What financing option would be best for first investment rental?

6 Replies

I'm interested in buying my first investment rental property. Looking at small multi-family properties. I'm wondering what would be my best route for financing on my first property. Should I go with a HELOC, Cash Out Refi, Conventional, or some other option out there?

If it is 4 units or less, most likely conventional. So you have no investment properties you own currently. To do the HELOC or cash-out refi, do you own a primary residence? And if you do, does it have enough equity? Some lenders would let HELOCs go up to 85% loan-to-value. But mostly likely its 80% for HELOC and Cash out refi. And even if you did that, would the proceeds you pull out be enough for the whole purchase of this new investment? If not, then it may be just to fund your down payment. Conventional investment would require 25% down. But you may be able to get FHA with 3.5% or less if the home meets certain conditions. Speak to a lender or mortgage broker and double check your debt-to-income ratios to make sure you qualify.

Originally posted by @Charles Situ :

If it is 4 units or less, most likely conventional. So you have no investment properties you own currently. To do the HELOC or cash-out refi, do you own a primary residence? And if you do, does it have enough equity? Some lenders would let HELOCs go up to 85% loan-to-value. But mostly likely its 80% for HELOC and Cash out refi. And even if you did that, would the proceeds you pull out be enough for the whole purchase of this new investment? If not, then it may be just to fund your down payment. Conventional investment would require 25% down. But you may be able to get FHA with 3.5% or less if the home meets certain conditions. Speak to a lender or mortgage broker and double check your debt-to-income ratios to make sure you qualify.

My primary residence is currently valued at $253,000. I owe $150,000. I’m more so looking to make just the down payment on my first investment property and most likely just the down payment on future investment properties. 

 

@Jason Hudson While HELOC are generally for short-term purposes, people have to used it to purchase properties---but mostly so they can act like an all-cash investor. Nonetheless, with HELOC the closing costs are much lower (appraisal + recording), which likely around $750. There are also lenders giving introductory low rates for HELOCs--I seen 2.40% for two years and 3 3/8% afterwards. HELOCs also gives you the flexibility to pay it back without late payment penalties. Cash out refi has a higher closing cost of $3-4K. But make sure you calculate theses into your DTI ratio. Also I don't know what kind of rates you have on your existing loan (where you have $150K left). A HELOC will keep that rate intact. But if you have a very low rate, the Cash Out refi will replace your existing loan with a new larger mortgage with new market rates.

So I would recommend talking to a lender first to see what they would qualify you for. Since you are a new investor and show no history of rental income you may not be able to use rental income to offset the new mortgage and expenses. So talking to them first will let you know where your buying power is. If you only qualify for a new purchase price of $250,000 with 25% down then you may not need to take out as much cash unless you plan on having that for other purposes. 

Also make sure you are accounting for closing costs as well as reserves when looking at how much you need to have readily available when you purchase. 

Originally posted by @Charles Situ :

@Jason Hudson While HELOC are generally for short-term purposes, people have to used it to purchase properties---but mostly so they can act like an all-cash investor. Nonetheless, with HELOC the closing costs are much lower (appraisal + recording), which likely around $750. There are also lenders giving introductory low rates for HELOCs--I seen 2.40% for two years and 3 3/8% afterwards. HELOCs also gives you the flexibility to pay it back without late payment penalties. Cash out refi has a higher closing cost of $3-4K. But make sure you calculate theses into your DTI ratio. Also I don't know what kind of rates you have on your existing loan (where you have $150K left). A HELOC will keep that rate intact. But if you have a very low rate, the Cash Out refi will replace your existing loan with a new larger mortgage with new market rates.

My current interest rate is 4.5% on my primary residence due to buying through a first time home buyers program 5 years ago. So it seems like the cash out refi would make more sense because the interest rate would be lowered.