?Opinions on tapping equity

12 Replies

Hey there everybody. I'm interested in hearing some opinions on different methods of tapping equity to acquire investment property.

I purchased my primary residence in 2011 with 20% down and a 30-year fixed mortgage at 5%. A year or two later I refinanced at 3.5%. The refinance worked out nicely as my monthly expenses dropped by hundreds of dollars. In the past couple years, however, my property's value has jumped up approximately 80-95K.

My plan going forward is to buy and hold multiple investment properties (using leverage, most likely). I currently have only one mortgage.

A few weeks ago, I started a HELCO thread, and I got some great insights on how different investors have used lines of credit to reach their goals.

I'd appreciate any thoughts on the best ways to tap home equity in general. If I do a cash-out refinanced, for example, I would do so at a higher interest rate, which does not make much sense to me (although I imagine there might be some advantages of which I am unaware). I'm curious if you folks have any opinions on using a home equity loan versus a HELCO (versus perhaps another method I have not considered). Furthermore, I'd be interested to hear if using a equity loan or a HELCO for a down payment is problematic in terms of securing a fixed mortgage for the remaining 75-80%.

thx v much!

I have purchased 2 investment properties and I am about to purchase my third, all with a 20% down payment funded with a HELOC from my primary home. There are still banks that will lend up to 100% LTV for about 5% interest. Good luck!

Call 3 bankers?

Hey Daniel. That's awesome to the hear that the HELCO is working for you.

dc

The first purchase is the hardest. I would use the HELOC for your 20% down on buying a new rental property. Make sure your cash flow is enough to cover both your new mortgage, your HELOC payment, and all expenses, as well as some cash flow. Good luck.

The max LTV for an investment purchase is 80% with a 5% CLTV (2nd mortage). That's pretty typical in the industry right now. I haven't heard of any big banks doing 100% financing on investments. But 85% is pretty good and rates are low. Save the HELOC for when you need it. Use the banks money first.

Originally posted by @Daniel Foster :

I have purchased 2 investment properties and I am about to purchase my third, all with a 20% down payment funded with a HELOC from my primary home. There are still banks that will lend up to 100% LTV for about 5% interest. Good luck!

Question for you Daniel. Do you have a list of lenders offering this? I am wondering if you are using local credit unions or national banks (US Bank, Wells, etc)

Thanks!

Brian

I am not a fan of combining a HELOC with a mortgage. I saw a lot of investors lose their shirts when the housing market went bust because of two loans against their investment properties. I have one mortgage free rental that has an open line of credit against it. I use it for 20% down payments and I pay it off before I buy another one. I have five rentals now.

I know it makes for a slow process but I sleep well at night.

Originally posted by @Brian Larson:

Question for you Daniel. Do you have a list of lenders offering this? I am wondering if you are using local credit unions or national banks (US Bank, Wells, etc)

I used Key Bank to get the HELOC on my primary. Its a little bit of a pain, as they don't typically do business in TN, so some of the amenities available to other borrowers, such as online account services, are not available to me. I would imagine it will be the same for you, since you are in California. The rate is just over 5% and they allowed a 100% LTV, so it is worth it to me to have to call in for account balance information and mail in paper checks for payment.

@Daniel Foster I was a bit confused. You are referring to 100% LTV on the Heloc at 5%, not a purchase, correct?

Thanks.

Correct. As in if your primary is worth $100,000 and you owe $60,000, Key would extend a $40,000 HELOC.

Hi All ( @Damien Christian,@Daniel Foster   @Will Pritchett  @Jerry W.  @Brian Larson  @Jack Slattery  

My view of this thread is similar to very common financial discussions around using credit cards for purchases versus cash.  The truth is to me it always comes back down to discpline.  If you use a credit card for convenience and timing, but are displined to ensure you treat it responsbily and pay it down, then it is a valuable tool.  However, many start with good intentions and end up later with a lot of saddles debt.

I view the HELOC similarly. I myself, find it a great way to help continue to finance real estate investing. But it makes sense, when you ensure (1) you are not over extending yourself - e.g. if any surprises happen both with the project or general life do you have reserves or contigencies? If you do, then again a good financing source for me. If you don't, then you risk being too leveraged where any hiccup could bring the house of cards down which unfortunately happened to a lot of people in the downturn (2) Does your investment make sense from a cash flow perspective considering total financing costs? A HELOC is a good way to being able to seize an objectively and independent good investment where you simply would like less $s in the deal or the use of the funds help you be able to do the deal. Too many times, I have seen HELOCs as way to rationalize a bad deal (the old hey I have 100% financing so it must be good). A good deal needs to be able to generate enough cash flow to both cover your traditional costs and your HELOC costs. Treat it as a loan with a defined minimum principal and interest pay-off schedule. If it does, then you are borrowing money at a low interest rate to earn a higher return and keeping the spread. HELOCs can give you flexibility so you don't want to keep them hilted, you want to use cash flow to pay it down at a regular schedule so you have additional emergency reserves or the ability to deploy it elsewhere.

So in summary, with little displine, HELOCs can lead folks to make a bad deal happen or end up with more leverage than is healthy or long term debt.  With good displine and a good deal, HELOCs can be a very inexpensive financing channe and one that allows you some flexibiltiy to seize a good deal you might have not been able to.  The key is to have a plan and to ensure you can easily service the debt and still have cash flow.

Hope that helps,

Eric