Take maximum mortgage amount available or only as much as needed?

Question

Hey guys! Looking for advice on a good problem. My wife and I are talking to a lender for an addition to our primary home; we're adding a 3 stall garage with a MIL suite above it that we intend to rent out along with use of half our barn so the tenant can board a horse on site since we don't need the entire barn. It's likely the best way to unlock the value in our property; call it a house and farm hack.

In speaking to the lender we qualify for more money than we need. If we take out a mortgage for the maximum amount offered, it would leave us with an extra $150k that we could put to work. I'm in Denver but have been scouting the KS City market for a while with an eye on starting an out of state rental portfolio. So this could be a perfect scenario of creating two rentals off of one loan, all using the same origination and closing costs as well as appraisal costs. If I don't use the extra money right away and park it in a CD my holding cost would be $300-$400 a month till I do use it.

What would you do? Take out the larger loan to pull the trigger on a rental in KS City AND do the addition, or focus on the addition first. I have baked in an extra $50k for unforseens and overruns fyi.

What considerations come to mind for any of you finance and mortgage experts?

Thanks kindly!

Anthony Gayden · Answer

I would take the cash and use it to invest. In fact I have done multiple cash out refinances and done just that.

Another option would be to get a HELOC on your property, that way there is no holding cost on the money.

Craig Curelop · Answer

@David Smit - If the HELOC is not an option for you, I would recommend deploying your capital methodically. A lot of things come up in large rehabs. I would knock out building the garage with the MIL suite first. THEN I would think about investing the difference in other markets.

KC seems to be where everyone is flocking to nowadays. However, there is still some potential in the Denver market for good cash flow if you do want to invest close to home. The strategy that has worked swimmingly for me is to purchase a single family home and rent out the rooms. If you can find the right deal, it will cash flow $1,000+ per month while still achieving Denver-esque appreciation.

Craig Curelop · Answer

@David Smit - Just because multiple people are living in the same house, does not mean that it is a multi-family. The lenders (or at least mine) just sees that as border income. They take the income from all of my leases and add them up. Usually, I am buying single families for around $400k and am renting out four or five bedrooms for a $600 to $900 each.

Hope this helps!

Steve K. · Answer

@David Smit Considering you currently have zero debt I’d take the max. Craig makes a great point about large projects going over budget though and it can also be stressful on a relationship so I’d avoid spreading yourself too thin and just keep the $150k as a cushion until that project is done and providing income, then see what you have left and put 25% down on a Denver investment property. I have a hard time getting SFR’s to cash flow around here but I’ve picked up a few quads in the price range you’d be talking about that provide great cash flow (after some updating and raising rents) as well as a great chance of appreciation being in Denver. I know nothing about the KC market but Denver is awesome and investing locally has a lot of advantages.

David S. · Answer

Hi @Craig Curelop, thanks for your input on this. Your advice is what I've always wanted to do, and right here in the local market. I must admit that local zoning laws have me a bit skittish about this concept. It seems a bit akin to the AirBnb model where you could be a pretty easy victim to a change in local housing laws. The other problem being that though I could afford to do something like that I would have to ax the addition plans which include a rental (MIL suite) because of the high cost of RE on the front range. And finally that puts all my eggs in the Denver basket, though that's possibly more of a pro than a con.

I have a ton of questions for you honestly, but if I had to pick one at the moment, I'd like to know how you're able to leverage a property with multiple tenants that isn't zoned as a multi fam? I would assume this is as easy as showing the leases and receipts but at the same time I know lenders are fussy over lesser matters. Do they actually go for this? Also, what's your typical price point on such a home?

Great advice; I'm still open to anything at this stage, so thanks for bringing that up!

@Ian Walsh I totally agree, especially this far into an economic expansion and an election coming up that could rile the markets depending on outcome. But at the same time I'm a fan of diversification too and cost savings being that I'm already closing on a loan here and thus may as well use it to save 4% on a rental (fees) and be a cash buyer (as far as a seller is concerned), both of which improve my equity ratio out of the gate. FWIW we currently have zero debt, as in absolutely none, period. So our debt to equity ratio will still only be somewhere around 35% after all this. So that's very healthy and as much as I care for in this climate believe it or not. Thanks Ian!

Ian Walsh · Answer

I am a big fan of low leverage.

Thomas Cummings · Answer

I always take the max cash and use it to buy more properties. And repeat.

David S. · Answer

Thanks for reminding me Anthony Gayden; We first looked at the HELOC route but found the interest rates to be significantly higher and the terms a bit more restrictive. Part of this has to do with our primary being zoned as agricultural property. Rules rules rules. With the HELOC we can do one or the other, with the 30yr we can do both and at a lower rate.

Thanks for your thoughts!

Take maximum mortgage amount available or only as much as needed?

Most Popular Reply