I'm still learning the ins & outs of real estate investing and excited to get in to my first deal. I plan to use the equity I've built up in my primary residence to finance the deal. Now all I need is the deal! Easier said than done I know :)
Are you considering a cash out refinance with a possible HELOC?
Here is some info on cashing out.
The typical cash out financing is done after 6 months of owning the property, based on ARV and available for mortgages #1-4. Please see delayed financing for less than 6 months after closing.
On a primary residence you can pull out up to 80% LTV on a SFR and up to 75% LTV on 2-4 unit multi-families.
On an investment property; A SFR if you have #1-4 mortgages you can pull out up to 75% of the equity and a duplex is up to 70% equity, 3-4 units is 65% equity.
On an investment property; If you have #5-10 mortgages you can only pull out money in the first 6 months (delayed financing) that you own the property, if you didn't originally get a mortgage on the property. As long as the value is there (on a SFR 70% LTV and duplex 65% LTV) You can take out up to the purchase price plus closing costs on the property.
If you are willing to pay the fees and go through two closings.... You can take out private or hard money on free and clear properties #5-10 and do a rate and term refinance with conventional to pull money out on them.
PROPERTIES LISTED FOR SALE For a rate and term refinance transaction, the borrower must evidence that the listing has been cancelled, and must not have been listed for sale as of the date of the application. For a cash-out transaction, the borrower must provide evidence that the listing was cancelled at least six months prior to the date of application.
Cash Reserves Required For Other Properties Owned by Investor;
If the borrower has 1-4 mortgages, an additional two (2) months for every other SFR investment property and second home is required and additional six (6) months for every other 2-4 unit investment property and second home
If the borrower has 5-10 mortgages, An additional six (6) months for every other investment property and second home.
Thanks all for the welcome and great info Jerry! That's exactly the reason I'm here, to absorb some knowledge.
I'm primarily interested in a HELOC for the flexibility of having cash on hand when I find the deal. Then, I imagine I'll pull out the equity of the investment property to pay off and free up the HELOC funds.
Welcome. I'm new too. I'm in the process of studying for the RE salesman license and want to purchase a multi unit as a primary residence. Rent out the others to generate cash flow. Good luck with your journey.
> I'm primarily interested in a HELOC for the flexibility of having cash on hand when I find the deal. Then, I imagine I'll pull out the equity of the investment property to pay off and free up the HELOC funds.
That's one way to go, but you would have to wait/bet on appreciation of the investment property in order to do that. And investment property HELOCs aren't a lot of fun.
It may end up playing out like this...
Primary residence: owe $300k, worth $500k.
Open HELOC with $0 balance but $100k credit line.
Find investment property you like, listed at say $375k.
Draw upon HELOC to cover 25% down, closing costs, and a few repairs you want to do. You close on the investment property, but now you have this $100k HELOC that is either an ARM (which makes you nervous) or at an ugly fixed rate (which you don't like).
Now...
Primary: owe $300k on 1st, $100k on HELOC, worth $500k.
Investment property: owe $281k, worth $400k.
Even if you go to 75% LTV on the investment, that isn't enough to nuke that HELOC debt.
However you could refinance the primary, rolling 1st and HELOC into a new first lien at $400k and 80% LTV.
After you close on the investment property, make sure you don't immediately blow an amount of money left over that your lender will want to earmark (but not touch) as "6 months PITI reserves" on fixing it up. If you have a healthy 401k/IRA, your lender can earmark that counting it at 60% of value to "check the box," but really it isn't a horrible idea to have a healthy "oh crap" fund as someone that owns multiple pieces of real estate in any case.
Thanks for the tips Chris. It would be pretty scary to have a 1st mortgage on the investment and a balance on the heloc. My goal would be to purchase a property 100% with the heloc funds and use what's leftover or cash to do the repairs, forcing up the value of the property.
Regarding PITI funds, I would probably want more than 6 months earmarked depending on the condition and age of the property. A bad A/C would gobble that up quick.
Chris, In your experience what would be the maximum debt to income ratio (including all debts) that might be allowed in order to refinance an investment property with a 1st mortgage? Also how do rents play in to the income side of the ratio? I've heard that banks typically consider only 80% of rents as income.
