Buying my first rental.
Hi everyone!
Very new to this, reading lots of books on how to start up my portfolio.
Where I get stuck is how I should finance my first rental. I bought my own house a few years ago and now have quite a bit of equity in my house (thank you Nashville market).
I could buy a rental straight up using the equity from my house or I could get a business loan and use some of the equity of my house as the 20% down payment. Any advice what I should do?
Thanks!
Hi @Matthijs Pol, if I were you, I would do a cash-out refinance and use that new cash to put 20% down on rental properties. This strategy is very popular with my clients.
Even if the rate is higher, they use it as an arbitrage strategy.
Let me know if I can be of any assistance.
I would say your focus should change from trying to find financing to finding experienced investors. I'm at that stage now, i've found some experienced people locally that would love to share their experience when i'm looking at a potential deal and could also finance it.
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@Matthijs Pol - Despite interest rates being higher than they've been for a few years, I think most people on the forums would still advise you to use leverage (i.e., a loan) and to not buy the home with cash. This is not a good environment to be illiquid in. Whether or not you should do a cash-out refinance or a HELOC to tap into your home's equity will depend on your unique situation, how much money you need to borrow, your projections for the rental income of the new property, etc. The most challenging thing in the Nashville market is going to be finding a property that cash-flows enough to help you pay off your new debt. That's not to say it can't or is not being done though.
Quote from @Reid Chauvin:To add on to Reid's point, even though interest rates are higher then they've been in years they still are not that high. You can still get locked into a fixed mortgage for less then 6% and most of what I've been hearing is that they will not stop going up anytime soon. It's all about making your cash work for you as much as you can and I see that best used by leveraging it with loans or if you are buying cash consider BRRRRing so that you can pull that money back out and then some for the next.
@Matthijs Pol - Despite interest rates being higher than they've been for a few years, I think most people on the forums would still advise you to use leverage (i.e., a loan) and to not buy the home with cash. This is not a good environment to be illiquid in. Whether or not you should do a cash-out refinance or a HELOC to tap into your home's equity will depend on your unique situation, how much money you need to borrow, your projections for the rental income of the new property, etc. The most challenging thing in the Nashville market is going to be finding a property that cash-flows enough to help you pay off your new debt. That's not to say it can't or is not being done though.
Hey Matthijs! Congrats on looking at your first rental!! Glad to hear you are reading books, there is definitely so much to learn when investing. I am also in the Nashville market and am an investor myself and work with a lot of investors (realtor). My suggestion prior to using your equity or taking a loan would be to talk with some lenders and see what your rates would be right now on an investment. Some rates are making rentals harder to pull off depending what your goals are (cash flow, home value, etc) Then I would start looking at the property type/price ranges you are looking for and see what makes the most sense for you. Id love to get coffee or something and discuss with you.
Hey @Matthijs Pol!! and welcome to the BP community. There are a lot of ways you can go from there. I would look at how much it costs to use either source. So whichever avenue has fewer costs and less risk, use that form of payment and leverage it to purchase a property that will pay for all that debt you used and more!
Hey @Matthijs Pol! Sounds like you have a TON of options.
I am not sure how much you have looked into the BRRRR method, but having a phat HELOC puts you in a great position. You can purchase property cash, improve it and force appreciation, then get long term financing on the property after improvements are made. If done correctly, you could use the same line of credit to purchase many rentals!
Say you purchase a not so nice looking house for $180k, put $60k into it, and now it's worth $300k. You basically paid $240k for a home that's now worth $300k. If the bank gives you a mortgage for 80% of the value of the property after it's all fixed up, you can pull back out $240k (80% of $300k), pay off the line of credit to be used again, and you basically got the rental for free + $60k in equity. Obviously this is an ideal situation, and the property may or may not cashflow depending on a bunch of other factors, but that's the idea.
Your strategy will depend on your goals of course, but if I had access to a large enough line of credit this is what I'd be doing. Good luck!