Financing Advice on SFR's

14 Replies

Hello,

I am looking for some advice on the best way to use the equity in my two rentals to buy additional properties.  Here is my current loan info:

House #1 - 64K left on loan.  House is on zillow estimate for 142K.  I know zillow is not the place to go to for estimates I just wanted to put it out there.  My realtor says the house is worth 160K and will sell immediately.  

House #2 - 88K left on loan.  House is on zillow estimate for 157K. I know zillow is not the place to go to for estimates I just wanted to put it out there. My realtor says the house is worth 170K and will sell immediately.

 Both homes are on 30 year loans:

House # 1 - 4.625%

House #2 - 4.5%

I would like to put these on 15 year notes. 

I have been told it's not worth it to refinance and pull money out because of all the fees I would be paying. I have also been told I can not do a HELOC either because they are investment properties although I have read and listened to a lot of investors on here that seem to be doing them.

I do have additional cash on hand to invest but I would like to use the equity build up in these two properties in addition to put myself in an even better position to purchase either a couple more SFR or a Multi family.

Both homes are located in Nampa, Idaho and are financed through a large bank, not a local community bank which I would like to start building a relationship with.

I would appreciate any advice.

Thanks,

Devon

@Devon Craychee we will all have opinions on what is the best method to having more investment properties but my suggestions are two fold:

  1. Cash is STILL King - once you spend your cash, it's really hard to get it back.  The equity that is in your investment properties is nice to have....but it's not doing anything.  It's not paying your bills or providing your with gas money (your cash flow does that...more on that in a second)...so if you have a use for that equity, meaning you can leverage it to gain MORE investment properties, then who cares what the fees are?  Don't get me wrong, you don't want to overpay for anything but leveraging your equity is EXACTLY the point of real estate.
  2. Cash Flow - your cash flow is very important.  It helps with maintenance costs, it allows you to build MORE cash to buy MORE properties (cash is king!) so my suggestion would be to consider keeping the investment properties in a 30 year fixed rate loan.  Your investment properties are not your primary home.  So the philosophies are a little different.  Deferring your business debt works because it allows another party to pay the debt (your renter), you keep the tax deduction (the interest that is paid), and you gain more cash flow.  Just think about it from that perspective.   

Feel free to ask more questions if you need.  Thanks!

@Andrew Postell I agree the equity in my places is not doing me any good and I would like to put it to work. Can I leave the loans as is and just pull out the equity through a HELOC or do I have to refinance? Sorry for the questions, the financing aspect of real estate investing is the one area I am trying to learn more about. From what I understand I could refinance and take out 70% of the new refinanced amount, is that correct? I am constantly looking for new deals so I would like to make sure I have all my finances in place to react when I find a good deal which is why I am trying to figure out how to use the build up equity I have. Thanks for your help and patience in advance! HA

@Devon Craychee no problem. Having a Line of Credit on an investment property is pretty challenging. Mainly because not a lot of lenders offer it. I might suggest to network with some real estate clubs in your area to see if any members know of any there locally. Expect to pay a pretty high rate (7% or so), maybe a max of 70%, and it likely be an adjustable rate for that type of a product. If you were to refinance the entire mortgage, you could receive 75% out of the value (if they are Single Family Homes). A line of credit would have lower closing costs. There's certainly pros and cons to everything. To me, I know you can get cash out at 75% with a conventional loan. A HELOC will require you to call around to a lot of banks. Try some smaller banks in the area of the property first. Don't be surprised if you have to call every bank in the area. Hope this helps!

@Devon Craychee @James Miller - check with Pioneer Federal Credit Union on their HELOC program for investment properties. Fees at closing are minimal, and the original loan stays in place. @Corby Goade - didn't you recently hear about another financial institution that might be offering cash-out refis on investment property? 

I recently did a HELOC on one of my rentals through America First Credit Union. They will go to 80% LTV and the rate was 4.49% variable.

Since the advent of Trump, every time I call this bank I hear the president's voice in my head emphatically pronouncing their name.

I see you guys mentioning LTV when getting HELOCS. How does the value of the property come into play? Isn't a HELOC a loan on the equity you already have in the property? Why can't you take that money out straight up?

@Kevin Phu Lenders are using the property as collateral for the HELOC, just as they do with a first. So of course, they want to make sure that the property is worth more than the total amount of loans on it.

Mine was valued at $400k, so the bank was willing to go up to $320k in total loans. I owed $245k on the first mortgage, so they did a $75k HELOC for me.

Of course, they could choose to go higher than that, but it would be risky for them because if the home's value went down much at all, their collateral would disappear. If the home's value went down 15% to $340k and then I defaulted, it would cost them about 10% of the home's value to foreclose and sell, leaving $306k of proceeds. $245k of that would go to the first, and would only leave them $61k back on their loan. So even at 80% LTV they are fairly exposed to home values dropping.