Buying a 2nd income property- HELOC?

Question

Last year in April I bought an income property cabin in Big Bear Lake, Ca. I paid cash so I own it outright. It has been doing very well in rentals so I want to buy a 2nd one.

I can't pay all cash this time- so I was thinking of taking out a Home Equity Line of Credit against the first house. Would be the best way to get another $100k or so to buy the new house with?

If so- is there a good place to start? Just go to my bank? I have a Credit Union but there's is a variable interest rate over 30 years (No penalties for early payback- which is great) but I don't like the idea of a variable rate.

Would love to hear thoughts on HELOC as well as any other thoughts on taking out a $100k loan (I will pay around $75-$125k cash)

Kyle J. · Answer

The first option I'd look at is to just apply for a new conventional mortgage on the house you're going to buy because you'll generally get the best rate/term that way.

The second option I'd look at (if the first doesn't work for you for some reason) is to do a cash-out refi on your existing rental.  You can still get a low, fixed rate, long-term loan going this route which sounds like what you'll need if you're going to have this money tied up in the second rental for a while.

The third and last option I'd look at is to do a HELOC on your existing rental to buy your new one.  You could do this, but (as you know) you're going to have a variable rate and it'll probably be a little higher than a conventional fixed rate loan would be (not much though).

Also, HELOCs are typically only for a 10 year period (though you do have options to extend them past that), but who knows what your financial/credit situation will look like in 10 years.  Plus the variable could possibly be much higher then.

Personally, I like HELOCs for short term uses (i.e. flipping or buying a house cash that you intend to then refi and pull that money back out).  But fixed rate, long-term loans are usually better for buy and hold type rentals.

Mike R. · Answer

I plan on holding both of these properties long term. Not looking to flip- I made good money in year 1 on the first property so would like to expand out to 2 and see how that goes.

Skyler Smith · Answer

I would talk with local banks and credit unions. What's your holding period on the new property? The massive advantage you have with a HELOC is that there is no origination fee if you pay it off and then want to buy again. For flippers or buy and holders investing less than 2-3 years, this is huge. If you have no closing costs, you could buy-fix-sell or buy-fix-refinance over and over again with no closing costs!

If you know you're going to be holding it for 10+ years, you could talk to a *local* bank and see if their commercial lender could encumber the existing property as collateral to buy the new one and you might not have to put any money down at all. A cash out refi is not bad, but there are other options that can work for your situation as well.

Not everybody at the bank is going to know what a "portfolio" loan is, I've found that the commercial lender is usually the one to talk to. That or they know who to send you to.

Mike R. · Answer

House is worth about $225k or so right now and is 100% paid off.

I  make enough income on the one house to easily cover the new loan- so 2 incomes from the original and the new one would be no problem at all.

Mindy Jensen · Answer

@Mike R., I believe a HELOC is always a variable rate. And no prepayment penalty is great, but most mortgages also have no prepayment penalty. You can typically get 80% LTV in a refi. You didn't say how much the current property is worth. Would 80% be close enough to $100,000?

Or could you just get a mortgage on the second property? Lenders are going to look at your debt to income ratio, along with your debt to credit ratio. Can your current income support both loans?

Mike R. · Answer

Thanks- who would be the best person to talk to about options? Someone at a local bank? Or hire a real estate finance type person?

Jonathan Wilks · Answer

You could also look into just a cash out refinance, but it might be more beneficial to look numbers wise. If the property is cashflowing it might make more since to do that, and if the loan to value on both properties was 50% or less you should do pretty well. I would also recommend if you do that to get the lowest term financing and the shortest amortization you could. I believe doing that would create a pretty safe and healthy portfolio, and if you have any additional cashflow pay down the loan quicker and do it again.