Should I get a mortgage on the rental I own outright?

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Should I get a mortgage on the rental I own outright?

Nick Brubaker
Decatur, GA · Member since 2015 · 423 posts · 53 votes

Dear wise real estate investors,

I am small time.  Just own one rental property (outright), which is worth about $160k.  I am wondering if I should take out a mortgage on it.  Here are my considerations:

I will be leaving my current job in the next couple months and pursuing a career switch, which could take anywhere from 3 to 8 months (maybe more). I have enough funds available on the side to finance this transition for about 5 or 6 months assuming no surprise expenses. If I do need to tap into more money I have several years of Roth IRA contributions, which I could draw from (obviously not ideal).

An alternative would be getting a mortgage for the rental property now while I am still in my job.  This could be sensible in that even though I have great credit and a good amount of savings/assets it might be more challenging to get such a loan during the transition or after starting the new job.  I might have need to utilize these funds for other reasons in the next year or 2 as well - if other investment opportunities arise, if we move into a bigger house, if I decide to go the self-employment/small business route.  The downside to this would of course be that I would now be paying for closing costs and interest for this money - an expense which I would not have otherwise.  Because I am wary of the stock market and real estate market these days, a lot of this money would be somewhat sitting in the short term and the interest payments would only be costs that I didn't have previously.  That said if it gives me more freedom to make the right career choices or it allows me to act on investment opportunities in the next couple years, maybe it will have been worthing eating additional expenses for the first several months.  

What do you all think? Attempt to transition to a new job as quickly as possible though possibly having to dip into my Roth IRA, but hopefully still having the option of taking out a mortgage once I secure a new job being that my credit score and other factors are strong. Or avoid the option of dipping into my Roth IRA, make sure I can get a loan while I can, and give myself the freedom and funds to take the right opportunities in the coming months though having to eat the costs.

What do you all think?  Thanks!

Nick

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Kevin Sobilo
Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
7y

@Nick Brubaker, have you considered a HELOC? (Home Equity Line Of Credit)

A line of credit would give you the security you want without having to make payments or be charged interest unless you actually need to withdraw money.

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  • Nick GiulioniPro Member
    Rental Property Investor · Carmel, IN · Member since 2016 · 1k+ posts · 615 votes
    7y

    The real question is, what are your goals? No one here can answer until you know what you are working towards. 

    1Reply
  • Nick Brubaker
    OP
    Decatur, GA · Member since 2015 · 423 posts · 53 votes
    7y

    Thanks Nick.  My goal right now is a successful transition to a new job, but I want to make sure I am making the right financial decisions in that process.  Does anyone else have insight?

    Thanks!

    0Reply
  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    7y

    @Nick Brubaker, have you considered a HELOC? (Home Equity Line Of Credit)

    A line of credit would give you the security you want without having to make payments or be charged interest unless you actually need to withdraw money.

    6Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y

    i would certainly consider putting a long term fixed rate resi mortgage on a rental prior to a career/job transition.  The only downside really is the refi costs. You can always pay it off once settled if you hate having the mortgage.

    Refinancing now will give you options.  Your w2 will allow you to refi.  I hate debt as much as anyone on here, but having more options is better than less. Plus, rates are down.

    Maybe go to a direct lender like a community bank to reduce origination fees and costs.  Good luck with your transition, Nick.  Exciting!

    4Reply
  • Nick Brubaker
    OP
    Decatur, GA · Member since 2015 · 423 posts · 53 votes
    7y

    @Kevin Sobilo Hmm. I haven't considered that and I'm wondering why. Can HELOCs be taken out on a investment property owned through my LLC. Are there downsides that might explain why I haven't even considered the option? Maybe higher rates? Thanks!

    0Reply
  • Nick Brubaker
    OP
    Decatur, GA · Member since 2015 · 423 posts · 53 votes
    7y

    Thank you@Steve Vaughan!!

    1Reply
  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    7y

    @Nick Brubaker, there are lines of credit for investment properties held within LLCs. Look to small community banks for this type of financing.

    The rates on all financing for investment properties is a little higher than owner occupied, but if you never need this money, you wouldn't be paying the interest anyways. It sounds like your primary goal is financial security during this transitional period. I think something like this would achieve that.

    2Reply
  • Nick Brubaker
    OP
    Decatur, GA · Member since 2015 · 423 posts · 53 votes
    7y

    Thank you @Kevin Sobilo!  Are there closing costs on HELOs?  I wonder why someone would choose a regular refinance over HELOs.  I guess only to reduce a rate?

    0Reply
  • Kevin Sobilo
    Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
    7y

    @Nick Brubaker, I haven't done a HELOC on an investment property YET. I have talked to a lender about it though. So, I plan to do one this year.

    The devil is in the details, but with a HELOC I think you will typically find a short repayment period maybe 10 years. Also, I suspect that there would not be a rate lock period. Most commercial mortgages are adjustable rate, but have an initial period of maybe 3-5 years where the rate is locked. I think (but not sure) that it is more common for a HELOC's rate to just float with no lock period.

    When you talk to lenders, check into those sorts of details. Each lender may offer a loan product that is slightly different.

    0Reply
  • Nick Brubaker
    OP
    Decatur, GA · Member since 2015 · 423 posts · 53 votes
    7y

    Thank you @Kevin Sobilo! 

    Anyone else have thoughts on the best strategy here?

    1Reply
  • Kevin S.
    Accountant · Tulsa, OK · Member since 2018 · 312 posts · 349 votes
    7y

    @Nick Brubaker I know you mentioned having a Roth IRA, but do you also have 401k contributions from you're current employer? Be prepared for several "if" statements: if you have a 401k, and if you transfer it over to your new employer (assuming they have a 401k plan as well), and if their 401k plan allows for loans, then you can take up to 50% of your vested balance or $50k (whichever is the smaller amount) as a loan from the 401k. The benefit here is that, while you're paying interest on that loan, you're paying it to yourself and the fees for 401k loans are typically very low ($100-$200 depending on the plan and vendor)

    1Reply
  • Nick Brubaker
    OP
    Decatur, GA · Member since 2015 · 423 posts · 53 votes
    7y

    Thanks @Kevin S..  Sadly I do not have a 401k.  

    0Reply
  • Brian Ellis
    Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes
    7y

    If I could start over, I would take a refinance over a HELOC. Its tough watching that interest only payment climb every month. My plan was to pay it off quickly, but that's just not the case anymore.

    I also planned on buying an investment property right away though. What I didn't realize, was it would happen immediately. Looking back, I would have gladly paid the closing costs.

    If you are going to sit on a HELOC, just remember that its prime plus one on investment properties.

    3Reply
  • Erik W.
    Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
    7y

    @Nick Brubaker, I know you said your goal is to "transition to a new job", but other than that, you're being pretty vague:

    "pursuing a career switch....3 - 8 months (maybe more)", 

    more investment opportunities arising....

    maybe a new personal house....

    "maybe the self-employment small business route..."

    You've got a LOT of ideas swimming around in your head, and none of them are small or simple.  None of them are specific either.  Changing jobs, homes, and starting a business are all rated as some of the most stressful situations one can put a person in.  Any ONE problem in one area can affect others profoundly.  I'd get a more concrete plan in place first before doing anything else.  

    For example, if you had said you had 5 years of experience as a construction site project manager and were looking to go into building homes for owner-occupied residential real estate and needed some start up and living capital...I'd feel a lot more confident like you have on vision of what the future looks like.  As of now, what is it you really want to do....specifically?'

    Going into debt and siphoning off your hard-earned retirement savings shouldn't even be discussed until you have a clear purpose and reason for doing either one.  Taking out a loan because today you have a W-2 job and tomorrow you may not strikes me as very short-sighted and a recipe for disaster.

    First find your 'WHAT', then figure out the 'HOW'.

    4Reply
  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    7y

    @Nick Brubaker

    Refi: Advantage-lower longterm fixed rate, disadvantage you begin paying the interest immediately.

    Heloc: Advantage-you don’t pay any interest until you use it and you can often can choose an interest only payment option, you can use it over and over if you pay it down/off like a credit card, disadvantage is a higher variable interest rate.

    Refi is preferable if the money being accessed is for longterm purposes (ie buy/hold) and you plan to purchase another investment soon whereas a Heloc is preferable for short-term use (flip, rehab, etc.) and/or you want the ability to pull the trigger in the perhaps distant future if/when a deal presents itself.

    1Reply
  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    7y

    @Brian Ellis so you used the Heloc for buy/hold?

    0Reply
  • Jeff Small
    Investor · Sewell, NJ · Member since 2016 · 68 posts · 48 votes
    7y

    @Nick Isabel a heloc on an LLC property. They made me sign personally also. This works for me.

    0Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    What's the end game and how does the mortgage help you get there?

    0Reply
  • Brian Ellis
    Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Brian G.:

    @Brian Ellis so you used the Heloc for buy/hold?

    I did. My plan was to renovate and refinance. But the appraisal came in too low after it was renovated and rented out. It didn't make sense to cash out. Although it has strong cash flow, and secured equity, I still have a large balance on my HELOC. The only way to pay that off is slowly with my savings.

    0Reply
  • Nick Brubaker
    OP
    Decatur, GA · Member since 2015 · 423 posts · 53 votes
    7y

    Thank you everyone.  Here is some more clarity on my plans:

    I expect to be in between jobs for 4 to 9 months including both retraining and securing a new job (W-2).  I would say we are $15,000 short in financing that.  

    In about 2 years from now we are hoping to buy a slightly bigger house while keeping our 2/1 as a rental. While we do have a good amount of savings to put toward this future down payment - most of it is in our Roth IRA accounts, which I'd like to avoid drawing from.

    A couple follow-up questions:

    Is it pretty safe to expect interest rates to continue to rise in the next few years?

    Should I consider taking a second mortgage on our primary residence rather than financing the rental property as rates might be lower?

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y

    @Nick Brubaker deductibility of the loan follows use, so you would not be able to deduct any mortgage interest or closing costs from the loan against rental income. Taking the loan against the rental property will seriously cut into cash flow and gives you no tax benefit, so it is not a good long term strategy. 

    Since you are only looking for $15,000 short term, have you considered looking for a credit card with 0% interest? Just do a Google search and there are offers of 0% that go as far as 15 months. 

    I never suggest credit cards, but in this case I think it has value. You will be motivated to keep the expenses minimal and to pay it off before the introductory rate expires. If you take out cash from a rental property, it is really easy to just see all that cash and spend it. 

    2Reply
  • Taylor Chiu
    Real Estate Agent · Salt Lake City, UT · Member since 2014 · 473 posts · 230 votes
    7y

    @Nick Brubaker

    Would you be using the funds from a refi for personal use? Or further investing? If for personal use, I would go with the refi over a heloc, due to the fixed lower rate.

    If for investing, especially BRRRR's, I usually lean towards a heloc.

    If you got a second lien on your primary, would that be enough to fund what you are looking for?

    1Reply
  • Nick Brubaker
    OP
    Decatur, GA · Member since 2015 · 423 posts · 53 votes
    7y
    Originally posted by @Joe Splitrock:

    @Nick Brubaker deductibility of the loan follows use, so you would not be able to deduct any mortgage interest or closing costs from the loan against rental income. Taking the loan against the rental property will seriously cut into cash flow and gives you no tax benefit, so it is not a good long term strategy. 

    Since you are only looking for $15,000 short term, have you considered looking for a credit card with 0% interest? Just do a Google search and there are offers of 0% that go as far as 15 months. 

    I never suggest credit cards, but in this case I think it has value. You will be motivated to keep the expenses minimal and to pay it off before the introductory rate expires. If you take out cash from a rental property, it is really easy to just see all that cash and spend it. 

     Thanks Joe.  You're saying I would not be able to deduct the interest on this loan even though it is a mortgage on my rental property which is generating income?

    Thanks for the tip about the credit card.  The only problem is though that I might not be for another 2 years or so before I can pull this money out of the rental to apply toward another investment and interest rates might be a good bit higher then?

    0Reply
  • Nick Brubaker
    OP
    Decatur, GA · Member since 2015 · 423 posts · 53 votes
    7y
    Originally posted by @Taylor Chiu:

    @Nick Brubaker

    Would you be using the funds from a refi for personal use? Or further investing? If for personal use, I would go with the refi over a heloc, due to the fixed lower rate.

    If for investing, especially BRRRR's, I usually lean towards a heloc.

    If you got a second lien on your primary, would that be enough to fund what you are looking for?

    Thanks Taylor.  I would use a small portion of the funds in the short term during this transition and the large share would be ear marked for a larger primary residence - renting out our current residence.  

    0Reply
  • Taylor Chiu
    Real Estate Agent · Salt Lake City, UT · Member since 2014 · 473 posts · 230 votes
    7y

    I see, in that case I would go with a refi over a HELOC. Hard to say whether getting a second lien on your primary or a first lien on your rental would be preferrable...

    1Reply
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