Down Payment Options (HELOC/Refi)?

Question

I am a Real Estate agent in the DFW area. We are wanting to begin our investment portfolio using the BRRRR method or via new construction. However, we need assistance in figuring out where the down payment will come from. Here is our situation.

We have two homes, our primary & a secondary at the lake we just renovated. We put both of these on a 10 yr mortgage at 2.35% interest. I was able to save enough money for a 10% down payment along with cash to renovate the lake house. However, real estate has slowed its pace and I'm not making hand over fist like I was last year, so we need to figure out where a 20% down payment & closing costs will come from. We have 5 months of savings to cover existing bills. We are finishing the furnishing stage of the secondary lake home so we can begin AirBnb to generate some cash flow.

I talked to our local bank regarding a HELOC on our primary home that we have about $400K equity in ($750K value), but because we took out 10 yr mortgages, our DTI is too high to be approved for $150K HELOC. Is my only option to refi one of my mortgages to a 30 year or is there another option?

I appreciate your time!

Mary Eubanks · Answer

Very helpful thanks so much!!

Harrison Sharp · Answer

This isn't an ideal time to get to bet into a BRRRR with rates increasing and the slow down in prices. If I were in your position I would get your lake house booked and stabilized before you take on a BRRRR and wait for things to stabilize in the next 6-12 months in the housing market and interest rate environment. The deals will still be there and 5 months isn't as much in reserves as you think with two houses on 10 year notes if things get ugly. If you're itching to get into something asap then 30 year am on the primary with a cash out would be the best way to do it while decreasing your lifestyle. You can also utilize hard money.

Harrison Sharp · Answer

I would not refi out of that rate right now, for your scenario based on the limited info i would try and go HELOC

Sean Beksinski · Answer

HELOC is 100% the way to go.

Mary Eubanks · Answer

Gotcha. Would 20% down & paying rehab costs out of pocket work for a BRRRR? Or do I need a larger amount down?Thanks so much for your help!

Nicholas L. · Answer

@Mary Eubanks you're right that a BRRRR and a flip are similar. With a BRRRR, you are hoping to boost the ARV and the amount it will rent for, so that when you refinance, the rent can cover the new debt service and all the expenses. With a flip, you're done - you sell and move on.The point I was trying to make is that it's more expensive, and more difficult, to buy a property that is a candidate for a BRRRR with financing - any kind of financing. The key to a successful BRRRR is to boost the ARV as much as you can and so it's often more difficult, and always more expensive, to buy with financing.

Mary Eubanks · Answer

Thank you Wale! I did not know the cost savings with refi vs HELOC. Much appreciated!

Mary Eubanks · Answer

My local bank has a loan 20% down of ARV and they finance the rest. Is that better for a flip than a BRRRR? Thank you!

Wale Lawal · Answer

@Mary EubanksWeighing the pros and cons of each option can help homeowners choose between a cash-out refinance and a HELOC. When comparing the two, consider the following factors.1. Think About Loan Terms - Cash-out refinances extend the length of your existing mortgage loans, while HELOCs add a second loan to your current time frame and therefore an additional monthly payment. So, if you can’t reasonably commit to the additional monthly expense, the cash-out refinance is probably a safer option.2. Consider Payment Options - You should also consider how you’ll receive your funds. If you’re in need of a one-time, lump sum of money to be used for a renovation or personal expense, a cash-out refinance will be simpler. But if you prefer to have access to your funds over a span of time, you’ll be better off with a HELOC, as the draw period typically lasts around 10 years and you can use your money as needed during that time.3. Compare Rates - Rates are always a key factor when comparing loan options. For homeowners who prefer fixed rates, a cash-out refinance will be more comfortable, as their payments won’t change over time. But if you’re comfortable with an adjustable rate, HELOCs may offer you access to more equity overall.4. Estimate Closing Costs - If you want to pay less upfront, HELOCs may be a better option. This is because refinancing incurs closing costs, while HELOCs typically do not.5. Don’t Forget Taxes - There are also tax implications of refinancing versus taking out a line of credit. Please consult a CPA for more information.All the best!

Mary Eubanks · Answer

Lake house mortgage is $3400, includes escrow