Refi to invest?

15 Replies

I have found a property that I would like to purchase as an investment. To get the funds to purchase the property, I plan on taking equity out of my primary residence. I am trying to decide if it is better to refi with cash out, or to get a HELOC. If I refi, my interest rate would go up, but I could also get rid of the PMI on this property.

Any advice would be greatly appreciated.

Thanks,

Ken

@Ken Cooper

Let's hit the numbers:

How much do you pay now for your mortgage?

How much will the new rental bring in?

How much will your money cost you if you refi vs. HELOC?

Will dropping your PMI actually drop your payments on the primary residence portion of the mortgage despite the interest rate going up?

Also, can the bank call your HELOC at any time?

@Aaron montague

Mortgage is 2371 now

If I rented out the new property long term 500 cash flow a month more if I used it as a vacation rental.

I don't have the refi vs HELOC numbers information of me, but I will make sure to compare.

No, the payment would not go down, it would stay basically the same. My thought was that I would be able to write off the interest, which I cannot do with the PMI.

Thank you for giving me some more to think about.

Ken

@Shawn Thom

Good question. I did not know they could do that ( new to this) I will make sure to ask that question.

Thanks,

Ken

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Raymond

@Ken Cooper

Your math problem is fun. It adds an element I don't usually see here on BP.

You mention $500 month in cash flow for the rental. Is that $500/month net profit or revenue? I ask because the first question for any investment is: Is it worth it?

If you'd like to put the numbers up here, I'll tell you what I'd pay for the place. I look at monthly rent against:

Taxes

Sewer and Water

Trash

Heat/Utilities

HOA

Cap Ex and Ops

Insurance

Mgmt Fee - as a % (general consensus here on BP is 10%. include it even if you think you are going to self manage)

Vacancy- as a %. 8% represents 1 vacant month/unit/year

I just refinanced my personal residence to buy a rehab/resale property. Unsure if you are buying a rehab, but the HELOC will have loan to value (LTV) restrictions that may preculde the full purchase of the second proerty (and associated rehab costs)...

My lender set me up with a portfolio "blanket" loan where they loan 80%LTV on the combined appraisal value of both properties (and roll in the construction costs seperately). The bad part about a vehicle like this is that it is presented as a 1/1 ARM...which is motivation for getting the second property rehabbed and sold...I think you have lots of options...some more detail about what you are trying to accomplish would be helpful.

I would do a refi and lock in a 30 yr fixed rate while the rates are still low. HELOCS are typically adjustable.

@Aaron Montague

Taxes are listed as $383

HOA is 315

I believe trash is included in the HOA as is insurance for the building, it is a condo. I will still need to get a policy to cover myself which I have not looked into yet.

Utilities will be put into the tenants name

There is onsite management which charges 10%

Rent is 1,200/m

It is a fully furnished 2/2, 985 sqft

You are right, the first question is is it worth it.

Thanks for your help,

Ken

@Brandon Sturgill

Thanks for the input Brandon,

This is a buy and hold situation, so a 1/1 ARM probably would not work here. It is a condo on the Gulf Coast that is I could rent out long term, or as a vacation rental.

Typically HELOC's on primary residences have the below characteristics:

- .50 to 2.50% fixed margin + Prime rate which is 3.25% currently for primary residence (more for business or investment properties)

- Max rate 18% - depends on your laws in your state but in CA its typically max 18%

- variable/adjustable month to month so its not like ARM's which adjust semi annually or annually these adjust month to month or whenever Prime adjusts. Prime has been 3.25% since 2009.

- If they are offering an interest only HELOC - home equity line of credit the monthly payment formula is usually the average daily balance during the month X Interest rate /12 = interest only payment per month

- some HELOC's require you to pay principal and interest so you may want to ask your bank how their monthly payment is factored if you're monthly payment is 1% of the balance out standing (Navy Fed CU) on a 100,000 HELOC then you'll be payming 1000 per month but if interest was only 4.5% annually then your break down would be:

1000 payment (375 interest, 625 principal)

- terms on helocs can usually be changed at any time there are clauses on the mortgage note that state (in my experience) that the lender reserves the right to modify the HELOC at any time so you may want to be careful. This may vary from state to state or bank to bank as well.

I've known home owners who saw that the market was crashing in 2008/2009 and maxed out their existing lines of credit because they feared that the banks would freeze them. Months later a lot of borrowers that came to me did have their HELOC"s frozen or modified downwards since the collateral value that backed the loan was rapidly diminishing.

@Ken Cooper

Are those HOA and tax numbers per month or per year? I hope they are per year. If they are per month, this is not a viable rental. Even at a cost of $0, it wouldn't meet my minimums for investment ($150/month cash flow AND 15% cash on cash return) At $0 cost, it cash flows $77/month and gets 17.6% Cash on Cash.

If HOA is monthly, don't buy it. You'll never make any money. It might look like you are for a while, then you'll have to replace a water heater or furnace and poof, all the profits are gone.

If both are yearly. Then this would be a decent buy at $95k in my book.

If the $383 tax number is monthly, I'd pay $43,500 for this place.

Both yearly against $1200/month in rent:

Mortgage Rate 5.00%
Length of Mortgage in years 30
Monthly Mortgage payment $407.98
Taxes $31.92
Sewer and Water $-
Trash $-
Heat/Utilities $-
HOA $26.25
Cap Ex and Ops $150.00
Insurance $58.33
Mgmt Fee $120.00
Vacancy $96.00
Total Expenses $890.48
Total Revenue $1,200.00
Cashflow/month $309.52
Cashflow/year $3,714.19
Cash on Cash Return 15.16%

Taxes are monthly, HOA is yearly against $1200/month in rent:
Mortgage Rate 5.00%
Length of Mortgage in years 30
Monthly Mortgage payment$ 186.81

Taxes $383.33
Sewer and Water $-
Trash $-
Heat/Utilities $-
HOA $26.25
Cap Ex and Ops $150.00
Insurance $58.33
Mgmt Fee $120.00
Vacancy $96.00
Total Expenses$1,020.73
Total Revenue $1,200.00
Cashflow/month $179.2
Cashflow/year $2,151.23
Cash on Cash Return 15.15%

@Aaron Montague

The tax is yearly, and the HOA monthly.

Thank you very much for looking at it for me. Sadly I got a call this morning that someone else scooped it up before I could. Being new at this, it was a great learning experience. They do have other units in this complex available and I may look into one of those.

Just so you know the asking price was 49,997

When I find another one I would like to run it by you if you don't mind.

Thanks again,

Ken

@Albert Bui

Thank you for the great info from some one who does this for a living. You brought to light a few things that I had not thought of.

Ken

@Ken Cooper

I tend to view HOA fees as slightly north of useless. While it is nice to have your 8 sq feet of lawn mowed and someone else pay for the insurance on the roof. I know I could get all of those things for quite a bit less than the total HOA fee.

Please bring all deals here to BP. Personally I love the analysis portion and seeing what is going on in other parts of the country.

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