Silverlake Duplex - HELOC Refinance?

Question

In September 2021 my wife and I purchased the Duplex we were renting for the previous five years in Silverlake, Los Angeles. This was our first real estate purchase of any kind. We were living in the back house and the front house had a tenant paying almost market rates at the time of purchase. The tenant moved out early March, we made some minor updates, repainted and were able to have a new tenant in for April 1st with a rent increase to market rate for the new tenants. Both units are freestanding, 2br/2ba. All has been going well with the new tenants and the property, our monthly out of pocket is substantially less than what we were initially paying in rent.

When purchasing the property, we came up a little short of the required 20% deposit. Our mortgage broker was able to set up a HELOC to bridge the remaining $60K+/- that was required. At the time, the interest rate on the HELOC was 5.5% though now it's at 7.99%. The main mortgage is 30 year fixed at 3.1%.

We had a good relationship with the previous owners, bought under asking and probably under market without the threat of multiple offers from other buyers. The initial plan when we purchased the property in 2021 was to cash out refinance and pay of the HELOC though that opportunity passed us by fairly quickly with the interest rate increases.

Other than making the monthly payments to pay off the HELOC, is there any strategies we should be considering to clear or reduce the cost of the HELOC?

Thanks,

-Andy

Rick Albert · Answer

You could replace the HELOC with a new one. Some credit unions for example have promotional periods (mine is interest only and fixed rate for the first 5 years). The problem is you will be encountering this issue in the future, so you are just kicking can down the road so to speak.

It does depend on what your long term goals are with this property and future properties. If you want more cash flow sooner, focus on paying it off. Maybe with the refi'd HELOC, you could make extra payments to pay it off faster. Or if the plan is to build a portfolio, use the cash you would have spent and buy more properties, where the cash flow becomes a law of averages (one property does well, the other does, but it levels out). If you are of the younger mindset and have other full time jobs, it might make sense to focus on expanding.

Andrew Enness · Answer

@Rick Albert Thanks for your response and insight, really appreciate it. At minimum we'll start to look at other options to replace the HELOC through other Credit Unions to see what other rates we may be able to obtain.

Ideally, we would like to grow our portfolio into other properties and do this sooner rather than later. We're putting a lot of sweat equity and updates into the back unit now so that we could potentially rent it out and look at finding another property we could live in and house hack again in the coming years.

@Erik Browning Thanks for your response. Some more details below:

PP = 1.25M

Current Value = Maybe 1.375M? (the asking price in September 21 was 1.4M), Redfin has it at 1.53M?

Loan Terms: 80% First /15% Deposit / 5% HELOC

PITI = $5,657

Current Rent = $5K Per Month.

HELOC = $62,500 at 30 years, variable rate.

Andrew Enness · Answer

Thanks @Rick Albert. We're going to shop around for lower rates on the HELOC to see what we can do to reduce the interest rate. We've recently been contributing a portion of our monthly payments to now paying the principle so it's come down a few thousand dollars from the starting 62.5K to 60K balance. We just hate the thought of paying 8% interest if we don't have to be. We'd much rather be saving those dollars to go towards the next property. Appreciate your input.

Rick Albert · Answer

Then the name of the game is to keep as much cash as possible. When I did my recent HELOC, I did the stress test to see what the payments would be like worst case scenario and if I was comfortable with that risk.

Erik Browning · Answer

@Andrew Enness

Handful of questions to get a better picture of your scenario:

What was the purchase price back in Sept 2021?

What is the approximate value today?

What were the terms of the loan, including the piggyback? For Example 80/10/10

What's your current PITI?

What's your current rent?

The discussion around another HELOC is for sure an option, but like Rick mentioned you will still have to pay it off eventually - ideally before it adjusts again. I had a borrower last monthl lock into a 4% flat for 12 months before it adjusts.

Silverlake Duplex - HELOC Refinance?

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