Success leveraging equity in home for down payment?

Question

Hi BiggerPockets Team,

I am moving out of state soon to take a new job, and would like to transition my current residence to be a rental. Would also like to use the equity in my current residence as a down payment for the home in my new location. What have you found to be the most effective way to do this in your experience? Which mortgage companies are easiest to work with for this type of transaction? Assuming good credit, what sort of interest rates should I be looking for right now?

For the rental side of this transaction, should I go for traditional tenants with long term contracts? Any success with AirBnB from fellow BiggerPockets members?

Really appreciate any guidance you can provide!

Regards,

Daniel

Frank Chin · Answer

I don't quite understand your logic so let me tell you where I was coming from.

I started REI in the early 80's when the interest rates were 12% or more, in fact up to 18%. By 1984, I was cash flowing already even at those rates, because I got them cheap enough, rents were going up, and I put good down payments in, in the 30% range.

By 1992, interest rates fell from 12% to 18% plus range down to 7%. I originally was going to refi out, given the large down I put down, but mortgage lenders were resistant. I had a 120K mortgage on the 3 plex I lived in, was going for a $170K on a property with ARV of $350K, but the banks were hemming and hawing. So I reversed course, no refi out, refi for about the same amount I had in each property, and the refi's sailed through. My argument was I'm already paying over 12% with no problems, so paying 7% would? Overall,I refi'd 3 mortgages totally over $300K, and reduced overall interest rates by 6%. That's 18K additional cash flow annually.

Then, I got a 120K HELOC to do foreclosure investing which I did extensively in 1992 to 1994. Bought several of them. The rate was good at 5% at the time. I won a bid for a $350K duplex for $200K. The foreclosing bank offered me a $180K mortgage if I chip in $20K. This is where they're looking for $20K seasoned cash.

What to do? Using $20K from my HELOC at 5% would come to $100 a month. The duplex I just acquired generates over $600 cash flow to start not counting the HELOC. With it, I cash flow $500.

Am I going to refi out from my 3 plex that I just refied a year earlier when they gave me a hard time refi out, so I didn't. With a HELOC that I'm only paying 5% interest, I'm cash flowing nicely on my original properties, just increase cash flow by $18K year barely a year before, why I earth would I go back to do another refi or look for hard money lenders.

So rather than doing what you're suggesting, I just use $20K from my $120K HELOC, pay $100/month in interest. So much simpler.

The good news is the property I got for $200K in 1993, I still have it, the area gentrified, and is now $1.3 million. Not only that, it's mortgage free for the last 6 years, thanks to the HELOC and the $100/month It cost me to get into it.

Brian Ellis · Answer

I used the sweat equity from my first house and purchased a duplex, I just closed on my third house and its only been a couple years. It has worked out well so far for me.

Michael Lewis Lee · Answer

Hello Frank!  The last thing I would do is to borrow money or increase my liability on my home.  Another thing is that I would not deal with a bank for anything unless I had a good relationship with them.  They are trained to take advantage of you and they pay the lowest interest rate that you could earn on their savings account.  If your deal is really a good deal you will acquire your loan from many sources that will not take as long to borrow their money and charge 20% down payment and they will not loan anything for repairs/rehab.

Using a Private Money Lender would not take as long to lend your funds, charge less than the 20% down, lend you the fix-up funds, and charge less than 10% on their interest rate.  One major negative is that it will be a 12 month loan and force you to buy an add value property.  One of the largest difference is that the Bank loan would or could be a 30 year loan.  Your house is an asset for the bank and a liability to you.

One other thing I might do is to pay down your house loan with any equity or get owner financing on your new investment property and it could be a win/win solution for both sides.  You could offer the Owner a Subject TO or a lease option and try to get the option of selling that new home on a lease.  Good luck to you!

Frank Chin · Answer

I had a triplex I lived in, bought a duplex, and used the HELOC to put down on the duplex. Problem was the bank will only consider seasoned cash of six months. At the time, I needed to put down $20K, and the HELOC was $120K.

Because my wife handle the finances of her elderly mom, her name was on the joint account for over 10 years, several times the balance required, and the bank accepted it as our seasoned cash. But we actually paid the down payment from the HELOC.

A co-worker anticipated the problem, and had another co-worker move some funds into a new account, put both their names on it, waited the 6 months, and had the required seasoned cash to show the bank. Paid his co-worker for the favor from what I'm told. He actually paid the down from a HELOC.

Finally, my original plan before my mother in law gave her OK was to take $20K out of my HELOC, park it in a money market account for six months, then use it as a down payment if the bank wants proof of seasoned cash.

Brooks Rembert · Answer

@Daniel Fudge, if the numbers work out, you can do a cash out re-fi.

Just make sure your new payments are low enough for rents to cover it... plus some.

If you're refinancing it and turning it into a rental, you're probably looking at about a full 1% higher than an owner occupied mortgage. Maybe even 1.5% higher.