HELOC or Cash-out refi

25 Replies

I am getting my feet wet in the world of real-estate investing. I own a condo in which my wife and I reside. We bought the property for 820K with a 80% 7/1 ARM at 2.95%; 10% HELOC and 10% down. I have since paid off the HELOC. The house on redfin is now 1,090,000 with a remaining mortgage amount of $600K meaning I have about 500K in equity in this property. My wife and I can save about 120K a year. I plan to buy rental property each year on a rinse and repeat process. Please advise what you would recommend and what types of properties to invest in. I am limited to buying in boston and will primarily look for properties will see home value increase by 10% per year. DO you recommend a HELOC to fund my next property or a cash out refi?

@Sam LaGrassa You've listed one of the fundamental mistakes an investor can make, creating a business model on hope and speculation. While it's nice to purchase with the anticipation of year-over-year increases in equity growth, a 10% target is an interesting component of your projections. Did you use a IRR template when creating your business model? To get that 10% average, how many years does it cover? I'm assuming if it's a buy and hold you're accounting for the highs and lows the RE industry goes through?

Thanks for all the questions/replies. 

I am using the 10% increase based on south boston's growth over the past 3 years. I would be comfortable with a 20% increase over 4 years and will be able to handle the ebbs during a downturn. I am not too concerned about the 10% increase though - the dilemma is really whether to do a HELOC or a cash out refi and what the pros and cons are of each.

Also pls note that my 2.95% expires in 2022 and a 30 yr fixed is currently 4.6%

I've used a HELOC for years to support cash purchases (in addition to loans against my 401k). It is a temporary loan to me though, I draw from it and then pay it off within about a year.

I did do a cash out refi ~6 years ago, but it was in conjunction with capturing an improved interest rate on our primary residence. I would probably not do it otherwise. 

@Sam LaGrassa @Aaron Hunt   The actual market numbers for Suffolk County, MA for Q1 2018 vs Q1 2017:

Median home price: UP 15.9%

Average home price: UP 14.4%

# of homes for sale: DOWN 33.5%

Days on market: DOWN 6.5%

Months supply: DOWN 29.7%  (1.2 months)

Now that's not to say that those numbers will continue, but that is the actual historical data for last year.

There's still an incredible shortage of homes on the market.  They're selling for more money and in less time.

Originally posted by @Charlie MacPherson :

@Sam LaGrassa @Aaron Hunt  The actual market numbers for Suffolk County, MA for Q1 2018 vs Q1 2017:

Median home price: UP 15.9%

Average home price: UP 14.4%

# of homes for sale: DOWN 33.5%

Days on market: DOWN 6.5%

Months supply: DOWN 29.7%  (1.2 months)

Now that's not to say that those numbers will continue, but that is the actual historical data for last year.

There's still an incredible shortage of homes on the market.  They're selling for more money and in less time.

Bruh, please. If I could have down-voted this I would have.

How about some "actual historical data" that we can make real conclusions from.

This stinks of self-serving data, and then further confirmation as I note that you're a RE agent in Mass.

Originally posted by @Sam LaGrassa :

Thanks for all the questions/replies. 

I am using the 10% increase based on south boston's growth over the past 3 years. I would be comfortable with a 20% increase over 4 years and will be able to handle the ebbs during a downturn. I am not too concerned about the 10% increase though - the dilemma is really whether to do a HELOC or a cash out refi and what the pros and cons are of each.

Also pls note that my 2.95% expires in 2022 and a 30 yr fixed is currently 4.6%

Your cash-out refi rate will probably put you higher than that 30 yr fixed note.

Benefit of HELOC is you can just dip into it when needed, but your primary would stay the same.

@Aaron Hunt You can insult me all you want, but it doesn't change the actual market data.

As I said, there's no guarantee that the trends will continue.  You can draw your own conclusions but this is the actual market data, "bruh".

Originally posted by @Charlie MacPherson :

@Aaron Hunt You can insult me all you want, but it doesn't change the actual market data.

As I said, there's no guarantee that the trends will continue.  You can draw your own conclusions but this is the actual market data, "bruh".

Um, how about no, Scott.

You show us a SINGLE YEAR of growth over 14.4% (calling it "historical data") and we're supposed to think that's relevant to the discussion for someone who wants to be an investor? That's insulting to all of us here. OP also specifically said Boston...not an entire county.

If you want to throw numbers out, share the last 5, 10 years, or 20 years of year on year growth pertaining to Boston...and we'll have a logical discussion here.

According to NAR’s findings, the median home price in the first quarter in the Boston-Cambridge-Newton area was $442,700. In the first quarter of 2017, it was $414,200. That’s a 6.9 percent increase and 1.2 percent above the national average.

@Aaron Hunt Well, there's your problem.  You're quoting a different market than I am.  Newton and Cambridge are in Middlesex County.  Boston is Suffolk County, which is all the OP was asking about and the data I presented.

And for the record, the data I referenced comes straight from the MLS.

It's not MY data.  It's not self-serving data.  It's just the raw data from Suffolk County, Mass.  As it states, Q1 2018 vs Q1 2017.

Not sure what the combative tone is all about, but it's not necessary.  

HI Sam,

A Heloc pro is you only pay interest when you draw upon the or having an outstanding balance but the con is that you pay interest usually based on prime + margin. The Margin is fixed while prime rate floats and its typically interest only.

As for fixed rate loan cash out refinance its fixed its great but downside is you pay interest day 1 even if you have a project to work on or not.

Depending on how you plan to deploy and how much you think you'll be deploying you'll pick a fixed or a line of credit.

@Aaron Hunt @Charlie MacPherson Boston is booming right now and i believe the numbers Charlie provided.  I also believe the price over the past 3 years would show at least a 30% increase.  Also to further refine what i meant by Boston, I am foucsed on investing in South Boston, East Boston, Everett, Revere and Dorchester as I expect the greatest growth there.  

If I do a cash-out refi on my primary house, what is the most I can pull out.  Do i have to have at least 20% or 25% equity in the home or can I reduce it down to 10%.  If it's 25%, that means I will be able to pull out around 250K in cash and put down 80K on three separate homes valued at about 320K each (25% down).

If i do a HELOC, i will have to pull 80K from my HELOC that i already have approved and will only be able to buy 1 house for 25% down at 320K.

Too many options? What would you do?

For clarification purposes: Suffolk County also includes Chelsea, Revere and Winthrop, although Boston is about six times larger than the three of those combined.

Big question would also be what types of properties you were looking for. Even with this prices, some triple deckers in the areas you mentioned still positively cash flow while smaller single condos may run at at a loss, depending on the terms.

@David Cahill and others, would you recommend investing in Condos or triple deckers? I can finance a property of up to $800K (20% down).  I am not into property management so am fearful that a triple decker will require me to spend more time than i'd like managing the tenants/property.

Also, what is the best place to invest around boston? Please rank the following areas for highest predicted home value increase over next 2 years:

Everett

East Boston

Dorchester (which area within Dorchester)

South Boston

Winthrop

Revere

Roxbury

@Sam LaGrassa I'll give you the same advice I've given many others.  LOOK SOUTH.

The south shore is much more affordable than anything inside RT 128.  The places I'd recommend looking are Brockton, Taunton, Middleboro, Plymouth, Fall River and New Bedford - the latter two being south coast, not south shore.

For example, average 3-plex sale price over the last 6 months:

New Bedford: $208.3K
Fall River: $231.2K
Taunton: $321.2K
Middleboro: $382.6K
Brockton: $444.3K
Boston: $974.6K.

Not only do you get more for your money on the south shore, but as you get north of the MA Pike and west of 495, you're into the Worcester hills - about 1,000 feet in altitude.  That means more snow.  Sometimes a LOT more snow.

South shore.  That's where I'd look.

@Sam LaGrassa MLS doesn't break the numbers down with that much granularity, but I think Boston is a very good guess for the highest increase.

I watched a 3-plex in Roxbury that needed at least $150,000 in rehab sell last year at $960,000.  I saw another in Allston list at $2.3M and in JP at $1.8M.

The rents you would have to get in these places would probably be enough to pay for a mortgage on a 4,000 sq ft home on the south shore - and you could probably get an ocean view too.

The only thing that would make me invest in Boston at this point would be a GAMBLE (horrible idea) on Amazon HQ2 locating here.

You are right about the property management bit in that three-families generally require more maintenance and upkeep vs. condos, but the returns are fare more superior. 

I wish I had a crystal ball about the potential increase in areas, but here is an off the cuff answer for ranking:

Dorchester (it's complicated - Dorchester is so large!)

Everett

Winthrop

East Boston

Revere

Roxbury

South Boston

@Aaron Hunt   After taking a second look at your quoted numbers, something is WAY off.  You said: "According to NAR’s findings, the median home price in the first quarter in the Boston-Cambridge-Newton area was $442,700. In the first quarter of 2017, it was $414,200. That’s a 6.9 percent increase and 1.2 percent above the national average.

There is no way on God's green earth that the median home price (median being defined as the mid-point between the lowest price and the highest price) in these towns is $442,700.  It might be that this was the amount of INCREASE in prices in that time frame.

Here's the current data:  Loooking at single family home sales over the last month in Boston, Newton and Cambridge, the least expensive home sold was $350,000 and the most expensive was $4,500,000.  

That places the median sales price at $2,075,000, not $442,700.

Originally posted by @Charlie MacPherson :

@Aaron Hunt  After taking a second look at your quoted numbers, something is WAY off.  You said: "According to NAR’s findings, the median home price in the first quarter in the Boston-Cambridge-Newton area was $442,700. In the first quarter of 2017, it was $414,200. That’s a 6.9 percent increase and 1.2 percent above the national average.

There is no way on God's green earth that the median home price (median being defined as the mid-point between the lowest price and the highest price) in these towns is $442,700.  It might be that this was the amount of INCREASE in prices in that time frame.

Here's the current data:  Loooking at single family home sales over the last month in Boston, Newton and Cambridge, the least expensive home sold was $350,000 and the most expensive was $4,500,000.  

That places the median sales price at $2,075,000, not $442,700.

That's the historical data provided by NAR.

And where did you get a median price of $2,075,000?

You are saying effectively HALF of all homes sold in Boston, Newton, Cambridge had a sales price of more than $2.075 million?

Also, why is the new MLS data only about single family homes? Are condos not included in numbers by NAR, MLS or did OP specifically say not interested in condos, etc?

I'm guessing that you might have missed a word in their statement.  If not it was a typo on their part.  $442,700 makes sense as the amount of the INCREASE in price in those towns over a year, but not as the median sales price.  

Especially as Cambridge and Newton are some of the most expensive in the state.  Parts of Boston are - Beacon Hill, Charlestown, South Boston, East Boston, Jamaica Plain.  Less so in Mattapan and Dorchester, though those are starting to gentrify and will soon be out of reach in my opinion.

For reference, the average list price for homes currently on the market in Newton is $2,265,975.  In Cambridge it's $2,269,563.

Single family homes are normally what gets discussed as that's what the majority of  sales are.  As SFRs go, so goes the rest of the market.  At least for the most part.

The median isn't the average.  It's the mid-point between the lowest and the highest.

For example, you could have 10,000 homes sold for $1.00 and one home sold for $1,000,001.  The median would be $500,000, where the average would be $10,099.

I don't think median is as useful as average when discussing sales prices.  Derelict homes pull medians way down and an odd luxury mansion (in a non luxury area) pull medians way up.  

I suspect that's the reason our MLS report includes both median and average.

Originally posted by @David Cahill :

You are right about the property management bit in that three-families generally require more maintenance and upkeep vs. condos, but the returns are fare more superior. 

I wish I had a crystal ball about the potential increase in areas, but here is an off the cuff answer for ranking:

Dorchester (it's complicated - Dorchester is so large!)

Everett

Winthrop

East Boston

Revere

Roxbury

South Boston

 If you as 10 different people you would probably get 9-10 answers on that.  I would focus on a few areas and look for good deals.  As Charlie mentioned (who by the way knows his stuff) deals are tough to find right now in any of those neighborhoods.  I would personally rank them with South Boston (depending on where in South Boston) and then East Boston (with bonus Amazon gamble) then Everett, Winthrop, Revere and Roxbury.  BUT some of the properties you find in Roxbury are going to be a much better investment than East Boston or South Boston.

Really no harm in looking at ALL the neighborhoods since the market is so tough right now and any great investment is going to be swarmed by investor cash. Just watched a Beacon Hill condo get listed for 500 and get 6+ offers for over asking in less than 3 days.