With the current interest rate environment, I’m highly considering refinancing my current home to access cash to start adding real estate to my portfolio.
Rough numbers, my mortgage is raised by $200/month to get my hands on approximately $50k, with $30-40k equity still left in the house.
Where do I start with the $50k if this is my first property? Low priced single family home, multi unit?
I need your help!
MFR, @Chad Gilbreth . Best way to scale, lower per-unit cost, start to realize efficiencies of scale.
Unless you have a very high rate currently, it's worth considering a HELOC. Much lower fees, no interest until you actually deploy the capital. I think this flexibility is worth the slightly higher rate. Just make sure you're planning to use it for short-term financing.
@Jaysen Medhurst current rate is 4.125.
Can you expound upon some of the specifics in your post, specifically HELOC versus cash out refinancing comparison and a description of the first part of your response please?
What would you specifically recommend with either the HELOC or the cash to start adding real estate to the portfolio?
Okay, @Chad Gilbreth , that's a pretty good rate. Hard to justify a refi just to lower it.
- Advantages of HELOC are what I mentioned above.
- Advantages of refi are lower rate, longer term resulting in lower monthly payments. Better for long-term debt.
As far as MFR goes, it's really the best way to scale. Think about managing 30 SFRs vs. 1, 30-unit MFR. You'll save money on management, CapEx, professional fees, closing costs, the list goes on and on.
At the end of the day, it's not 30X harder to purchase a 30-unit complex than it is to buy 30 SFRs. More money, more due diligence, sure, but you could probably find and close on the complex in the same time it would take to find and close 2 or 3 SFRs.
The other big consideration is appreciation. Your SFR portfolio is only going appreciate as much as the market. With commercial MFR, you can force appreciation by improving NOI (increasing income, lowering expenses) or (depending on conditions) lowering cap rate through repositioning.
If you lower your SFR portfolio expenses by $10k, they're not worth any more money. You do that with a MFR at an 8% cap rate and you've created $125k of value.
I don't know how much capital you have access to, but I'd use that as a jumping-off point to start considering MFR, especially 5+.
Once you're 5+ units, you're no longer competing with the residential market, which can really distort pricing.