Investor financing with equity - how does it work?

Question

So I'm starting out considering rental property investing.  I've talked with my lender (on my current house) and asked some questions.

I have $200-$230K in equity I can access depending on how an appraisal of my house would go.

My father wants to kick in some cash (maybe $150K) for the investment property too.  We'd buy something in the $300K to $500K range in the North Utah area most likely.

We'd finance the rest with a co-borrower mortgage.

So there's two loans.  (1) My primary cash-out refi, and (2) an investment property mortgage

We want to take our time and do plenty of research, watch the market, etc.  Maybe watch for months...  But I also want to be able to pull the trigger right away if the right opportunity comes.  But pre-qualifications expire, loan applications and rate locks expire - everything pushes you to get your financing lined up and find your property in the next 30-60 days.

If you don't want to act so fast but want to watch the listings and wait for that great opportunity, all your financing approvals expire... and when the great opportunity
shows, you are delayed setting up financing again.

Is there a way to have it both ways?

How do you navigate the financing aspect of all this?  Do you literally have to get prequalified over and over?  Is there education on BP that helps teach the strategies?

David M. · Answer

@Daniel G.

Yup, thats about right from what I understood...  As always, consult a professional..

David M. · Answer

@Daniel G.

well, there is a bunch to consider...  and its really all up to you...

-adjustable rate mortgages/loans do pose a risk should the rates move

-hloc are beneficial since you can move money in and out, and since they are interest only it helps your dti ratio

-you could mitigate the interest rate hike by simply refinancing when you see the rates rising.  However, that assumes you will be able to qualify for the loan.  Of course, I don't know your finances or future job/income prospects.

-with the standard deduction being so high now, having a loan against your primary may not be the most economical.  If the interest payments could be attributed to the rental, they would be fully deductible there and thus effectively reducing your rate (if you have a 4% loan and you can take a tax deduction in the 25% bracket its like having a 3% loan). granted its all passive so you have those rules to consider.

-Oh, and what are the relatively new rules on whether you can take the interst payment deductions on a cash-out refi?  The cash has to be used on your primary residence, or just any sort of real estate property?  Look into that as I haven't kept up...

Another thing you may want to consider is if you don't like leverage, why is it okay to have a massive loan against your primary residence, but not your rental?  You are just pushing debt around, and its costing you.  You take out a loan to purchase the rental, then you say you refi against your primary to heavily pay down the loan on the rental.  That will mean the rental loan will be payed off in a few years probably (unless you are able to recast the loan) and now you've paid for a loan that you really didn't want.  And, then paid for another loan on your own house.

??

Good luck.

Darius Ogloza · Answer

A HELOC will answer you problems.  You only pay interest when you draw funds.  Otherwise, it's like cash sitting in the bank.

David M. · Answer

@Daniel G.

Sure, you need PoF when making an offer.  However, the pre-approval/qual ltr isn't nearly as hard as you make it out to be to continually renew it.  At least it shouldn't be...

Right, you could refi on your primary later to tap the equity.

No, any loans would hit your DTI.  But, some people try to calc their dti without the hloc interest as an expense.  Since you would need to declare drawing on the hloc, the interest due would go against your dti even though you hadn't drawn on it until closing.

David M. · Answer

@Daniel G.

I wouldn't worry about the prequal ltr expiring.  They are free and a good/decent loan officer will send you another one without much, if any, additional paperwork or credit check.  They just don't want a lttter out there for a year and find out that you lost or changed jobs orsomething...

Basically, figuure out your lender and get the prequal.  And "wait."  I've worked with clients we spent 18 months looking for property that suited them.  The loan officer just waited for us.  Like I said, if there is real change to your income or debt status, then they don't really need to run anything.  So, its sort of a "trust issue" as to whether they need to rerun everything.  I don't believe its done unless somebody figures the client is doing something fishy.  And if they are, it will be found when finally applying for the mortgage.  While both the lender and the agent try to warn clients against doing stupid things, it happens... but the prequal letter is still good!

hloc would be the most flexible way to go.  Otherwise, yes you'd have to cash-out refi first and sit on the cash.  You could put it as part of the contingencies of your offer, but boy that would seriously weaken your offer.

Let me ask, why?  If your father can kick in up to $150k and you are lookin at up to $500k purchase price, you easily have the 20% down required for an investment conventional loan.  Do you not want to be highly leveraged?  Don't forget the hloc/loan on your primary will go against your DTI so your credit servicability will be reduced.  usually you want to be able to finance as much as possible.

Good luck.

Jason Albasha · Answer

Why do you need the prequalification so badly? Submit your offer, you don't HAVE to have prequalification.

If you'd like to submit and offer with a preQ letter, then yes, you'll have to get the letter refreshed.

Chadwick Fairbanks · Answer

Can you get a HELOC for the $230K?  Your dad already has cash.  $380K cash is plenty to buy an investment property in N. Utah... forget the MLS, it's a ripoff!  I get investment properties in all the time that are off-market.  Get your HELOC in place and then let's have a phone call about what and where you prefer and I'll find you something!

Daniel G. · Answer

Interest payment deductions are quite limited now on cash-out refi.  The stuff I read says that from 2018-2025 you can only deduct cash out refi if used on direct improvements to a primary or second home. I took that to mean that if used on a rental down payment I can't deduct the interest.  Before 2018, I think you could deduct the first $100K cashed out in a refinance no matter what but apparently that's not the case since 2018 (except for some complex grandfathering rules...)

That was my interpretation.  But the 'internet' is not always easy to understand on these specifics.  I'm going to assume the worst though on that.

Darius Ogloza · Answer

I believe you are worrying for no good reason.  HELOC's tend to have variable rates pegged to the discount rate but Jerome Powell has promised to keep the rate near zero until 2023 - you should have plenty of breathing room.  Two, no reason I can see why refinancing should be impacted by whether you used a HELOC to make the initial purchase.

Daniel G. · Answer

Is a HELOC's utility reduced if I can't refi with a good fixed rate after using it for the purchase?  With a HELOC I worry about rates going up, and I can't refi to fixed rate like if I refi'd and sat on the cash a few months.  Maybe it is in the noise, someone would have to tell me I'm worrying for no good reason.

Investor financing with equity - how does it work?

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