Seeking Advice on Real Estate Investing Strategies
Member since 2024 · 63 posts · 39 votes
Seeking Advice on Real Estate Investing Strategies
6 Replies
- 1yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Shayan,
Best option to avoid issues and stay risk free along with having a better approval chance would be to go with a Cash out refinance. A Heloc is an open end mortgage same as a credit card the only benefit is that you only pay on the amount you borrow. The down fall is a Heloc can "Never" be used as an asset or for PITI reserves required when buying a new Primary or investment property.
A heloc can also cause major issues with credit and one slight hiccup or missed payment the bank or lender who is holding the Heloc can close or reduce your line of credit. Even if you make all of your payments on time there are times when something happens by accident or a collection pops-up and drops the credit scores.
Again even if you have great credit as you start to add more credit cards, mortgages, auto loans to your credit you can also be viewed as "High risk" due to Excessive trade lines in credit or higher DTI - debt to income ratios. Some banks and lenders will calculate your Heloc payment based on the Max limit even if you only have a small portion used due to preventive risk. That alone can kill a deal due to over the Max DTI limit.
A cash out refinance is tax free and its an immediate liquid reserve so it can be used as an Asset or PITI reserves. Basically cash in the bank is a very good way to get an approval on bigger loan amounts or in general. Higher assets or cash in the bank increases what is called you compensating factors which banks/lenders use to qualify. Cash out or cash in hand also allows you to avoid having a heloc sit in 2nd lien position and you cannot borrow more money until you pay off the heloc.
Cash out refinance is one loan and if you need more you can simply do another cash out refinance.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes1y
Quote from @Shayan Sameer:
Hello everyone,
Hope you all had a great New Year! I have a question and would really appreciate your input.
I’ve done a couple of fix-and-flip projects in the past using hard money lenders, but I’ve noticed that their fees and interest rates significantly cut into my profits. In some cases, after running the numbers, I’ve even faced potential negative returns, causing me to miss out on promising deals here in South Florida.
That brings me to my question: I currently own two homes—one is my primary residence, and the other is a rental property. Both properties have a substantial amount of equity that’s essentially sitting idle.
Would it be a good idea to tap into this equity (through a HELOC, cash-out refinance, etc.) to fund future fix-and-flip projects or purchase additional rental properties?
I’d love to hear your thoughts on whether this approach makes sense or if there are other strategies you’d recommend to optimize profitability.
Thanks in advance for your advice!
Using a HELOC can provide you with the necessary capital at a lower interest rate to fund your next projects without leaning too heavily on hard money lenders, which can eat into your profits.
Here are a some actors that you would want to consider:
1. Cost of Borrowing: Compare the interest rates and fees associated with a HELOC or cash-out refinance to the hard money loans you’ve been using. Often, traditional lenders offer better rates, which can significantly improve your profit margins.
2. Market Conditions: South Florida has a dynamic real estate market. If you’re confident in your ability to find undervalued properties, using the equity in your homes can provide the leverage you need. Just ensure you do thorough market analysis to avoid pitfalls.
3. Cash Flow Management: If you take out additional debt, it's crucial to have a plan for managing your cash flow.
4. Personal Circumstances: Consider your comfort level with debt and risk. If you're already in a secure financial position, leveraging your equity could be a smart strategy. However, if the market turns, it could add pressure and cause you to lose your primary residence.
5. Have you also looked into other funding options? Perhaps partnerships with a capital provider where its a lower rate but give up some upside?
7e investments53 Reviews - Member since 2024 · 63 posts · 39 votes1y
@Chris Seveney thanks for your feedback. I have not looked into partnerships with a capital provider. Not familiar with that option. How does it work?
- Member since 2024 · 63 posts · 39 votes1y
Quote from @Jason Wray:
Shayan,
Best option to avoid issues and stay risk free along with having a better approval chance would be to go with a Cash out refinance. A Heloc is an open end mortgage same as a credit card the only benefit is that you only pay on the amount you borrow. The down fall is a Heloc can "Never" be used as an asset or for PITI reserves required when buying a new Primary or investment property.
A heloc can also cause major issues with credit and one slight hiccup or missed payment the bank or lender who is holding the Heloc can close or reduce your line of credit. Even if you make all of your payments on time there are times when something happens by accident or a collection pops-up and drops the credit scores.
Again even if you have great credit as you start to add more credit cards, mortgages, auto loans to your credit you can also be viewed as "High risk" due to Excessive trade lines in credit or higher DTI - debt to income ratios. Some banks and lenders will calculate your Heloc payment based on the Max limit even if you only have a small portion used due to preventive risk. That alone can kill a deal due to over the Max DTI limit.
A cash out refinance is tax free and its an immediate liquid reserve so it can be used as an Asset or PITI reserves. Basically cash in the bank is a very good way to get an approval on bigger loan amounts or in general. Higher assets or cash in the bank increases what is called you compensating factors which banks/lenders use to qualify. Cash out or cash in hand also allows you to avoid having a heloc sit in 2nd lien position and you cannot borrow more money until you pay off the heloc.
Cash out refinance is one loan and if you need more you can simply do another cash out refinance.
Thanks for the feedback here. Cash-out refi is a good option also, but I do have a really good interest rate on both of my properties. I think I'm around 3%, and I do not want to touch that. If I do a cash-out refi, it will change my interest rate, correct?
- 1yJason WrayPro MemberBanker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
Yes, your rate will change but not much if you have good credit it will go up around 5.875% to 6%. Keep in mind a HELOC rate will be much higher because of the CLTV and risk. Most Heloc rates right now are around 7.75% to 10% so if you look at your blended rate between your fist and Heloc you would be better off doing a cash out refinance.
A lot of people forget or simply do not know that if you do a cash out refinance the rate does go up but in 12 to 24 months if you do a "rate and term" refinance you can get it back down fairly close to where it was at prior. May need a little rate buy down but in the long run it is much better to raise your rate 1% to 1.5% versus taking a Heoc rate above 8%.
The whole point of taking cash out is its quick and you avoid having the associated risks that come with a Heloc. Cash out should be used as a 12-24 month loan so that you can buy another property and pull cash out at the next 12th or 24th month mark.
At that point you take a portion to pay off or down the first loan and use the rest as a down payment on the next REI. If you can shorten the window on the cash out refinance to the next purchase/refinance the rate is not really a factor. You will not have the rate long enough for it to interfere with your current and proposed profits.
This is where having a good team comes into play for example having a seasoned realtor who knows the market on the purchase/ARV side. As well as seasoned Banker/Loan officer that can run the proposed numbers to see where you need to be LTV/ARV and number wise. That is an upfront game plan with numbers that should be somewhat fail proof if done correctly.
Lastly dont forget that 85% of people who take out a HELOC end up doing a refinance within 3 years to consolidate into one loan. So you might as well be a head of the game do the cash out refinance buy the next 1-2 properties and simply refinance the original mortgage as a "rate and term" which carries a lower rate.
- Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes1y
Quote from @Shayan Sameer:
Hello everyone,
Hope you all had a great New Year! I have a question and would really appreciate your input.
I’ve done a couple of fix-and-flip projects in the past using hard money lenders, but I’ve noticed that their fees and interest rates significantly cut into my profits. In some cases, after running the numbers, I’ve even faced potential negative returns, causing me to miss out on promising deals here in South Florida.
That brings me to my question: I currently own two homes—one is my primary residence, and the other is a rental property. Both properties have a substantial amount of equity that’s essentially sitting idle.
Would it be a good idea to tap into this equity (through a HELOC, cash-out refinance, etc.) to fund future fix-and-flip projects or purchase additional rental properties?
I’d love to hear your thoughts on whether this approach makes sense or if there are other strategies you’d recommend to optimize profitability.
Thanks in advance for your advice!
To Sum it up, its a good idea if you can exceed the cost of capital (higher rate than your cost of debt) with what you earn on your heloc/debt you pull out and invest.
The question is how much gains above is enough to substantiate the risk of your variable interest rate, well thats up to your personal investing criteria. Some people need 2% above the borrowing cost (8% cost of hELOC you gotta then make 10% + etc) and others will want to double their cost of capital or 200% so it depends.
Everyone's going to give you their anecdotal experience or what their preferences are so its good to hear it all and determine your own.
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