Do you refinance or do a HELOC on your rentals?

49 Replies

I have a rental I've owned since 2011, it's appreciated significantly and I currently never plan to sell it, but I'd like to capitalize on the equity in the home without selling it, so I could possibly possible use those funds to purchase another rental. How do you go about that, or is that a bad idea?

@Jesse Chambers there's pros and cons to it all.  Here's some quick summations on the two options:

  1. Cash Out Loan - fixed rate and rate is likely lower than a Line of Credit. Forecastable cash flow. Closing costs are higher. And you are paying interest on that money immediately. So if you don't use that money, and it's sitting in your bank account, you still have to make your mortgage payments. So you're paying for it with the interest on the loan.
  2. Line of Credit - Lower Costs. Use it when you need it. You are only paying interest when you use it. Since LOCs 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 LOC will modify into a different product all together. Meaning after opening the LOC for 10 years it will cease to be a LOC. 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. Not every Line of Credit has that clause but many do.

Hope this helps.  Thanks!

@Andrew Postell Excellent information. Thank you for sharing good sir. 

I have a quick question for you Andrew, if you don't mind? (sorry OP for thread jacking)... What's a fair rate for a HELOC on an investment property? I've heard that it's typically 1% + prime (so currently 5.5+1=6.5), is this true? It obviously will depend on your entire application (credit score, D:I ratio, etc) but let's just say you're pretty green across the board.

Also, do you recommend trying to find a local credit union (hard to find one that will do a HELOC on an investment prop based on my several attempts) or going to a public bank? Thank you!

@Svyatoslav Popach hey there. A family member of mine just got a heloc on an investment property. 6.5% thru a credit union. Process was quick and they did an air appraisal. 10-14 seems way too high for a heloc

@Jesse Chambers IMO it's a great idea. A HELOC allowed me to scale up much more quickly and inexpensively than a refi on my properties. If I had done a refi instead of a HELOC on my 1st property I would have only been able to buy 2 properties last year instead of 5. I also would have been cash flowing LESS and paid thousands more in closing costs. Buy for cash, open a HELOC at 70-80% LTV, repeat as needed. It can also help you eliminate the need to keep going back for loans down the road, costing you several thousand dollars each. Currently I'm clearing my lines as fast as I can so I have available cash for the next great deal I see or a downturn.

BUT, be careful. Make sure you have cash reserves aside from the HELOC, buy smart, make sure your numbers fit your criteria for CASHFLOW, and make sure you clear your lines ASAP if you do the interest only option.

PenFed Credit Union has been awesome for me with their lines (no affiliation). Up to 80% NOO, minimal fees, desktop appraisals in some cases and quick to process the loans.

You should be very excited about your position and good luck!

Thanks everyone sorry for the delayed response I am new to the site and couldn't find my post to view replies. I will definitely take the advice I'm going to look into a HELOC on my rental at a local credit union. I tried a few places and they wouldn't do it on an investment property.

I also have a home I purchased for $80K in 2011 that I live in that is currently valued around $250k that I only owe $53K on.  I’m considering trying to get as much cash as I can, but would prefer to wait for a dip in the market with all the economic indicators signaling a potential shift.  

Granted I've been thinking the stock market and real estate market has been overvalued for some time, and it keeps rising so maybe I'm incorrect. Just trying to prepare so I can gobble up some more investment properties when/if lending becomes more scarce and inventory becomes plentiful.

@Dave DeMarco thanks for the advice, so I guess I still am partially confused on the difference between the HELOC & Refinance that it would impact your ability to purchase 3 additional homes via HELOC. Is it because it costs less to HELOC? Or is it related to the way a HELOC is viewed vs the way a Refinance is viewed to potential future lenders?

My situation is I have 2 houses I purchased in 2011 one FHA for $95K and one with 20% down for $88K. I'd say the $95k property is worth 225K according to Zillow and I owe $73K on the mortgage. Have rented it for the last 8 years and it's a great property. The other I remodeled and live in, worth $250K-$275K I would guess, but I only owe $53K on that one.

In that situation would you try and HELOC the investment property first or both or how would you approach it? I'm working to understand the benefits of doing so, but also the long term impacts as I plan to rent out the home I live in eventually, but not sure of the best approach.

There are banks, usually local or regional banks, that will do HELOCS on non-owner occupied properties. Typically they don't go higher than 75% LTV. 95% of the time, a HELOC is the way to go- you typically don't get a better LTV with a cash out, and unless you know exactly what you are going to do with that money, the cash out refi will probably cost you more in the long run.

For me, there has to be a viable exit strategy to pay off the HELOC in less than 12 months, that frees up my line so I can do another deal and I also don't want to have a large balance on a variable rate indefinitely.

I have done a combo of both. I like the option a HELOC offers (yes the rate is variable and will continue to rise). The HELOC basically acts as a credit card with a huge limit.

Sometimes it's just easier to do a cash out refi and pay everything off immediately. You have to call and call and call but you will find local banks who will do HELOCs on investment property. PenFed offers great LTV and rates if you have up to 3 properties (but they can be a PITA so beware).

@Jesse Chambers  It depends on your goals. How much is enough cash flow for you and your family to live the life you want to live? You have to begin with the end in mind and work from there. If you haven’t mapped out a plan, do so. That should help you decide which property is better to tap. Also use BiggerPockets for help with all questions you have. There are agents, lawyers, CPA’s and battle tested investors of all styles here. The knowledge that the members here possess cannot be understated. 

In regards to the HELOC vs refi, the HELOC is going to be much less expensive than a refi. Thousands less. You also mentioned hoarding cash for a downturn. Tapping the equity now while the market is going up or at its peak is a wise play in my opinion. You have enough equity that you can buy property in a lot of markets for cash. That is a good thing. It gives you massive bargaining power (I was getting killed by cash buyers when I first started out) and it allows you to take out another HELOC on the property purchased and pay the original HELOC back. Buying this way also eliminates seasoning issues you may bump into also. With some refi's lenders want you to have owned the property for 6-12 months before they will lend to you which can slow your growth (forgive me if I'm stating things you already know). If you have purchased correctly, which you clearly have based on your current holdings, you will have 20-30% equity in a cash flowing, appreciating asset and have cash you can tap over and over again. Again, depends on your style and what your goals are.

BOTH ways work just fine based on your equity position. 

I’m truly excited for you and feel free to PM me 

Where can I read about interest deductions on "cash out refinance" or HELOC on a rental?

Basically I am trying to learn about this situation:

Say I bought a place for $200,000 and borrowed $140,000 and have paid that down to $100,000 now (and the place is worth over $400,000 now). I am a bit confused about what interest payments would be deductible if I borrowed more? Does depreciation affect it in any way (lets say in this example $50,000 in depreciation had already been taken).

Can I just borrow whatever amount someone will lend and deduct the interest?  So I could borrow/refinance say $200,000 more (bringing the outstanding mortgage to $300,000)?  Or is there some limit related to the original purchase price (or that price minus depreciation? - so $150,000)?

Is the situation different it I borrow an extra $40,000 to pay for upgrades/repairs (refinishing floor, repainting whole house, new fridge...) to the house?  Or what if I paid for upgrades out of my own cash but now want to reimburse myself (to increase my cash buffer)?

I have tried finding these details but have found it a bit difficult to find something definitive on how the rules work.

Originally posted by @Mary K. :

    @Peter T. 

My mortgage broker told me that nobody does HELOCs on NOO so glad to hear others are doing it. I have checking/savings at PenFed. What PITA factors come into play using them for a HELOC on NOO?

 I would recommend you call up and ask them questions like that, I can't speak for them. 

@Svyatoslav Popach predicting what the rate for a Line of Credit (LOC) on an investment property is pretty tough. In Texas, it's generally prime +2. So this might be a more regional type of thing. Actually FINDING a bank that can do LOCs on investment properties is pretty hard so you may only have 1 option sometimes. I've heard PenFed is used by a lot of investors on a national scale. I have not used them personally but if you are looking for specific rates in your state maybe try your state specific forum. Maybe some locals might add what they have been able to find out there. Hope that helps!

@Dave DeMarco thanks so much for your advice, it seems I need to do some goal setting, and evaluating the end game. I did have a question regarding paying off the HELOC with the next property...so are you saying you buy a property cash with the HELOC money, so it's paid in full. Then do you refinance that house and use that money to pay off the HELOC?

I am realizing I’m very green to the use of debt to increase my passive income. I’ve just always been a frugal saver and used that money, but now looking at it I’m beginning to realize there is potential for much more.

@Corby Goade thanks for your help. It seems I need to do some mapping and strategizing then on how to pay off the HELOC being it's a variable rate. Do you have any tips in that regard?

Would you buy another property cash with the HELOC and then refinance the cash property, and use those funds to pay off the HELOC?

I’m still working to learn the house hacks and various options available to me to increase my units and passive income.

@Jesse Chambers my only problem with a HELOC is yes it's like a credit card. But if you use all that available credit, your utilization will be 100%, and it hurts your credit score. I am posed with the same decision about our personal home. Have 100k in equity we want to use for investment purchase but we are trying to get our scores above 750. So we chose cash out refi. Going through the process now. Good luck!

@Jesse Chambers Yep, you've got the concept down. You use your HELOC to pay for a property and rehab and the goal is to get it to the point that you have increased the value by at least 25%. When you do that, you do a cash out refi and lock the property in at a fixed rate for 30 years and use the cash out refi to pay off your HELOC. It's that simple, at least in concept. The challenge, at least in my market, is finding a deal that will accommodate.

Feel free to let me know if you have other questions. 

I used Navy Federal Credit Union for my investment property HELOC. I was denied by PenFed because I had more than 4 or 5 loans. NFCU has the same loan policy, but they waived it in my case.

I'm currently at 100% utilization, and my credit score dropped by 20 points [my overall utilization is 10%].