Advice on Financing First Rental - Taking the Plunge

[Kyle Vincek]

Hello BP Community,

New member here, thinking of dipping my toes into the investor world and hoping a few seasoned investors will help me make a better decision going forward.  I have been reading about real estate investing for about the last 2-3 years and just recently discovered the BP podcasts.  Took the plunge and have now joined the site - I'm hooked!  Been reading similar posts, but haven’t found anything as close to my situation to help me understand the thought process completely.

Thinking about buying my first rental in Feb/March of 2016 and am seeking BP community to help me understand the different options for financing, given my current situation.

Current Situation:

In July 2015, I was able to save up enough money to buy my first house via conventional mortgage. Yay! After reading Rich Dad Poor Dad ~ 2-3 years back, I knew I didn’t want anything to fancy (fixed up) or to close to market value, so my first target for buying my first home was going to be foreclosures (ideally that did not require too much work).My plan was to gain a bit of equity by fixing up a foreclosure and eventually either selling it or using the equity in the house (3-5 years down the road) to buy my first rental property.

As luck would have it, I was fortunate enough to find a house that matched my criteria and was also fortunate enough to win my bid on a nice house (foreclosed).The icing on the cake for this deal was that my initial purchase price was $50,000 less than the appraised value.As a result, I now have a potential $60,000 in equity in the house. This as a result has potentially accelerated my plan. However, I can not refinance the house for 6-months (house value purchase price for 6 months), but after that my lender is going to let me refinance to A) get rid of PMI & potentially B) use equity in house as a basis for getting a rental going – years ahead of schedule.

So here's where I humbly ask the BP community for assistance. In your opinion, what is the best option to use this "equity" locked in my house until I sell it? Again, goal here is to finance a rental property. HELOC vs HEL vs Cashout Refi vs … ? Are there other options I am not seeing here or have yet read about?Just need ~25-30k, to buy an under market value foreclosed property, put in 10-15k renovations, then get a renter. Ideally, at least a 10% Cash on Cash return. Plan is to start small (low purchase price on rental) to limit risk by still being able to pay rental unit mortgage with my personal income (until I get my feet wet and more comfortable).

My lender is pushing for a HELOC (ARM ~5-8% after remortgaging to remove PMI), but also has HEL (fixed 4% - after remortgaging to remove PMI), OR I could Cash-out Refi, by rolling what I think I will need into the new mortgage. I think my Lender wants me to refinance enough to have 20% equity, then HELOC the remainder. I know the interest payments on the HELOC are deductible, but is there any big upside one way or another that I'm missing here?

For sake of conversation, let’s assume $4,000 cash on hand.  Again, not trying to by an expensive place here...

Any insight or feedback be GREATLY appreciated!