Best Financing options for a MFR

8 Replies

Hello All, 

I am a rookie and have 3 doors in Los Angeles that flow nicely and have built up quite a bit of equity. I'm looking to add a duplex or triplex in Los Angeles but running into high-interest rates and large down payment requirements. My previous properties were owner-occupied then rented out so very favorable loan terms hence the good flow. I plan on a cash-out refi on both properties for the down on the next purchase; does anyone have tips or resources to put as little down on the next purchase as well as keep my current loan terms as intact as possible? Specific Los Angeles experience would be super helpful.

Thanks All

As an investment there is no way around the large down payment and rates will vary lender to lender. I always advise my clients to explore a HELOC before a cashout refi, origination is less, HELOCS can be reused once paid, and if you wont have to take the rate hit that comes with a cashout refi. The aforementioned totally depends on your scenario; what rate you have now, are you paying MI etc. Your best bet may be to explore building an ADU on your existing properties, or to buy a SFR and build 1-2 ADU's. Going from a multi to a SFR/Condo the bank will allow you to buy with a 3-5% downpayment. I'm getting quoted to build an ADU now using my HELOC, the ROI is amazing in comparison to the cost to buy in my mkt (Inglewood). The numbers for a SFR with ADU are penciling about the same as a duplex in most LA markets, my client just purchased a 3/1 SFR with a legal studio ADU in Carson for $595k, this is comparable to duplex prices.

@Erik Joseph If you owned the 1st property awhile and now tell the lender that you are locating, I don't see any problem using 5% down to occupied it as "primary". 

The second choice is to refi the first property to 25% equity and consider it as an investment property. Make the next purchase "primary resident".

You should speak with a few mortgage brokers and see who can workaround for you!

may I ask how you're cash flowing in LA?  Even if I avoid buying retail, numbers just don't work for me.

What part of LA are you primarily investing in?

Hi Erik,

One good point is that current interest rates are very low (under 4% if owner occupied). If you are planning to do a cashout refi on the properties you own, you will have very favorable terms in my opinion (even if not owner occupied). 

The way I look at putting a low down payment on rental properties is that your bottom line will be less because your monthly payment will be higher. Given all the risks with rental properties (vacancy, repairs, etc.) it is always better to have a lower payment amount to mitigate. Due to high prices in Los Angeles, many times you will not have a positive cashflow unless you do at least 20%-25% down payment.

It seems like your goal is to gain appreciation in the long term. Yes, you want to add more doors to your portfolio however you are borrowing money to do so, thus lowering the cashflow on the other doors. In this case I would not mind putting a large down payment since you are playing the long game, and with risks growing everyday of a sell-off or bubble, you will be able to CYA in the worst scenario.

Great feedback all. 

@Clarence Johnson great piece of information and a great way to add value especially if looking to increase the value of a property and refinance.  I currently only use handymen and specialty workers so I haven't required a contractor that I will need to have for this route.

@Robert Chuang These 3 doors are all investments I have a separate primary residence so I am not sure how I can make my next investment a primary residence unless there is some loophole I am not aware of.  

@Steve Kim , Currently I am in Gardena and South Los Angeles and both properties are flowing well but the equity is what has improved the most.  Both homes had hefty down payments and that is what allows the cash to flow.  1 is a duplex and the other is a townhome. 

@Andrew Aladjadjian I think you have a good point the money down will help with the monthly flow I just would prefer not to have so much cash tied up in the event I can move on another investment sooner rather than later.  But this is looking to be the most realistic route for me. 

So do any of you have advice on what is the smarter choice HELOC or Cash Out? How much can be pulled out on a HELOC vs. Cash Out? I have a HELOC on one of my properties with a variable rate and it's just eating away at more potential profit. Are their fixed HELOC's? Will another HELOC scare banks away when looking to close on the next investment property?

@Erik Joseph

I believe you will have some trouble finding a lender who will lend a HELOC on an investment property. HELOC's are much more common on primary residence properties. Although a HELOC gives better flexibility, a cash-out loan will give you the stability of a fixed rate, and may be a lower rate than the HELOC.

Is the HELOC you currently have on your primary or investment property?

Investment HELOCS are not typically easy to come by, I hear that US Bank may do them and Wescom Credit Union in Hawthorne just did one for a client of mine (non occupied duplex) last month.  The rate is variable, but when your looking at the cost of origination, and the possibility of reusing the money the variable rate is not scary.  This is especially in consideration that your buying a performing asset and and not a hummer, home remodel, trip around the world or other horrible use for your HELOC.