Financing Advice /Tips

[Nadya Babanskaya]

Hi everyone! Newbie here looking to jump in and buy my first rental property very soon. I keep going back and forth on financing it, here are the 2 options I’m looking at and would love if anyone could help me walk through the math and see what’s the better or more logical choice:

1. Get a regular conventional loan and put 20% (25-30%?) down. Not trying to buy a complete fixer upper so hopefully no issues qualifying. I understand that my offer would look less attractive than a cash offer.

2. Get a HELOC (saw an intro rate of 3.99% for first 6 months locally), buy with cash, immediately apply for delayed financing, get 70-80% of the purchase price back to pay down HELOC and pay the remaining 20-30% with my money (and perhaps (hopefully) some cash flow if rented right away) within those 6 months during the low rate period. This way my offer is more attractive as I'm buying with cash but I'm still only using the same 20-30% of my own money in the end (plus delayed financing closing costs, not sure how much those are).

What do you think is a better option, am I missing something or are there better options I’m not considering? Would love any input, tips or advice from more experienced investors.

Thank you!

[Taylor Dasch]

Hey great question and I am still trying to figure out the best way to go about this as well. 

1. Conventional loans can be good especially when you are first starting out or refinancing out of HML or PML. I did this for my first rental and it has the lowest interest rate in my investment portfolio. I wouldnt be too worried about making the offer look less attractive than a cash offer as the market isnt nearly as competitive as it was last year. The advantage of a cash offer is getting a discount on the property.

2. If I had the option, and was very comfortable with my market(which I am) I would go this route. I like the idea of a HELOC - I dont have to worry about the high fees for HML/PML. If you have enough to do the full PP and rehab, I would use the HELOC to pay for the property - hopefully at 75%, then refinance and pay the HELOC back, rinse and repeat. This seems like it will be the least expensive way to go about this because you should be able to keep using the HELOC for that purpose. But it sounds like you want to get something a little more turn key so this may not be an option - even then though, leveraging the HELOC could get you much more in terms of cash flow.

#2 is the better option in my opinion because it allows you the ability to scale. 

[Carlos Ptriawan]

Quote from @Nadya Babanskaya:

Hi everyone! Newbie here looking to jump in and buy my first rental property very soon. I keep going back and forth on financing it, here are the 2 options I’m looking at and would love if anyone could help me walk through the math and see what’s the better or more logical choice:

1. Get a regular conventional loan and put 20% (25-30%?) down. Not trying to buy a complete fixer upper so hopefully no issues qualifying. I understand that my offer would look less attractive than a cash offer.

2. Get a HELOC (saw an intro rate of 3.99% for first 6 months locally), buy with cash, immediately apply for delayed financing, get 70-80% of the purchase price back to pay down HELOC and pay the remaining 20-30% with my money (and perhaps (hopefully) some cash flow if rented right away) within those 6 months during the low rate period. This way my offer is more attractive as I'm buying with cash but I'm still only using the same 20-30% of my own money in the end (plus delayed financing closing costs, not sure how much those are).

What do you think is a better option, am I missing something or are there better options I’m not considering? Would love any input, tips or advice from more experienced investors.

Thank you!

 go with (1) as it's balanced market and it's rental property only anyway.  In this market there's no need to rush, there's not much bid. 

[Nadya Babanskaya]

Quote from @Carlos Ptriawan:

Quote from @Nadya Babanskaya:

Hi everyone! Newbie here looking to jump in and buy my first rental property very soon. I keep going back and forth on financing it, here are the 2 options I’m looking at and would love if anyone could help me walk through the math and see what’s the better or more logical choice:

1. Get a regular conventional loan and put 20% (25-30%?) down. Not trying to buy a complete fixer upper so hopefully no issues qualifying. I understand that my offer would look less attractive than a cash offer.

2. Get a HELOC (saw an intro rate of 3.99% for first 6 months locally), buy with cash, immediately apply for delayed financing, get 70-80% of the purchase price back to pay down HELOC and pay the remaining 20-30% with my money (and perhaps (hopefully) some cash flow if rented right away) within those 6 months during the low rate period. This way my offer is more attractive as I'm buying with cash but I'm still only using the same 20-30% of my own money in the end (plus delayed financing closing costs, not sure how much those are).

What do you think is a better option, am I missing something or are there better options I’m not considering? Would love any input, tips or advice from more experienced investors.

Thank you!

 go with (1) as it's balanced market and it's rental property only anyway.  In this market there's no need to rush, there's not much bid. 

Would you have any suggestions on scaling up after this purchase? I won’t have the money for another down payment myself. Cash out refi the new property after 6 months? HELOC on my primary home?

[Nadya Babanskaya]

Quote from @Taylor Dasch:

Hey great question and I am still trying to figure out the best way to go about this as well. 

1. Conventional loans can be good especially when you are first starting out or refinancing out of HML or PML. I did this for my first rental and it has the lowest interest rate in my investment portfolio. I wouldnt be too worried about making the offer look less attractive than a cash offer as the market isnt nearly as competitive as it was last year. The advantage of a cash offer is getting a discount on the property.

2. If I had the option, and was very comfortable with my market(which I am) I would go this route. I like the idea of a HELOC - I dont have to worry about the high fees for HML/PML. If you have enough to do the full PP and rehab, I would use the HELOC to pay for the property - hopefully at 75%, then refinance and pay the HELOC back, rinse and repeat. This seems like it will be the least expensive way to go about this because you should be able to keep using the HELOC for that purpose. But it sounds like you want to get something a little more turn key so this may not be an option - even then though, leveraging the HELOC could get you much more in terms of cash flow.

#2 is the better option in my opinion because it allows you the ability to scale. 

Thank you, that’s the one I’ve been leaning towards, especially considering the ability to scale. It is definitely the more risky option with a few moving parts and hoping everything falls into place though 😬

[Jay S.]

#2 is risky. HELOC rates these days are very fluctuating. I have seen many clients getting burned because of it since last year. And then you are trying to do cash out refinance which also has not favorable rates and terms compared to just purchasing. What if price comes lower when you refinance?

So, Go with #1. Instead of 30% down, you can perhaps do may be 10-15% down? There are lending options around there. DM me if you need help. 

[Matt Calnan]

Quote from @Nadya Babanskaya:

Quote from @Taylor Dasch:

Hey great question and I am still trying to figure out the best way to go about this as well. 

1. Conventional loans can be good especially when you are first starting out or refinancing out of HML or PML. I did this for my first rental and it has the lowest interest rate in my investment portfolio. I wouldnt be too worried about making the offer look less attractive than a cash offer as the market isnt nearly as competitive as it was last year. The advantage of a cash offer is getting a discount on the property.

2. If I had the option, and was very comfortable with my market(which I am) I would go this route. I like the idea of a HELOC - I dont have to worry about the high fees for HML/PML. If you have enough to do the full PP and rehab, I would use the HELOC to pay for the property - hopefully at 75%, then refinance and pay the HELOC back, rinse and repeat. This seems like it will be the least expensive way to go about this because you should be able to keep using the HELOC for that purpose. But it sounds like you want to get something a little more turn key so this may not be an option - even then though, leveraging the HELOC could get you much more in terms of cash flow.

#2 is the better option in my opinion because it allows you the ability to scale. 

Thank you, that’s the one I’ve been leaning towards, especially considering the ability to scale. It is definitely the more risky option with a few moving parts and hoping everything falls into place though 😬

 I would agree, number 2 gives so much more flexibility. And yes it has a higher interest rate as people have pointed out, but with no principal payments required, the cash flow will be much stronger than traditional term debt.