Cash out Refi personal home vs HELOC vs Conventional - 1st deal

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Cash out Refi personal home vs HELOC vs Conventional - 1st deal

Ryan Johnson
Rental Property Investor · Houston, TX · Member since 2018 · 174 posts · 100 votes

My first REI was a lot bought at auction last year that has over doubled in value. Its time to move on. Im looking to purchase my first income generating property now. Running numbers on SFH and 2-4 plex in the Houston metro area.

My initial plan was to sell my lot and 1031 it into something else and obtain a conventional loan for the difference. Unfortunately with rates creeping my mortgage broker is quoting 6-6.5%. 

He's recommending I cash out refi my personal home to pull 250k out at 4.75-5%. 

Here are my options financing wise and the pro's and cons of each. Please feel free to add additional pros and cons as well as what route you'd take. 

1- Conventional loan - cons: Higher rate 6-6.5%, longer closing time, less attractive to sellers? 

Pros: no holding cost, can look at my own pace with no pressure to put money to work. 

2- HELOC - I have a 200k HELOC on my personal home that can be upped to 250K, rate 5.99% but variable, interest only.

Pro: I can make aggressive offers within 250k and close quicker. I'd plan to cashout refi sooner than later to pay down the HELOC and look for the next deal with HELOC money, No holding cost, no time pressure

Cons: variable rate, can not deduct HELOC interest on taxes

3- Cashout refi personal home and pull 250k out. Rates 4.75 - 5%. Id have to buy down the loan to get it the 4.75% but the buy down is worth it over the 30 year loan and I do not plan on moving anytime soon. Id likely cashout refi to pull my cash out sooner than later keeping my liquidity in search of the next opportunity. 

Pros: more aggressive offers, lowest rate out there. 

Cons: Holding costs, pressure to find a deal - this is bad and good as it forces me to take the next step but still has added pressure. This adds debt of 10k total to buy down the rate to 4.75% which is my current rate but saves 32k over 30 yrs. Title costs will be more since this loan will be the largest. 

I will still attempt to 1031 the lot proceeds into whatever property I buy. 

Any words of wisdom out there? I have a stable higher paying W2 gig so won't be buying anything I couldn't personally make payments on if needed.

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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    7y

    @Ryan Johnson HELOCs are great in the investment world. Love 'em and so do many other people. Using a HELOC to acquire properties is a great strategy but you need another strategy to pay it back quickly. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

    So if you use a HELOC to buy for "cash" then refinance that property, that would be a terrific strategy. No "hard money" costs, etc. But you need to know how to calculate all the items necessary to refinance later. Meaning construction costs, ARV, etc. etc. While Hard Money Lenders do charge a lot...they also do tell us if our deal is bad! If you do it on your own, you are the only one who checks. Just be fully informed when pulling that trigger. BUT do NOT get caught in that HELOC rate. It's happened too many times to really good people.

    Your HELOC will have the lowest closing costs and you only pay interest on it when you use it.  If you were to do a cash out loan, then you pay interest even if you aren't using the money and the closing costs are ENORMOUS in comparison to that HELOC.  if you are looking to do the BRRR method then use that HELOC to purchase, then refinance out each property will keep you going for many, many properties.

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

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