Rental Property Investor · OKC, OK · Member since 2008 · 108 posts · 235 votes
I was recently posed a question and I'd love to hear your thoughts? Let's say you have a typical small portfolio with buy and hold properties that are leveraged (let's say 70% LTV) but own one property outright. And let's arbitrarily say that the fully owned property is $200k appraised value. The goal is to take cash out (we'll say $150k or 75% LTV) to then use to purchase properties using the BRRR strategy. Therefore, this cash would typically only be tied up 3-6 months (and I know some require a year or so seasoning but let's use 3-6 months) at a time and then recycled to do the same thing again.
Assuming both are options, would you:
A. Get a mortgage for the $150k.
B. Get a line of credit for $150k.
Obviously both have slightly different tax consequences, affect your balance sheet differently with regard to net worth, and many more implications. But I'd love to what you'd do and if it's in line with what I suggested.
I would go to a bank, get a mortgage and put down the 20-25% needed, if it's a simple question.
It all depends on what you're buying, and what kind of a market it is, because you're absolutely right-- cash is king! We only do cash deals, so much simpler,faster and easier! If your market is very hot and there are multiple offers likely, then you'd be better off with the equity line and being a cash offer, and then later pulling out the cash. If it's not a competitive market, check out recent sales, and see if there is a big discount for cash buyers, if it's significant, that'd make me change my plan. You really need to look at all the details, and determine what's the best option, as it's not a quick apples/apples.
Unless it needs to be a cash deal, I'd get a mortgage. Why borrow from yourself, when you can borrow from a bank, it's the beauty of OPM! I'd absolutely get an equity line and have it be available, not plan to use it now.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
8y
If the paid off property can support a $150k mortgage, I'd go that route. Better interest rate, better tax advantages, no dead equity sitting in the property.
Rental Property Investor · OKC, OK · Member since 2008 · 108 posts · 235 votes
8y
@Jason
@Jason D. Even with a line of credit, you are using that equity to grow your portfolio. Use the line of credit to purchase a property. Pay on it while it's "in service" then repay it when you finance that property. Then do it again. And I'm assuming one would do the exact same from the proceeds of option A.
Rental Property Investor · OKC, OK · Member since 2008 · 108 posts · 235 votes
8y
@Linda S. Do you mean why buy a property cash vs. get a mortgage for the get go? Because banks will typically loan 80% of purchase price or 80% of appraisal whichever is lower. Also, many sellers prefer cash buyers.
Example:
Purchase price is $85k. Appraisal is $150k. So the bank would only loan 80% of the $85k. So pay cash and then get it appraised and the bank will then loan you the full $85k back and more if you are so inclined.
I would go to a bank, get a mortgage and put down the 20-25% needed, if it's a simple question.
It all depends on what you're buying, and what kind of a market it is, because you're absolutely right-- cash is king! We only do cash deals, so much simpler,faster and easier! If your market is very hot and there are multiple offers likely, then you'd be better off with the equity line and being a cash offer, and then later pulling out the cash. If it's not a competitive market, check out recent sales, and see if there is a big discount for cash buyers, if it's significant, that'd make me change my plan. You really need to look at all the details, and determine what's the best option, as it's not a quick apples/apples.