Cash Out Refinance vs HELOC for Investment Property

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Cash Out Refinance vs HELOC for Investment Property

Coley B.
Chicago, IL · Member since 2014 · 8 posts · 3 votes

What do YOU prefer - LOC or cash out refinance to pull out equity in a non-owner occupied investment property?

I have a long-term buy and hold strategy. I purchased and renovated a multi-family investment property over the last 2 years. So I want to pull out the equity to buy another property. I plan to do the same thing over and over (buy, renovate, rent, cash out, repeat). I understand the pros and cons of refi vs. LOC. I also understand the difficulty in pulling cash out. I'm simply wondering which one do YOU prefer and why (refi or LOC)?

- Looking to pull out $100-150k

- Current loan is 4% over 30 years

- Refi closing costs in Chicago are about $2k (includes appraisal)

- Wells Fargo would charge 1% on LOC loan amount plus annual fee of 0.25% (approx. $1,000 - $1,500 in closing costs plus $250-$375 annually)

I love the flexibility of the LOC and not having to pay interest until I use it. Plus since I'm simply gonna use it for a down payment on next property I would simply rinse and repeat. But with interest rates so low and my very long term buy/hold strategy should I simply refinance at a slightly higher rate (4% --> 4.5%) so I can lock in that extra cash at a low rate over the next 30 years? I'm thinking a cash out refi makes the most sense.

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Lumi Ispas
Real Estate Consultant · Chicago, IL · Member since 2014 · 720 posts · 439 votes
11y

Hi Coley, 

Here's my two cents: If you would flip properties, and reuse the money in different projects, or invest it at a higher rate than what you are paying the bank, I will say use the HELOC.

However, as you are planning to use the money towards the down-payment of another property, the money will be locked for a long period of time and you won't be able to pay off the HELOC, therefore, there are no benefits of having the HELOC.

Good luck to you and message me if you would like the information of some of the top lenders in the City!

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  • Roy N.Pro Member
    Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes
    11y

    @Coley B. 

    For us it depends on whether we have an immediate use for the capital.   If we do, then we would refinance a property as a mortgage would be 1/2 - 1% lower than the rate on a HELoC.  

    If we do not have an immediate need, but the property was up for refinancing (here it happens ever 5(ish) years), we would set-up a HELoC.   It's doubtful we would break an existing mortgage to refinance the property just to establish a HELoC.

    0Reply
  • John Weidner
    Chicago, IL · Member since 2014 · 710 posts · 200 votes
    11y

    I'd probably go with a HELOC but I think max you can pull out is 65% LTV better to sit down with a banker and discuss options

    I recommend Fifth Third.  If you need a good contact you can message me 

    0Reply
  • Coley B.
    OP
    Chicago, IL · Member since 2014 · 8 posts · 3 votes
    11y

    For commercial LOC, Wells Fargo allows 75% LTV on first lien position and up to 70% on second lien position. They hold my first lien so I imagine they would go up to 70% on a second lien.

    0Reply
  • Lumi Ispas
    Real Estate Consultant · Chicago, IL · Member since 2014 · 720 posts · 439 votes
    11y

    Hi Coley, 

    Here's my two cents: If you would flip properties, and reuse the money in different projects, or invest it at a higher rate than what you are paying the bank, I will say use the HELOC.

    However, as you are planning to use the money towards the down-payment of another property, the money will be locked for a long period of time and you won't be able to pay off the HELOC, therefore, there are no benefits of having the HELOC.

    Good luck to you and message me if you would like the information of some of the top lenders in the City!

    2Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    11y

    LOC might be riskier in the long run as the rate wouldn't be fixed. I play the same "game" with my primary residence. Instead of refinancing, I obtained a HELOC and have been using that to do my real estate investing. I've used the HELOC to make down payments, finance a flip, even do a few all cash purchases with the intent to cash out refi, just like you're mentioning.

    I'm making interest-only payments on the line right now and there is an option to convert it to a straight amortized loan later down the road if rates rise. I have been acquiring a lot of rentals and If it came down to it, I don't mind selling my primary to wipe that HELOC clean, pull out my remaining equity, and start with a clean slate (assuming house prices in my area don't take a nose dive).

    I really don't plan on selling my rentals any time soon, like I would my house. So If I had immediate use for the funds, I would probably just do the refi in your situation! 

    2Reply
  • Kerry Fladung
    Wholesaler · Sioux City, IA · Member since 2014 · 6 posts · 3 votes
    11y

    I have permanent long term financing on all of my properties except one with a RLOC.  I use the RLOC to pay for ongoing repairs (roofs, HVAC systems, etc) and as a funding source for the down payment (sometimes the whole purchase price) and renovation work on new purchases.  Once the project is done, rented, and cash flow stabilized, I get permanent financing on it and pay down the RLOC.   Then the cycle starts  again.

    0Reply
  • Mark M.
    Real Estate Investor · York, PA · Member since 2015 · 22 posts · 6 votes
    11y
    Originally posted by @Mehran K.:

    LOC might be riskier in the long run as the rate wouldn't be fixed

    I am curious. is there a such thing as a fixed rate LOC? I know yes for mortgages but for LOC? Great thread because I am in a situation right now figuring out which way to go with a LOC or a fixed rate long term mortgage.

    0Reply
  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    11y

    Pull out that capital and lock in the rate with permanent financing.


    Frank

    0Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    11y
    Originally posted by @Mark M.:

    I am curious. is there a such thing as a fixed rate LOC? I know yes for mortgages but for LOC? Great thread because I am in a situation right now figuring out which way to go with a LOC or a fixed rate long term mortgage.

    You should be able to switch the LOC over to a Home Equity Loan at any time (verify this first). I know my HELOC has that option to lock the current rate in, and then start as a loan (2nd mortgage) that will be amortized from that day forward. I'm not sure if there are any fees or other things associated with this option though.

    1Reply
  • Mark M.
    Real Estate Investor · York, PA · Member since 2015 · 22 posts · 6 votes
    11y
    Originally posted by @Mehran K.:
    Originally posted by @Mark M.:

    I am curious. is there a such thing as a fixed rate LOC? I know yes for mortgages but for LOC? Great thread because I am in a situation right now figuring out which way to go with a LOC or a fixed rate long term mortgage.

    You should be able to switch the LOC over to a Home Equity Loan at any time (verify this first). I know my HELOC has that option to lock the current rate in, and then start as a loan (2nd mortgage) that will be amortized from that day forward. I'm not sure if there are any fees or other things associated with this option though.

    The bank I spoke to did say that they review the LOC every three years and if unsatisfied, would have the option to convert it into a fixed rate term mortgage. I didn't think of asking about fees, though. Thanks for bringing that up Mehran.

    0Reply
  • Mark M.
    Real Estate Investor · York, PA · Member since 2015 · 22 posts · 6 votes
    11y
    Originally posted by @Franklin Romine:

    Pull out that capital and lock in the rate with permanent financing.


    Frank

    I am considering that option as well. Sufficient to say having both a LOC and a mortgage will provide me with two strategic debt instruments I can manage over the long-term.

    0Reply
  • Jerry Padilla
    Lender · Rochester, NY · Member since 2014 · 3k+ posts · 1k+ votes
    11y

    @Coley B.  I would do a cash out refi. I want only one mortgage with a fixed rate as rates are at all time lows. 

    2Reply
  • Mel F.
    Lender · Chicago · Member since 2015 · 66 posts · 25 votes
    11y
    Originally posted by @Mehran K.:

    LOC might be riskier in the long run as the rate wouldn't be fixed. I play the same "game" with my primary residence. Instead of refinancing, I obtained a HELOC and have been using that to do my real estate investing. I've used the HELOC to make down payments, finance a flip, even do a few all cash purchases with the intent to cash out refi, just like you're mentioning.

    I'm making interest-only payments on the line right now and there is an option to convert it to a straight amortized loan later down the road if rates rise. I have been acquiring a lot of rentals and If it came down to it, I don't mind selling my primary to wipe that HELOC clean, pull out my remaining equity, and start with a clean slate (assuming house prices in my area don't take a nose dive).

    I really don't plan on selling my rentals any time soon, like I would my house. So If I had immediate use for the funds, I would probably just do the refi in your situation! 

    I am about to invoke the same strategy but wondered how long you hold the investment before getting a cash out refi? I'd like to cash out or get a HELOC on the investment within 30 days to free up my cash for another possible deal.

    0Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    11y

    By strategy you mean by an all cash project (purchase+rehab+lease to tenant) and then refinance? This will depend on your lender. Some lenders won't have any seasoning requirements for their commercial/portfolio loans and will do the cash-out-refi (COF) on an appraisal on any day. Some lenders will want to wait 6 months to a year before they'll allow you to COF based on the new appraisal amount.

    The last lender I worked with also wanted to see that the property was leased out after the rehab (property was "performing").  Hope that helps!

    Update: I sold my primary residence last month, paying off my HELOC and pulling out the remaining equity, like I was planning on last November :)

    2Reply
  • Mel F.
    Lender · Chicago · Member since 2015 · 66 posts · 25 votes
    11y
    Originally posted by @Mehran K.:

    By strategy you mean by an all cash project (purchase+rehab+lease to tenant) and then refinance? This will depend on your lender. Some lenders won't have any seasoning requirements for their commercial/portfolio loans and will do the cash-out-refi (COF) on an appraisal on any day. Some lenders will want to wait 6 months to a year before they'll allow you to COF based on the new appraisal amount.

    The last lender I worked with also wanted to see that the property was leased out after the rehab (property was "performing").  Hope that helps!

    Update: I sold my primary residence last month, paying off my HELOC and pulling out the remaining equity, like I was planning on last November :)

     Yes, cash purchase+rehab+lease+refi is the strategy. For now, this will be the only item in my portfolio.. Would a commercial lender balk about that?

    0Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    11y

    It could be an issue for some lenders. If you present yourself professionally, have a plan, have a good deal, and have a good financial profile, that will help. 

    I'd start by calling around and seeing who does commercial/portfolio loans on residential properties, what their terms are, and have all your questions answered.

    1Reply
  • Daniel Kern
    Investor · Northfield, NJ · Member since 2017 · 43 posts · 3 votes
    7y

    I know Im resurrecting an old thread, but I have an investment property at about ~55% Equity position that I want to either cash out refinance or take out a HELOC to pay off a small loan used to buy the investment property and use the rest of the funds as a down payment for the next property. Whats the best option here to continue growing while paying off all debts? Cash out refi or HELOC? I do not have the next property lined up yet or UC so I have the time if one strategy is better than another.

    0Reply
  • Steven Young
    Rental Property Investor · Bentonville, AR · Member since 2017 · 23 posts · 9 votes
    7y

    @Daniel Kern Did you ever find an answer? I am in a similar situation, I have some equity in my primary residence that I want to pull out to buy a rental property but am having trouble deciding between Cash-out vs HELOC.

    0Reply
  • Daniel Kern
    Investor · Northfield, NJ · Member since 2017 · 43 posts · 3 votes
    7y

    @Steven Young

    I dont think there is an official "correct" answer but if I was in your position where you're looking at your primary residence, I would do the HELOC over the cash out.... my situation was a little different in that I was looking at a cash out or HELOC on an investment property in the name of my LLC so Cash out was really my only option.

    Thanks, feel free to message me for brainstorming or let me know how you decide to proceed and good luck!

    0Reply
  • Steven Young
    Rental Property Investor · Bentonville, AR · Member since 2017 · 23 posts · 9 votes
    7y

    @Daniel Kern

    That's something I'll have to keep in mind, I didn't realize that if it's in an LLC you can't get a HELOC, but that does make sense. I'll tell you a little more to see if you still suggest the HELOC in my situation. So I bought this duplex a 3 months ago and am currently living in one unit (house hacking) while doing some renovations. I see it as more of an investment property than a primary residence because I will be moving out next year into another small multi-family and repeating the process. It's only my primary residence because I wanted to be able to get started with very little cash upfront. I bought the property for 95k and put down 5%, so my current balance is 90k. The property appraised for 120k during the loan process, and with some renovations and increase in rents I think it would appraise for around 130k. I was locked in at 5.125% interest rate but interest rates have already dropped significantly in the past few months. My thinking is that I could wait a little longer and finish repairs, refinance at the lower rate and in the meantime pull out around 30K (a local lender told me that because it is my primary residence I can refi up to 95% ltv which is where I started 3 months ago anyways). Between the lower interest rate and the fact that I want to use the proceeds as a down payment on my next property, I was thinking that the cash-out made more sense. I want to make sure I'm seeing the whole picture before moving forward though, what would be some advantages of the HELOC?

    0Reply
  • Daniel Kern
    Investor · Northfield, NJ · Member since 2017 · 43 posts · 3 votes
    7y

    I see what you mean. I like the HELOC because your principle will remain the same, youll have access to about the same amount of money at a low interest rate and your cash flow will remain what it is today. The Refi will increase your P&I payment and therefore lessen your cash flow but youll recoup that potential loss when you do in fact move out of the property and into another once you get a new tenant to replace you in the current duplex.. Seems like you made a great deal. Do the future calculations with the the new mortgage and rents for both units and compare that to the HELOC terms.

    0Reply
  • Michael Paolucci
    Winston Salem, NC · Member since 2017 · 1 post · 1 vote
    7y

    I had the same type of question and there is a lot of great advice here, thanks! I've read a couple articles that preferred the HELOC over a cash-out Re-Fi because the HELOC used simple interest; does this make sense?

    1Reply
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