Equity Stripping: Heloc vs Mortgage

7 Replies

I'm going to be purchasing my first rental properties in the next couple months with hard money loans. I would like to pull equity out soon after to pay back the loans and lower my monthly debt payments. I know that 2 of the most common methods for this are mortgages and helocs. 

My question is this: How soon are banks/lenders willing to offer these services? Are these available on any properties I own or do they typically need a "seasoning" period of a certain amount of time before I can pull equity out of a property? 

Originally posted by @Ryan Cunningham :

I'm going to be purchasing my first rental properties in the next couple months with hard money loans. I would like to pull equity out soon after to pay back the loans and lower my monthly debt payments. I know that 2 of the most common methods for this are mortgages and helocs. 

My question is this: How soon are banks/lenders willing to offer these services? Are these available on any properties I own or do they typically need a "seasoning" period of a certain amount of time before I can pull equity out of a property? 

 Why are you buying first with a hard money loan?

If you are rehabbing, there is a 6 month seasoning on the ARV

Gonna be buying turnkey. So I won't be doing rehabbing personally but the property will likely get some rehab. I guess it would depend then if the rehab was done before or after I purchased? 

Already have the hard money accessible to me and it saves me the hassle of applying for more traditional financing. 

@Ryan Cunningham thanks for the post here.  So if you buy the property with a loan, the lender (the hard money lender in this case) will place their lien on the deed.  This is important to understand because your next step is to refinance that loan.  So the new lender won't be giving you the money to pay back the hard money lender, they will be cutting that check to the hard money lender themselves.

I say all of this because we now need to know "how much will your new lender's Loan To Value (LTV) will be". Hang tight with me when we follow the numbers:

  1. You need to know your After Repair Value (ARV)
  2. You need to know what your total acquisition costs will be
  3. You need to know what your total renovation costs will be
  4. You need to know what your closing costs with your new lender will be
  5. You need to know what your new lender's LTV will be

So if you buy a home for $50k, put $30k in renovations, have $5k in costs and the home is worth $100k...then your total acquisition costs are $85k.

If your next lender will lend 80% LTV and have $5k in costs, then that means you will need about $10,000 out of your own pocket to refinance!

And please understand the numbers are not important but the concept of those numbers is.  

Likewise, know that a "cash out" loan (where you actually receive cash) usually has a LOWER LTV than a "rate and term" loan (meaning, they just pay off the loan on the deed).

I would highly encourage you to be prequalified ahead of time so you know how to plan.

But do feel free to tag me and ask any additional questions.  Thanks!

Originally posted by @Andrew Postell :

@Ryan Cunningham thanks for the post here.  So if you buy the property with a loan, the lender (the hard money lender in this case) will place their lien on the deed.  This is important to understand because your next step is to refinance that loan.  So the new lender won't be giving you the money to pay back the hard money lender, they will be cutting that check to the hard money lender themselves.

I say all of this because we now need to know "how much will your new lender's Loan To Value (LTV) will be". Hang tight with me when we follow the numbers:

  1. You need to know your After Repair Value (ARV)
  2. You need to know what your total acquisition costs will be
  3. You need to know what your total renovation costs will be
  4. You need to know what your closing costs with your new lender will be
  5. You need to know what your new lender's LTV will be

So if you buy a home for $50k, put $30k in renovations, have $5k in costs and the home is worth $100k...then your total acquisition costs are $85k.

If your next lender will lend 80% LTV and have $5k in costs, then that means you will need about $10,000 out of your own pocket to refinance!

And please understand the numbers are not important but the concept of those numbers is.  

Likewise, know that a "cash out" loan (where you actually receive cash) usually has a LOWER LTV than a "rate and term" loan (meaning, they just pay off the loan on the deed).

I would highly encourage you to be prequalified ahead of time so you know how to plan.

But do feel free to tag me and ask any additional questions.  Thanks!

Thank you for all of the awesome info. My financing is going to be private through someone I know and not a professional HML, so I am essentially purchasing the property in cash and if I refinance, as far as the bank would be concerned, I would be 100% owner. I have a lot of flexibility on the repayment of the original money borrowed and so am not so worried about that portion of it.

My question is more so about taking the equity out and either using it to look for more properties or paying back my lender. Obviously I want to do it prudently and avoid newbie mistakes. You've already given me something to think about; I totally didn't think about paying twice for the closing costs! 

So I guess an additional question would be on the difference between HELOC and mortgage. Are HELOCs going to only offer the same 75-80% that mortgages typically offer or can I take advantage of the full equity if the bank sees me as a fully paid off owner?

HELOC will have higher interest rate, for practical purposes think of it as a credit card secured by your house.

Mortage will have closing costs, but lower interest and likely longer terms. Unlike the HELOC it's a one time thing... as in once you pay it off it's done.

HELOC could make sense if you were going to buy house cash (HELOC funds), cash out refi that house (new mortgage), then pay off HELOC............ rinse/repeat till you are out of money or the bank stops lending. 

Mortage makes more sense if you just want to get the money out and have a simple long term play. You will have to pay more in closing costs... added with the HML that could be a lot.

If you are just repaying the loan, then you can refinance immediately. If you want to take the ARV after rehab into considerations, it generally takes 6 - 12 months to season the property before a bank will do a cash out.

As others have stated, you are going to get hit with a lot of fees buying this way vs. just going thru conventional financing.

@Ryan Cunningham I still need to defer to knowing more information again.  Without knowing the interest and terms that your private lender is giving you it would be hard to advise you on whether you should pay them back or not.  I have seen many private deals that require no payments and are only to be paid back when the property sells.  So without knowing the terms and conditions to your private loan it might be hard to know what direction to go in.

I would say that if you are to buy with "cash" that you actually shouldn't buy with cash but to rather structure the purchase as a mortgage.  I highlight the reasons in the post I wrote HERE.

Someone above actually mentioned some of the restrictions to buying with "cash" too buy my article not only addresses thought but shows you how to receive a higher amount back with no waiting.

If you feel comfortable sharing the details of your private loan I can offer more advice.  Feel free to tag me with any other questions.  Thanks!