First investment property - HELOC or Cash Out

[Catherine Carey]

We hit the buy and hold lottery with our first home.  We were given our first home (my boyfriend's family home, which his father deeded over to him for zero consideration). Since then (approximately 7 weeks ago) we have spent approximately $3000 in repairs and upgrades and we estimate that we have another $1500 to go before we can rent it.  We had it appraised (because his family had considered selling it before we presented them with our idea to take it over) and it appraised at $158,000.  I'm not sure the $4500 in repairs will get us more than another $1000-2000 on that number, if anything.

While my boyfriend has spent every spare minute working on the house, I've spent all my time crunching numbers and listening to BP podcasts.  I'm so grateful for all of the information that is shared!  But I still cant quite figure out our best way to move forward.  We want a second (and hopefully third) property by the end of the year.  With less than $5000 in this deal, and being able to rent it in our area for around $1500, we are looking at a monthly cash flow of close to $900/month.  Its doubtful we'll get another family member to hand over the Deed to a property so we need to refi and get as much money out of it as we can to buy our next property.  

So the question is... HELOC or cash out? Pros and cons? Or is there a third option I haven't thought of?

Thanks in advance for any advice!!

Catherine, Baltimore MD

[Kerry Baird]

Your boyfriend will almost certainly be looking at a refinance, since HELOCs in first position are rare; there are a few lenders that will do HELOCs (in second position, after a first mortgage) on investment properties. But an investment HELOC in first position is like chicken teeth. You might find one if you call every lender in your State.

Are you planning on going on title? Something to think about. For now, it is his house and his financial journey...

The current plan is to rent it out and therefore, he will want to pursue a non-owner occupied mortgage.  Most lenders will not consider rental income until the owner has 2 years of experience.  This said, talk with small local lenders, community banks and the like as they can often be more flexible.

If your bf prints out his own credit score and brings it with him, asks for estimated investment mortgage costs based upon that credit score, he can start gathering information without having credit pulled a bunch of times.  Multiple pulls will hurt a credit score, unless one is "shopping" for a mortgage in the span of 30 days. 

Once he's found the best lender for this situation, then take the credit pull, start gathering credit card and bank statements, etc. and he's off to the races with a mortgage application, getting an appraisal scheduled, called insurance agents for quotes, getting an inspection...and on...