What's the best way to tap the equity of my primary?

Question

My California primary is worth $650-700k and I owe 335k meaning I've got a sizable amount to equity that I want to leverage to buy a 4plex somewhere in the US and start down this path of building up lots of cash flow and rental properties. Most people seem to indicate that if my plan is to hold onto these properties (which I am) that I'd be better served to do a cash out refi on my primary. However, I currently am 4 years into a 15 yr loan at 2.75% so thinking about doing a cash out refi and ending up in a 30-year loan for 500k just does not feel good. I'm very emotionally attached to my primary and put in lots of custom upgrades (think lots of hardwired tech and smart home) and my 3 young kids live in it and my long term is definitely to hold onto it. So with that considered should I do the HELOC route or would that cash out refi make more sense to better suite a cash flow rental income strategy?

And if I do a HELOC for my first rental, would that mean I'd end up with 3 loans\LOC? 1 for my primary, 1 for HELOC on my primary, and 1 for the investment property? Conversely if I do a cash-out refi, I'd just have 2 loans? 1 for the primary and 1 for the investment property?

Luciano A. · Answer

@Jase MachadoIf not mistaken a HELOC is a lot cheaper to do than a refi in regards to costs. Also HELOC only charges you interest on what you use. If you buy a rental in all cash then refi if possible a BRRRR strategy then you pay off the heloc thus no payments on it until you buy second rental. Being originally from CA I highly suggest you explore investing out of state. So many greater opportunities for cashflow. Just make sure you fly out before sinking your money into the deal.I recently drove out to Killeen TX to look at a few multi family as I’ve been hearing there is great value there but some of the properties in the neighborhoods they were in I see risk if market turns. However broker was telling me many CA investors buying these up. Numbers on paper look great but in this business numbers and reality don’t always turn out as planned. Best of luck

Simcha Davidman · Answer

@Jase Machado I think you nailed it - you need to really hammer down what your goals are. While you continue your education and networking, you can then you can start to shift your focus toward the things that will get you to where you want to be fastest.I'm pretty sure there are podcasts with people living in big, expensive cities - and making it work. It's not going to be by buying $50k houses that hit the 2% rule, but people are making money in real estate everywhere, literally.On the other hand, you may decide that buying at a distance is better for you. One benefit that this has is you're sort of forced to set it up as more of a business than if it was only a few minutes away from you. Between your family and job, I assume you're not looking for an additional job of landlording. So to the extent that this is accurate, make sure it fits with your goals, too.There are no definitive guidelines because there are too many ways to skin the cat, and too many goals you may have while doing it. If your ultimate goal is to buy a mall or an office building, don't buy a single family house or an apartment building. There are also those who espouse the view that if you want to get into multifamily, you shouldn't even buy single family, if you can avoid it - because they're different investments and different businesses.For example, if you want to own apartments (or anything large), an option is to take your equity (looks like you can probably get $150-200k) and just go do it. You can go a distance and go the distance - buy a million dollar property (thereabout) with 15-25 units and you have scale. Or, you can find a partner who is interested in similar things (preferably that has more experience than you) and can do something similar. Now you're looking at a combined $300-400k equity and you can buy a nice size building/complex. I'm not recommending this, but as you stated, you need to figure your goals and then go after them - and not some other goals.Best of luck!!!

Nick Gann · Answer

@Jase MachadoI enjoy Helocs. Primarily because if you use the money and refi out later the loan follows the refi property and pays off the heloc which gives you the ability to use heloc funds again. Another advantage to a heloc is only paying interest on what you use. A revolving equity account like this is a great starting point and can mean better deals since as far as seller is concerned youre all cash.

Mike D'Arrigo · Answer

@Jase Machado I'd have a tough time giving up a 2.75% interest rate on the primary loan.

Simcha Davidman · Answer

@Jase Machado you're probably best off financially with a refi, but that's not necessarily best for you. You need to take nonfinancial things into account, too.You can also look into a Home Equity Loan, which is a second mortgage. You could get a fixed long term loan with a relatively low rate (I think usually lower than the HELOC rates), and it wouldn't effect your primary mortgage. Your rate would not be as favorable, though, because this new loan would be a second position lien.In terms of the second paragraph, I'm not sure I follow. Regarding the three loans, do you mean (1) your primary loan, (2) the heloc for the down payment on the investment property and (3) the primary mortgage on the investment property? If so, then yes, it seems like you got that right.Good luck!

Matt Brown · Answer

@Andres I. CepedaHow do you get data like that on a given area?

Luciano A. · Answer

@Andres I. CepedaHi Andres I drove out there to look. While driving got pulled over by State Trooper. After telling him where I was going he told me that is one dangerous area. We chatted and he gave me some tips. After driving through the area myself I was still interested. However I don’t like how a neighborhood can be of all duplexes or fourplex. If you find a deal that makes sense let me know. I prefer to do 5 units or bigger but agree with you Killeen has good pricing compared to other places.

Andres I. Cepeda · Answer

@Jase Machado and @Luciano A. Killeen-Temple closed sales is up 8.7%, days on market is down to 49, and months of inventory is at a staggering 2.7. Compared to the state wide average of 6.4% closed sales, 54 DOM, and 3.8 months of inventory. Its a great time to invest in Killeen-Temple! Let me know if you need help getting your next investment in the area

Jase Machado · Answer

@Mike D'ArrigoMike, Agreed! Thanks for that comment.At this point I’m def trying to decide between a HELOC or a 2nd mortgage to fund this endeavor. 2nd seems more financially smart but since I’m a newby and likely to try to do 2 staggered investments spaced out, the HELOC seems more flexible and appropriate. Besides I could always convert the HELOC to a 2nd down the road.

Jase Machado · Answer

@Simcha Davidman Thanks for that info! I had not considered that 3rd option of taking out a 2nd mortgage.Its amazing how many options there are in terms of how to get my initial money down and where I might want to invest and how (flipping vs rental income). The more I'm reading into bigger pockets and following podcasts I'm getting quite educated but I'm also realizing that I need to do some soul searching to understand what my ideal end state goal is. Previously my end goal was to get rich but now I see there are lots of paths to get there with varying degrees of risk. Do I favor cash flow or appreciation over time, it seems hard to achieve all these at the same time. If where I live had cheap houses in the 50k range then it would be a no brainer for me, but I live in CA where scaling wide to start is impossible because properties are so expense (1-2% rule aint happening here) so I have to make some hard decisions about what my goals are for getting started.I wish there were some general guidelines that work for all newcomers, such as invest local with a single family home and learn about fixing it up and being a property manager (conservative approach), which seems to be the only choice for some people. It feels like since I've got a bit of capital to start that I have sooooo many options (local or remote) (cash flow or appreciation) that it is a bit confusing where is appropriate to start. One thing that I think I have learned that seems to hold true is that because my day job is moderate six figures and I plan to keep my regular job for a long time, that I should plan to get more of turnkey rentals and use property managers. To that end, if my goal is cash flow and to have turn key properties with property managers that going to the midwest or south is the right thing to do. Maybe I do a HELOC so I can use a portion of my equity and start with something local to cut my teeth on the process over the next 6 months and then plan to use more equity later to get a property in a remote location. That might be a sort of hybrid approach? It seems all these Podcast people that are accumulating millions in properties over just 3-5 years with very little down all seem to be in these secondary markets like west Texas and Wisconsin and Michigan where they can get lots of little houses. I wonder what the recipe is for us California newbies to get rich without relocating to those states.