Buy and hold investment property- purchase with all equity?

Question

Buying our first buy and hold investment property. We refinanced our house and planned to use the equity for the down payment. We found we have enough equity to purchase the investment property with the equity alone and avoid applying for a second mortgage. Our interest rate is great at 2.62%. If we used all equity to purchase the investment property we would do a 15 year term fixed. Pros and cons of using all equity? Is it smarter to get a second mortgage? We have options and appreciate any advice!

Kayla Utley · Answer

@Damaso Bautista In all of my studying and learning about real estate it has been reiterated to leave emotions out of the analysis, which is why I am being extra cautious about not letting emotions make the numbers seem better than they are. But yes, we can afford it, the numbers do work, and I figure it is a win/win if I do this the right way. Plus, it is a good opportunity to learn from experience.😊 Thanks for the help!

Kayla Utley · Answer

@Pam HolbrookSo in that case wouldn’t paying the whole amount with equity be the safer bet? The house doesn’t currently need repairs and we already have fulfilled our first tenant to start cash flowing. We are not really interested in refinancing anytime soon as our interest rate would already be 2.62%

Damaso Bautista · Answer

@Kayla UtleyI believe everyone has their own plan of action in real estate. As long as your numbers work and the cash you are locking up is the path you are choosing, then I don't see anything wrong with that you are doing.I would just make sure that you are satisfied with the returns you are getting for the money you are locking up. This is different for each investor because everyone's goals are different.Even if you lock your money up, it doesn't stop you from doing a cash out refi on your paid off home later on down the line if you choose to explore that avenue later.There is no right or wrong answer as long as you are making money on the deal that is all that counts.Good luck!!!

Damaso Bautista · Answer

@Kayla Utley"This is a special chunk of land"That statement leads me to believe that this is a personal purchase, that is doubling as a true investment. Which means nothing to me personally but can cloud your judgement in future real estate investments.Most pro real estate investors try to leave emotion at the door or work strictly off of the numbers.If you say the numbers work, then they work. It isn't really that scary. It would be scary if you were lying to yourself saying that this is a great investment and it is really just a " special chunk of land" that you want.Even if that was the case if you can afford it why can't you buy an property that you want. It is done all the time.There is nothing wrong with that.

Kayla Utley · Answer

@Damaso BautistaIt is a scary time to invest given the pandemic but you hit home with everyone’s goals being different. The numbers do work and this is a special chunk of land to us so we are just trying to make well thought out decisions from all angles to ensure the success of our first investment property. All the advice is greatly appreciated!

Bill Goodland · Answer

@Kayla Utley closing costs are definitely a concern but I would just calculate a cash on cash return of getting the loans. Strategy makes sense, but it depends what the goal is. Less leverage equals more security, more leverage usually means more growth. Up to you to find the sweet spot but one thing I always recommend is determine the return you are getting on your equity in a property and compare the opportunity cost of investing that money elsewhere

Pam Holbrook · Answer

Hi Kayla, I would wait. I'm in the middle of my 1st rental purchase and rehab. The market is unstable and there are too many unknowns. I'm listening to J. Scott from Biggerpockets "What Works (and Doesn't) in a Recession" who is saying it's not time to invest now. It's impossible to know how refinancing will be 6 months from now. This is the time to be extra conservative and not over leverage (as many on bigger pockets promote). What's your exit strategy a, b and c?This is not a time for rookies to start. The risky BRRRRR process just got riskier secondary to an unprecedented time

Kayla Utley · Answer

@Damaso BautistaThank you 😊

Damaso Bautista · Answer

@Kayla UtleyGreat to see you are doing your due diligence for a win/win on this one. I am sure it will work out great and you will learn much from this experience.I wish you and your family much success in your real estate journey and in life.

Pam Holbrook · Answer

Addendum: I purchased and rehabbed 100% with a HELOC as I learned on biggerpockets. :(