Hey BP community!

Looking for some advice on a unit I have in Wilmington, North Carolina. It's a SFH that cash flows somewhere around $75-$100 per month. It wasn't purchased to be a rental but we turned it into one. I have the option to do a refinance on the property and drop our interest rate from 4.375 to around 2.5%. It looks like this would give us somewhere around $150-$200 extra in cash flow per month. We don't have a ton of equity in this thing so we're not looking at pulling any cash out; the only benefit would be the lower interest rate/better cash flow.

The original intent was to keep getting loan paydown/equity over the next year and find a lender to do a HELOC on it as an investment property. I talked to a lender earlier this year that could do it but we didn't have the equity so I figured I'd wait a year and try again.

If we go through with the refinance, won't that drain the equity along with any hope of using a HELOC a year from now? Would it be wise to forego cash flow NOW for the hopes of a HELOC later? I would hate to miss out on an extra $200/month and then get to next year and find out lending requirements have changed and no one can do a HELOC on an investment property.

Thanks for your insight!

Your though process is strong, and I would affirm that a refi now will kill your chances of a HELOC unless you can pump more cash into the mortgage balance.

We have a HELOC on our investment property, and it is my primary account for everything. The flexibility to spend it to the limit, pay it down and respend it is tremendously helpful.

There's always a chance banks will change lending requirements, and we're doing what we can to eliminate our complete dependency on banks, but as long as you maintain a strong credit score, a reliable cash flow and income, and business at the bank you want to borrow from, they'll likely approve you for the HELOC when you have the necessary equity.

Out of curiosity, have you asked for a first-position HELOC? If not, and it's not a familiar term, look it up. There is a ton of literature and plenty of videos online about the first position HELOC. It's a superior product and the most powerful investing account you can get.

Best of luck out there!

@Brandon Allenczy Don't forget the closing costs and bank fees for the refinance. Every time the bank gets involved you can bet it's costing you money. It's either out of pocket or equity. 

This is a great example for newer BP members to read. If the intent to purchase wasn't for a future rental a lot of times the numbers don't work. The cash-flow is OKAY but the cost to ReFi neglects the reasons to improve it. Unless you plan hold this property for 10 years+ the cash-flow probably won't surpass those costs. You're talking an extra $100 per month, $1200 per year. In the grand scheme of things that's not very much. Given how hot the market is I would consider selling. Maybe you can find a better DEAL in 2021 that meets your improved investment criteria. 

My first property and now rental cash-flows about $150 per month, but the equity position is great. I would chase after that on the next one! Good luck man. 

@Jody Sperling

Great to know, thank you! And no I've never heard that term so I'll start researching now! I feel like I keep getting chased by the shiny object of more cash flow, but what we really need is more (healthy) leverage like a HELOC to help us keep the ball rolling.

Thanks again!

@Jaron Walling , totally makes sense. I do intend to hold nearly everything I buy from here on out indefinitely. So I was looking at it as a tiny "savings account" that pays a slightly better return than banks would, and I can keep utilizing a HELOC on it for future purposes. May not cash flow the best, but it's a great swiss army knife to keep buying other good deals in the future. If I sold it, I could buy 1 great deal. If I hold it for 30 years, I could keep getting that cash flow and using leverage on it to buy multiple great deals.

Hi @Brandon Allenczy I think the amount of equity available for a HELOC could also influence your decision. I closed a HELOC a little over a year ago (in Texas, so the standards are probably different than NC), but like a traditional refi, I only got a percentage of the total equity as available credit. Also, that HELOC was for a 1 year term, so technically there was no guarantee mine will be extended. Again, I think TX has a crazy rule, but the HELOC was REQUIRED to be in first position. Keep in mind that the HELOC, like a refi, will include typical closing costs like title insurance, lender feeds, etc. I'd definitely check the terms and loan-to-equity-value percentages your lender is offering on the HELOC. If you don't have much equity, a historically low interest rate on your balance might be the way to go if you plan to hold long term.

BTW, I invest in NC and would be interested to know if you have a lender for the HELOC lined up. Would you be willing to share that contact in a DM? Thanks!

@Jaron Walling After thinking about it though, I could do what I mentioned above on a better deal if I sold it. I could sell it, buy a great deal, and get THAT cash flow while using it for years to come to buy other properties. Real estate is awesome.

@William Wilson , great point! It might not make much of a difference it I could only get a tiny bit out relative to the cumulative cash flow of such low interest rates over the next few decades. I think I might do what I mentioned above. Collect the little cash flow that I'm getting now, and if the market is in good standing a year from now, I could sell it to buy a much better deal and use that one in the future to buy more property. 

@Brandon Allenczy that might be a good plan. Plus, I tend to forget that each month's principal payment is kind of like hidden cash flow that happens to be going into building my equity.

@Jaron Walling  @Brandon Allenczy  I'm not so sure on the return of the refinance not being worth it.  It all depends on closing costs, yes you are paying for them with equity but if its only $2k-$2.5k then an extra $100 a month pays it back in 2 years.  That's a pretty good payback timeframe and could be worth it if you plan to hold the property for any significant period of time.

@Brandon Allenczy I am also interested in your location.  I have been thinking about the Wilmington - Jacksonville NC area since I have a buddy in the Marines down there.  If you don't mind I would like to talk to you about the market in that area.

@Nicholas Bolcon I get what you mean, but after the input here I decided to not do the refinance. If I sell the house I could snowball that into an even better deal and still get a good ROI with much more cash flow. I see your point and the benefits of both, though.

If you or @William Wilson want to know more/get connected in Wilmington, I recommend reaching out to @Joe Prillaman ; I moved away from Wilmington but he's still in the market and is crushing the Airbnb game there. He can tell you all about the market and give great recommendations.

@Brandon Allenczy

What's your strategy? Are you looking to build up a portfolio with long term buy and hold?

Have you lived in the home for 2 of the last 5 years? I believe this is the criteria for selling without taking a tax hit. So this could be a good option if you have a bit of equity and want to put the cash to use in a different property.

I currently have a heloc on a rental property. It was previously my primary and is now a rental. It's nice having that line of credit to reuse and put towards future investment properties.

Is the property in good shape and is it easy to rent? I would consider hanging on to it long term, refinancing to get the bump in cash flow and possibly adding a heloc down the road when there's more equity.

You really just need to decide what your strategy is and how quickly you want to scale. That should help you make a choice.

@Jody Sperling can you advise me in to how to get a Heloc on a rental in Oklahoma. I can’t find Anyone. Thanks

@Richard Updegrove , thanks for your input! Our strategy is buy and hold. Our specific goal is to grow from 3 units to 31 units over the next 3 years, at an average cash flow of $200/door. We're doing this through a combo of small multifamily (househacking) and BRRRR.

The rent on the unit I mentioned here is actually slightly under market value but it's in great shape, I just didn't raise the rents on the existing tenants when they renewed. So I think I can hit our target of $200/door on this and utilize the HELOC. If not, then I probably will look at selling and snowballing into a better deal that gives me more cash flow a lot sooner.

good question. has the property appreciated significantly in order to maximize the heloc line? my primary is at 4.375% currently and i'm going thru a refi with Citi (no cahs out). They offered $2k towards closing costs, and when all said and done, it should cost me about $500 or so for a 2.875% rate (about $100/mo saved). I'm yet to see the final worksheet, so they better come thru on that $2k lol

i'd do a quick cost/benefit amortization schedule of current loan vs new loan + closing costs. you'll be pushing your maturity out (i assume you're thinking another 30 yr fixed), so factor that in as well. shop around and see if maybe you can score some closing costs credits to make this refi as cheap as possible. refi only the balance and secure the heloc against the property value, that way you're not paying for cash you don't use. imho, of course. 

@Brandon Allenczy , I tend to agree with @Nicholas Bolcon : "if its only $2k-$2.5k then an extra $100 a month pays it back in 2 years".  ie. You'd be hardly losing any equity, but would be saving nearly 2%/y in interest payments for the duration of the loan.  ie. After 2 years, that $150-200/m extra income is free money!  (Even quicker if all the extra cash flow goes back towards the loan until you're back to the same equity position).  Cheers...

what banks are you all talking to, that will do a HELOC on an investment property?

You must acknowledge the costs of selling a property and acquiring a new property as well. You already have this property, and without much equity in it, what exactly are you walking away with after realtor fees, other than possibly $400 cash flow? Why not refinance, and use the cash flow created to build the money you need to use instead of chasing a heloc that will cost money to set up and utilize. The benefit of a Heloc is utilizing equity. Without much equity you are spending similar money costs with the refi, just to get access to a small loan. Might as well just have the cash. If the heloc market tanks in the future, you will have cash. If it doesn't, drop the money on the house principal and the use the heloc later. Even that scenario only makes sense if the house appreciates further.
It costs 20% down to finance a rental through the bank. Imagine coming up with 20% to buy the property YOU ALREADY OWN. It can be managed better, increase rents to market, and refinance to unleash the type of investment you have, but just doesn't quack like you want it to...yet. If it can, get it there. Isn't that what real investors and entrepreneurs do? Remember, the HELOCs usually carry costs similar to the refi anyway. Apples to apples. One nets you cash income, which is never bad.