Refinancing options on forever-home turned rental.

7 Replies

Hello BP. Somewhat of a newbie here and would definitely appreciate any insight.

My wife and I purchased a home in 2015 as our forever-home for $520K, current guestimated (zillow) at around $625K, with a balance of $430K. It was financed with 30y VA fixed. Started renting it out in early 2017 due to job transfer with a neg cash-flow of $100.00.

Even though we do like the area and we may decide to retire there (about 10 years away, 7 years till military retirement) we are more inclined to make our money work for us and aim to build a 5 rental property portfolio by 2027.  

Can anyone give me some recommendations of either:

1. Refi with conventional (since we do not reside in it = no VA option) to lower mortgage to establish positive cash flow?

2.  Refi and cash out if possible to leverage prospective deals?


Those are what I have as options with my limited experience.  Any thoughts on these options or any other proposed options would diffidently be welcome.  

Just a brief aside.  I have allotted 40K(after paying off some bills) to use towards prospective investment opportunities.  

Thank you in advance folks.  Looking forward to any guidance.

-Mike

Hey Michael. I am in a similar position and asked this question in a different forum. I'll quote some of the replys I received and found useful!

---

Originally posted by @Cody Land:

I own a paid-off SFH in Pensacola that cash flows $1100/mo. Home value approx 160k, 10yrs old. I am wanting to get a 2nd rental property in the near future. I have $30k in cash that I can put towards my next purchase. Curious to hear people's thoughts or experience on whether to:

1. Use my equity position to get a HELOC for next property then BRRRR.

2. Find a property to BRRRR with the $30k in cash and non-HELOC loans.

3. Some other strategy I haven't thought of.

Increasing my investment risk by taking out a HELOC on a paid-off property makes me a bit nervous and I would really appreciate the wisdom from someone that is or has been in a similar situation. Thank you in advance.


Originally posted by @Matt Jones:

@Cody Land

Helocs are a great option for flexibility because you can take out only what you need and pay it back as you can. The challenge with a heloc is that the rates can change on you and unless you plan on paying it off in full you will eventually need to convert it to long term debt. My preference, If I know I will be buying another investment property, is to pull out 75% equity through a cash out refinance at a good rate that I can lock in long term. That may have been what you meant by option 2 but I thought you meant to use non-heloc loans to purchase the new property rather than refi the one you already have. The reason I like to refi my existing property is that I can move faster, make stronger offers and get better deals with cash than I can with a nice downpayment and conventional loan. As far as increasing your risk, yes leverage will increase your risk but I believe it can be done in such a way as to maximize your returns without opening yourself up for a major catastrophe at the next market downturn. Currently my leverage strategy is to owe no more than 75% of LTV on any single property and keep my portfolio LTV at 60% or better. As my portfolio grows I will slowly shift to being more conservative since I will have more to lose. Finally, I set up most of my properties on a 20 year term, which meant I had to buy good enough deals to payoff in 20 years and still cash flow, so they will start paying off well before I hit retirement age.

Originally posted by @Stuart Grazier:

@Cody Land I don't think many lenders will do a HELOC on a non-owner occupied property (ie rental property). I've read in the BP forums that PenFed may do it, but I haven't personally had any experience with it. I'd recommend doing a cash-out refinance like @Matt Jones is suggesting. The rates are still really low right now and you can lock in a 30 year term conventional mortgage at 75% LTV, which is about the best use of "other people's money". There is very little risk in this strategy; keep the $30k of cash you have as a Reserve in case something happens and in the mean time you will have your renters paying your mortgage for you. Use other people's money (the bank) to go do your BRRRR. Rinse and repeat!

Originally posted by @Tom Murray:

@Cody Land, I'll add to @Stuart Grazier reply... I used PenFed to get a HELOC on a non-owner occupied 4-plex. They were easy to work with and offered competitive terms. The 4-plex is owned by two couples, and only one person (me) joined PenFed in order to qualify. We used that LOC for rehab costs on another project.


Working backwards, I've also had a HELOC against my primary residence for about 3 years. That HELOC - against my house - is what allowed me to get started in REI. I used NavyFed for the first 2.5 years, as their allowable LTV and max loan amounts had been the highest I could find, but I recently moved over to Chase for a better rate.


Either way - investment property or primary residence - I'm a huge fan of the power of HELOC to get some momentum in REI. And, in line with @Matt Jones suggestion, we have recently considered a cash out refi on our 4-plex in order to convert our PenFed HELOC to long term debt. However, the LTV limits prevent us from making that happen (best we're seeing for a cash out refi on investment property is about 65%, but our PenFed loan is at 80% CLTV), and we'd rather work through a minor cash flow impact today than settle for a long term (30 yr) cash flow crunch (of course planning to pay off HELOC before it converts to long term debt).

Good luck!

-Tom

Originally posted by @Michael Encoy :

Hello BP. Somewhat of a newbie here and would definitely appreciate any insight.

My wife and I purchased a home in 2015 as our forever-home for $520K, current guestimated (zillow) at around $625K, with a balance of $430K. It was financed with 30y VA fixed. Started renting it out in early 2017 due to job transfer with a neg cash-flow of $100.00.

Even though we do like the area and we may decide to retire there (about 10 years away, 7 years till military retirement) we are more inclined to make our money work for us and aim to build a 5 rental property portfolio by 2027.  

Can anyone give me some recommendations of either:

1. Refi with conventional (since we do not reside in it = no VA option) to lower mortgage to establish positive cash flow?

2.  Refi and cash out if possible to leverage prospective deals?


Those are what I have as options with my limited experience.  Any thoughts on these options or any other proposed options would diffidently be welcome.  

Just a brief aside.  I have allotted 40K(after paying off some bills) to use towards prospective investment opportunities.  

Thank you in advance folks.  Looking forward to any guidance.

-Mike

Hey Mike

Just refinance it to restore your VA eligibility. You should be able to get 75% loan to value. If your Zillow value holds (may not) you'll be able to get some cash out toward your next endeavor. Remember, you will not get full rental amount towards income (probably only 75%), so you have some negative cash flow to deal with.

Best of luck

Stephanie 

@Michael Encoy

Cash out financing will give you an LTV of 75% on a SFR rental and a 70% LTV on a MFR. so if this is a SFR than there is a little bit of cash to pull out.

The property is already cash flow negative though? My concern with a refinance or cash out refinance is that your rate will be higher and the property will be even more in the negative.

If you are wanting to use your VA again, though it may be worth it to refinance into conventional. I would take a look at where your rate is at now and what it will be if you just refinance it cashout.

@Cody Thank you for forwarding the info.  I'll definitely look at those options, but leaning towards refiing and cashing out.  Noticed you're from OH, we just sold our place in Kitsap and we definitely miss the PNW.  


@Stephanie  Thank you for your input.  I may go that route, but wouldn't I have an option not to limit the amount I take out to ensure I do not incur the neg cash flow?

@Jerry. Yes, currently my mortgage is just under $2800 and rent for $2700. WRT what you mentioned about my rate increasing if I went conventional. I think you are spot on. My current rate is 3.375% (VA). I don't see my rate decreasing. It may not be worth it if my rate hikes up considerably.

@Michael Encoy

Hi mike,

This might not be a response you want, but I would sell it and make good use of the tax free capital gain of your former personal home which you resided in for 2 of the last 5 years.

If it’s truly your forever home, buy it back once you return using the money it made you which you’ll have multiplied in the meanwhile.

I love houses and end up pretty attached to them, but I would come to resent a home if it was cash flowing a negative every month before cap ex. Plus tenants seem to wear out my duplexes fast compared to my personal home and I feel that I have some great tenants.

Good luck regardless of the path you take.

-Justin

@ Jerry I thought about that as well, but we lived in the house from Oct 2015-Jan 2017.  So we would not qualify for the tax free capital gain. 

Thank you for the reply.

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