Investor · San Antonio, TX · Member since 2021 · 4 posts · 4 votes
Hi everybody,
I would like to get opinions and recommendations from you on what to do next.
Currently finishing up a AirBnB. The property has no mortgage just paying for insurance/utilities. The plan is to pay off some personal debt, file a lawsuit, and start a new flip or buy n hold.
Would it be better to do a DSCR cash out refi and let the property pay itself off/cash flow.
or
Should try to go for a HELOC (if possible) to continue my plan?
If you plan on investing a HELOC is not the best choice for multiple reasons. They are good for the rainy day or the "what if factor" pretty much like a credit card. If you are going to be using if for buying more REI there can be some road blocks which can arise after application/appraisals. A HELOC is an open end mortgage again same as a credit card. They carry a credit risk and are viewed as a liability never as an asset or liquid reserves required when purchasing additional REI.
The other issue is at any time the HELOC can be closed or reduced if your credit score drops or your debt to income ratios increase. Just like a credit card the bank/lender who holds the heloc will monitor your credit. On a cash out refinance its tax free, and you keep it in your bank where its there when you need it without risk. It actually can be used as a qualifying asset and PITI reserves required for additional REI during underwriting.
Plus cash in hand is king where it can be used to put more earnest money down on a contract for an aggressive offer or down payment.
If you plan on investing a HELOC is not the best choice for multiple reasons. They are good for the rainy day or the "what if factor" pretty much like a credit card. If you are going to be using if for buying more REI there can be some road blocks which can arise after application/appraisals. A HELOC is an open end mortgage again same as a credit card. They carry a credit risk and are viewed as a liability never as an asset or liquid reserves required when purchasing additional REI.
The other issue is at any time the HELOC can be closed or reduced if your credit score drops or your debt to income ratios increase. Just like a credit card the bank/lender who holds the heloc will monitor your credit. On a cash out refinance its tax free, and you keep it in your bank where its there when you need it without risk. It actually can be used as a qualifying asset and PITI reserves required for additional REI during underwriting.
Plus cash in hand is king where it can be used to put more earnest money down on a contract for an aggressive offer or down payment.
I agree with Jason. Just closed a HELOC on a 2nd residence. Very difficult to get through underwriting since 99.9% of HELOC lenders only lend on primary residence. I hear PenFed credit uniion may lend HELOCs on rentals like yours with no debt. But rare.
Re DSCR lenders I've done 6 in last 2 yrs. Financeofamerica is the worst, so bad I reco no one ever use FofA!! Lendinghome now kiavi is good. Slightly a head of Kiavi is lendingone in FL. When I compare and rank its re the PIA and stupidness in the underwrigting PIA process. All lenders in all catagoriies may have similar terms with small +/-, what differents lenders in a space are their underwriting teams and processes. A bunch of lenders lend on purchase money for rentals, or cash out REFI but every lender will be very different re the pain in the but, length of time, hoops to jump to get closed. Some will even baiil on the loan and not fund leaving you high and dry especially if purchase money. Go with ok terms but BEST underwriters IMHO. You only find this out from 1st person referrals.
@Andrew Ibarra - Why is a conventional refinance not one of your options? I agree the HELOC will be extremely difficult to get on a rental property. The comparison, IMO, should be DSCR vs conventional loan. If you can go conventional you will most likely get a better combo of rate/closing costs and no prepayment penalty (PPP). DSCR loans come with PPP's ranging from 0-5 years. Do you want to be tied to a 8%-10% rate for multiple years?
The future of mortgage rates is a tough one to predict, and it looks bleak in this moment. That being said, the aggressive actions of the Fed should reign inflation in and its very possible that mortgage rates drop a year from now. 6, 12, 24 months - who knows. But, having the flexibility to refinance without a PPP into a lower rate in a year or so should not be overlooked.
Some lenders will want to see the property seasoned. If you are just finishing up to place as STR it might be hard to get anyone to lend. Having paid for investment property will generate more cash flow and reduce the risk, especially in this market. Hold the property for a few more months and get some income coming from STR and then approach local credit unions or banks and see what options they will give you. One thing to be careful of is to read all loan docs and term sheets. Some have prepayment escalation clauses thus if you refi once rates come down you will be paying a penalty if they have prepayment for 3-5 yrs.
Congrats on buying in all cash and getting your property rehabbed. You are in a good position so don't rush and find a vehicle that will make sense in your situation.