HELOC or.....?

Question

One of my investors has a lot of cash but does not want to have it all tied up in his properties.  He currently owns 2 rentals which he financed 70% at good rates (around 7.5% I believe).  He bought both of those off the MLS using traditional financing.  I am trying to explain to him the value of buying our next property with cash to get a better deal and then pulling the equity out with a HELOC or other form of debt.  I have never done this before but it seems easy enough.

So, is the easiest/best way to do this with a HELOC or would it make more sense to buy it cash and then 'sell' it to ourselves with traditional financing? I'm sure it's a situational question, so let me say that we plan on either  holding it as a mid-term rental or selling it with a lease/purchase in hopes of closing between 3-5 years.

Jon Holdman · Answer

Get the refi financing lined up before you do this deal.  You may be in for some surprises.  I don't think any lender is doing HELOCs on investment property.  Cash out refi's are also very difficult and may require seasoning.  A year in some cases, though it may be less if you use the original purchase price for the value.  You should be able to do better than 7.5% at the moment.  Again, speak to some brokers or lenders and get the financing lined up before you make this purchase.

Bryan Hancock · Answer

Your cash will definitely have to be parked in the property for a while to let it season unless you want to pay premium rates.  Refinances don't necessarily have to be cash out, but for what you are trying to do it likely will be.  You are going to pay a bit of a premium for that loan.

I also think you need somewhat long-term money because a lease/option tenant/buyer doesn't always exercise their option.  Keep in mind that the bank that does the loan can call the loan if you have ANY option on it too, regardless of length.

I am not sure what a mid term rental means, but if the hold period is longer than 5 years you will definitely want long-term money.  A straight 30-year note is always a good pick.  A HELOC will likely float with interest rate changes so that is a poor choice IMO.  It is possible you can find product that isn't volatile and is recast on a good note, but it seems like a lot of work when 30-year debt is such a good choice.

Check out The Mortgage Professor's site:

The Mortgage Professor

for a ton more information on loan products and articles on choosing the right product.  You really need to have a solid plan and not many alternatives to choose the right product.