My wife and I were working through some sceneries and had some questions we were hoping to have answered.
We are looking to get into multi family investing early next year. We currently owner finance a home. We have accumulated a large some of equity in this home.
1) Could we pull money out of this property and use it as a down payment or use the home as collateral for a multi family unit? (Again it is owner financed)
2) If not would we have to refinance through a bank in order to do so?
3) If we had to refinance how soon could we pull money out of the home? Could we cash out refinance?
Investor · Charlottesville Virginia · Member since 2021 · 348 posts · 346 votes
2y
Hello Angelo,
I believe it is possible to get a heloc on a seller financed home as long as you have enough equity in the property and your DTI can support it but if I had to guess it is going to be more difficult to find a bank that will do this than a traditional one. Honestly, this question could be easily answered by a 5 minute call with your mortgage broker.
If this is not possible you would need to refinance into a loan with a bank and yes it would be a cash out refi.
When it comes to your particular plan I have some thoughts about what may be better. What is the rate/monthly payment on your seller financed note? If your rate is good and monthly payment is really low it may be better to go the heloc route otherwise I would probably do the cash out refi. Here is the thing to consider. You are trying to get into multfamily investing. Multifamily is not normally an asset class where you get your money back quickly, so you should expect to be making those monthly payments for a long time. The downside of a heloc is that they are usually adjustable rate which is not a great move in this market. The upside is that they only start accruing interest and requiring payment once you pull from them so if you are planning to get in next year then going this route could save you on payments.
Lender · Chicago, IL · Member since 2008 · 54 posts · 34 votes
2y
@Angelo Revercomb if you are trying to get to equity in your home and there is a lien (loan) on the property you would either must pay-off that loan with the refinance or get a HELOC as they can be in the 2nd lien position allowing you to keep the current loan in place. As @Jacob St. Martin pointed out these rates are tied to Prime (instrument the Feds have been using (raising) to fight inflation) and has moved up quite a bit over the last year and half. Also, you'd want to make sure there is nothing in your current loan that prevents you from getting a second loan. The documents you'd want to review are the MORTGAGE and the NOTE. The seller might have a clause that discourages this. Rates are higher now, but many are forecasting rates to improve at some point next year so timing might work out for you to do a cash-out refinance. FYI, if you're doing a conventional loan Fannie Mae and Freddie Mac changed their guidelines in 2023 to require that you own the property for 12 months (there are some exceptions like inheritance) before you can take cash out of the property. Hope this helps!
Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
2y
As long as you set up your owner financing legit (with a note and a deed of trust), then you should be fine getting a HELOC. The lender will pull a title report and ask for a copy of the note. They'll look for things like whether your 1st mortgage is an adjustable rate, interest only, or if it has a prepayment penalty. Those factors will impact their decision. If it's a clean 30 year fixed fully amortized loan, you should be good.