Funding strategy for first deal

3 Replies

Hello everyone, 

I would like to obtain my first rental property next year  (fingers crossed).

I currently own a home 100 % clear (worth approximately 160k) and would like to use the equity to fund the down payment for the second property. 

I've been researching HELOAN VS cash out refi, and I think the refi is the better option. What is your opinion? 

Is it better to pull out only what's needed for the DP or is purchasing property 100% cash the better option? 

Do you have any ball park figures on what the cash out refi rate may be for the Burleson TX area?   If not, what's a good way to research those numbers? My credit is excellent.

Thanks, 

Chris 

Hello Chris,

There are pros and cons to each option.  

An Equity Line will most likely give you the most flexibility.  They tend to be interest only, which give you the option of making a low minimum payment and paying back the principal at your discretion. A cash out refinance will have a fixed payment amount that is most likely fully amortizing and therefore will be higher.

That being said, keep in mind that most equity lines have interest rates that are tied to the current Prime rate.  When the prime rate goes up, so does your rate on the Equity Line.  You will most likely see the rate rise in the coming years.  One of the benefits of a cash out mortgage is the ability to obtain a fixed rate loan that will not be subject to an increase in market rates.

It really comes down to what makes the most sense for you.  If you plan on paying back the equity line in 2-5 years, that might be the way to go.  If you want a little more peace of mind regarding what your payment may be, then perhaps a fixed-rate cash out refinance will be better.

I hope this helps,

@Christopher Ward if you buy it all cash your ROI will be much much much lower. You can take the same amount of money and buy 4 properties. 4 properties with 25% cash and 75% financing vs 1 property at 100% cash. Of course it's all about comfort level and what kind of rentals you buy but you can certainly play it safe and do waaaay less than 100% cash.

Thank you both for the information. 

@Salvatore Lentini, do you know a James Way up in Doylestown? 

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