about paying off the loan quicker. 300 is going straight to principle and I think that is my best way to go at this point. Save a specific amount of capital for next investment while also paying off years into this mortgage to earn equity and potentially REFI in a year or so. I am hoping to hopefully get into a conventional and house hack a duplex-triplex with FHA owner Occ but sounds like I may have to pump the brakes.

Thanks for the advice and the warm welcome.

Ryan

Brian Hughes · Answer

Thanks

You can refi the same amount (if you have enough overall equity) or put cash in or take it out (again, if you have enough equity). In your case since you apparently didn't put a lot down, you'd have to put cash in to get to 20% equity it sounds like.

Another thought -

Instead of trying to refi given rates are enough higher that even without PMI your payment would be about the same if you don't put cash in, what about just paying down the loan faster? Its a long term strategy for sure, but consider that a small part of your payment right now is principal - for example on that ~1500ish payment I bet your principal is probably only about $200-300. If you pay $1800/mo you are DOUBLING your rate of payoff, meaning you would ultimately take YEARS off your loan. It would also mean after a couple more years you would be in a better position to look at refinancing. Even if you sell long before you pay off the loan, that equity basically carries forward forever.

I've been aggressively paying down loans (and saving for new opportunities) since starting with the rentals, and the duplex is free and clear now; the triplex debt is under $100k, and the 4-plex debt is about $220k. All of these started as 20-25% down 30 year loans.

It is true that if I were paying minimums and had not paid down debt as part of some of the refinances I could potentially own another property or two by this point, but the cash flow might not be much different.

I owner managed successfully up until march 2017 when I hired a property manager. Reasons for the change were due to my plans to keep scaling, mitigate Seattle regulations, desire to be able to go on vacations and trips again without leaning on friends/family to keep eyes on things, and because I've now got enough cash flow that I'm willing to accept the expense.

All my properties so far were MLS listed and I worked with agents. There is overhead there of course but I haven't done badly. The duplex sale may be the first one where I don't do a listed/MLS transaction. We will see. My impression with the off market stuff is anything really good doesn't get syndicated or otherwise made available, the buyer who was in the right place at right time to get the opportunity keeps it or calls up whoever their most reliable buyers are already. What you see published among investor forums are the scraps. Obviously, there are going to be other opinions there. I also don't do enough volume to be good at networking and all the things one needs to be good at for finding and executing on transactions - I'm a lot better at improving and operating. So I'm basically a buy-fixup-long-term-hold strategy.

Ryan Rogers · Answer

@Brian Hughes,

Great time to buy. First duplex I lived in after college (Rent) owner bought around the same time.

Impressive portfolio and congrats. Do you do your own property management? Or have one? Did you work with an agent on all of these properties?

Ryan

Ryan Rogers · Answer

@Dave Skow

Thanks for the advice. Does the loan amount stay the same after a REFI from FHA-Conv? It's pretty much the upfront cost of the Refi and possible higher interest rates that I will run into but initially PMI will fall off eventually years later once 78 percent of the loan is payed off?

Ryan

Brian Hughes · Answer

I PM'd the broker info. If mortgage brokers told you about the FHA rule I'm sure its accurate.

My strategy has been pretty simple and conservative -

My first house was a fixer in north seattle. I dumped a lot of sweat equity into that and benefitted from some appreciation (the runup to the first housing bubble) I basically did a straight-across trade from the house to the triplex in 2006. (house sold for 420k, triplex bought for 410k). Financing for triplex was regular 30yr fixed owner occ residential loan. Since I moved all the equity over rent from 2 units (which were below market even then) paid the lions share of the loan. I house hacked the triplex living in 1 unit for the next 3 years while fixing it up as units turned over. In 2009 after the bubble popped but before the bottom I bought the duplex (283k on 400K original asking price) and moved there and repeated strategy. 2014 I bought the 4-plex in burien (also 410k; 1-4 unit non owner occ residential mortgage) its the first investment I bought which I didn't owner occupy. I've refinanced everything at least once, primary objective being reducing the monthly payments, secondary object reducing debt.

I haven't taken any HELOCs or second loans, hard money, etc. I do have a software engineers salary, am frugal by nature, and am single so that helps build up funds. I've also benefited of course from the big run up in equity on stuff I've owned since around/before the RE bubble in 2008. But since I have been only buying, and not cashing out its mainly been my savings and rent income getting rolled into new purchases.

Basically with this strategy I have been doubling my unit count every 5 years or so. triplex gave me 2 units (3rd owner occ) - duplex gave me 4, 4-plex gave 8. I'm targeting a 10-20 unit complex for purchase with proceeds from planned duplex sale, which will keep that pattern going.

I'm not a pierce county expert by any means, but I'm probably going to be looking for small/medium complexes (at least 8 units, ideally 10-20) basically as close in to downtown and as urban as possible. I like fairly modern (mid century or later) built-as multifamily properties that are functioning but value add. there was a 16 unit a block from wright park that was listed for several months. It finally went pending recently but is the exact type of thing I'm interested in.

Dave Skow · Answer

refinance the FHA to a conventional loan ...max out the cash back on this …...after this is done - get a HELOC on it for as much as possible ….doing this will free up your ability to use FHA on next property and also provide some capital you can use

Ryan Rogers · Answer

@Brian Hughes,

I have had two different lenders express the FHA mileage. Yes, if you can PM me that would be great. She sounds like someone that is reputable.

True, I could work on this house as it needs some appliances all across the house and focus on getting it to be rent ready in the next year or so. It wouldn't be a bad idea to pump the brakes and save some capital.

Impressive portfolio. Did you use FHA and leverage with HELOC's to be able to move on to the next one? I wouldn't mind house hacking a duplex if one comes on the MLS. Single. No kids, and time to work on investments.

Let me know about pierce county. I live down here and would be interested to see your ideas.

Ryan

Brian Hughes · Answer

If you haven't heard that stuff about FHA loans from a reputable source (a mortgage broker) I would ask them. If you want I can PM you the one I have been using for the last 10 years or so. One of the only brokers I've found who 1) always gives her best rates up front and 2) answers emails at 11pm :)

Given that the housing market is starting to slow more than a little bit AND everybody thinks the economy as a whole may also slow down in the next 2 years or so, I would not overextend/overleverage. I'd focus more on paying down existing debts and saving and making any improvements you can that make sense. In another year, it might be a better time to buy. In another 3-5 years if rents and appreciation stay flat-ish all the people who bought rentals too high in the last 12 months are going to be looking at short sales.

First house was a fixer bought in July 2001. Spent 5 years living in and working on that and then I got into rentals 2006 with a triplex. I've got a duplex, that triplex, and 4-plex in south seattle and burien areas now. I'm actually in the middle of buying an SFR for my own residence now to officially end the house hacking (live in the duplex lower unit now), and after that I am probably going to be looking at trading up the duplex to a larger investment property ideally someplace south king or pierce if I can find one where the numbers aren't too horrible.

Heloc or Cash for 2nd Property on SFH/Duplex. Refinance?

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