Should I Refinance or HELOC?

Question

Hey BP community!

Looking for some advice on a unit I have in Wilmington, North Carolina. It's a SFH that cash flows somewhere around $75-$100 per month. It wasn't purchased to be a rental but we turned it into one. I have the option to do a refinance on the property and drop our interest rate from 4.375 to around 2.5%. It looks like this would give us somewhere around $150-$200 extra in cash flow per month. We don't have a ton of equity in this thing so we're not looking at pulling any cash out; the only benefit would be the lower interest rate/better cash flow.

The original intent was to keep getting loan paydown/equity over the next year and find a lender to do a HELOC on it as an investment property. I talked to a lender earlier this year that could do it but we didn't have the equity so I figured I'd wait a year and try again.

If we go through with the refinance, won't that drain the equity along with any hope of using a HELOC a year from now? Would it be wise to forego cash flow NOW for the hopes of a HELOC later? I would hate to miss out on an extra $200/month and then get to next year and find out lending requirements have changed and no one can do a HELOC on an investment property.

Thanks for your insight!

Jody Sperling · Answer

Your though process is strong, and I would affirm that a refi now will kill your chances of a HELOC unless you can pump more cash into the mortgage balance.

We have a HELOC on our investment property, and it is my primary account for everything. The flexibility to spend it to the limit, pay it down and respend it is tremendously helpful.

There's always a chance banks will change lending requirements, and we're doing what we can to eliminate our complete dependency on banks, but as long as you maintain a strong credit score, a reliable cash flow and income, and business at the bank you want to borrow from, they'll likely approve you for the HELOC when you have the necessary equity.

Out of curiosity, have you asked for a first-position HELOC? If not, and it's not a familiar term, look it up. There is a ton of literature and plenty of videos online about the first position HELOC. It's a superior product and the most powerful investing account you can get.

Best of luck out there!

Jaron Walling · Answer

@Brandon Allenczy Don't forget the closing costs and bank fees for the refinance. Every time the bank gets involved you can bet it's costing you money. It's either out of pocket or equity.

This is a great example for newer BP members to read. If the intent to purchase wasn't for a future rental a lot of times the numbers don't work. The cash-flow is OKAY but the cost to ReFi neglects the reasons to improve it. Unless you plan hold this property for 10 years+ the cash-flow probably won't surpass those costs. You're talking an extra $100 per month, $1200 per year. In the grand scheme of things that's not very much. Given how hot the market is I would consider selling. Maybe you can find a better DEAL in 2021 that meets your improved investment criteria.

My first property and now rental cash-flows about $150 per month, but the equity position is great. I would chase after that on the next one! Good luck man.

Brandon Allenczy · Answer

@Richard Updegrove, thanks for your input! Our strategy is buy and hold. Our specific goal is to grow from 3 units to 31 units over the next 3 years, at an average cash flow of $200/door. We're doing this through a combo of small multifamily (househacking) and BRRRR.

The rent on the unit I mentioned here is actually slightly under market value but it's in great shape, I just didn't raise the rents on the existing tenants when they renewed. So I think I can hit our target of $200/door on this and utilize the HELOC. If not, then I probably will look at selling and snowballing into a better deal that gives me more cash flow a lot sooner.

Brandon Allenczy · Answer

@Jody Sperling

Great to know, thank you! And no I've never heard that term so I'll start researching now! I feel like I keep getting chased by the shiny object of more cash flow, but what we really need is more (healthy) leverage like a HELOC to help us keep the ball rolling.

Thanks again!

Nicholas Bolcon · Answer

@Jaron Walling @Brandon Allenczy I'm not so sure on the return of the refinance not being worth it.  It all depends on closing costs, yes you are paying for them with equity but if its only $2k-$2.5k then an extra $100 a month pays it back in 2 years.  That's a pretty good payback timeframe and could be worth it if you plan to hold the property for any significant period of time.

Brandon Allenczy · Answer

@Jaron Walling After thinking about it though, I could do what I mentioned above on a better deal if I sold it. I could sell it, buy a great deal, and get THAT cash flow while using it for years to come to buy other properties. Real estate is awesome.

Brandon Allenczy · Answer

@Jaron Walling, totally makes sense. I do intend to hold nearly everything I buy from here on out indefinitely. So I was looking at it as a tiny "savings account" that pays a slightly better return than banks would, and I can keep utilizing a HELOC on it for future purposes. May not cash flow the best, but it's a great swiss army knife to keep buying other good deals in the future. If I sold it, I could buy 1 great deal. If I hold it for 30 years, I could keep getting that cash flow and using leverage on it to buy multiple great deals.

Brandon Allenczy · Answer

@Nicholas Bolcon I get what you mean, but after the input here I decided to not do the refinance. If I sell the house I could snowball that into an even better deal and still get a good ROI with much more cash flow. I see your point and the benefits of both, though.

If you or @William Wilson want to know more/get connected in Wilmington, I recommend reaching out to @Joe Prillaman; I moved away from Wilmington but he's still in the market and is crushing the Airbnb game there. He can tell you all about the market and give great recommendations.

Nicholas Reece · Answer

You must acknowledge the costs of selling a property and acquiring a new property as well. You already have this property, and without much equity in it, what exactly are you walking away with after realtor fees, other than possibly $400 cash flow? Why not refinance, and use the cash flow created to build the money you need to use instead of chasing a heloc that will cost money to set up and utilize. The benefit of a Heloc is utilizing equity. Without much equity you are spending similar money costs with the refi, just to get access to a small loan. Might as well just have the cash. If the heloc market tanks in the future, you will have cash. If it doesn't, drop the money on the house principal and the use the heloc later. Even that scenario only makes sense if the house appreciates further. It costs 20% down to finance a rental through the bank. Imagine coming up with 20% to buy the property YOU ALREADY OWN. It can be managed better, increase rents to market, and refinance to unleash the type of investment you have, but just doesn't quack like you want it to...yet. If it can, get it there. Isn't that what real investors and entrepreneurs do? Remember, the HELOCs usually carry costs similar to the refi anyway. Apples to apples. One nets you cash income, which is never bad.

Brent Coombs · Answer

@Brandon Allenczy, I tend to agree with @Nicholas Bolcon: "if its only $2k-$2.5k then an extra $100 a month pays it back in 2 years".  ie. You'd be hardly losing any equity, but would be saving nearly 2%/y in interest payments for the duration of the loan.  ie. After 2 years, that $150-200/m extra income is free money!  (Even quicker if all the extra cash flow goes back towards the loan until you're back to the same equity position).  Cheers...

Should I Refinance or HELOC?

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