Is a refi or a heloc the way to go?

Question

Hi all-

We just got started in the SFR game last year and have just filled our second rental this month.  For our third acquisition we're wanting to try something more like a brrrrr.  We were able to do a cash refi on our personal home which has appreciated quite a bit over the past ten years and gave us enough to cover that next theoretical acquisition.

The question we are kicking around is should we refi our first property that we just acquired last year?  We were able to purchase it for 50k w 20 percent down and its now appraising at around 85k (we got a good deal on it!)  So if we refi we'll basically get all of our up front cash back out of that house (a la a brrr.)  Our second home was also purchased with 20 percent down.  Both properties are cashflowing around $300/mo after all expenses.

So the question that I'm uncertain of is how would a refi hurt our potential for future financing for other acquisitions?  If so, would a heloc be a better approach to have as a potential "emergency" fund to take care of surprise catastrophes?  Or are we so small time right now that the banks don't really care either way?  Theoretically if we had 10 properties all cashflow positive a couple hundred bucks a month, but all at an LTV of 75-80% would most lenders look favorably or dis favorably on our debt?  I know that's a little open ended and multi pronged, but we're still trying to figure out what "over leveraged" actually means for us.  We're relatively risk averse so are trying to grow our portfolio, but want to do it in a smart way.

Any thoughts about all of that?

David M. · Answer

@Mandy S.

Basically.  To be clear, if the mortgage is $500 and the rent is $1000, then the bank calcs it as 75% of $1000 - $500, or $250 of additional income to service a debt/loan.

I believe you can have no more than 10 personal/residential loans.

David M. · Answer

@Mandy S.

The refi would increase your monthly debt payments.  That, in turn, will make your debt to income ratio worse which will make it harder to qualify for larger loans.  You need to look at your fixed debt (e.g. car payments, mortgage, property tax, insurance) vs your income.  Rental income is taken at 75% to account for vacancies and unforseen expenses.  Usually, its easier to make the calcs as two sets, one with you personal debt and income and another with your rental 75% income and debt.  When you run it that way, you will see if your rentals are actually increasing or decreasing your overall dti.

Talk to your lender about how it will change your "borrowing power."

Does that make sense?  Feel free to direct message me and we can chat about how to calculate this.

Good luck.

Mark Sewell · Answer

Again I think for that rule, we are talking about qualified loans, eg., FHA fanny/freddy that stuff, which is government backed.  Don't think that rule exists for conventional loans and I am 99% sure nobody cares on non-QM (if not somebody please correct me).

Mark Sewell · Answer

DTI ratio is a non-factor if you use a non-QM loan product.  Costs a bit more but I've seen people with strong credit get 5.75% here in the last week or so.

Your challenge on this is getting a loan that small.

The money you could manage to get out of it, if you could, would be about the same as a nice big fast AMEX card line - which BTW is not a bad thing to have in your back pocket in case that AC unit goes out or whatever (emergency fund).  And if you don't use it you aren't paying for it.

To me I think you are in a great position on that first home, and I would hold steady for now.  That crazy appreciation is likely to continue.  Maybe when it hits $100k, go for a refi and see about getting some cash out.

Mandy S. · Answer

@David M. Got it.  Thank you again!

Mandy S. · Answer

Thanks Elise and David.

@David M. That's helpful.  So if if rental A has a mortgage of $500 but rent is $1,000 we'd calculate that as $750 from the bank's POV?  Those numbers are comparable to our first two rentals so theoretically if each new acquisition is in line with that is there a point at which lenders will generally say "too many mortgages" or something along those lines if they're all cashflowing well?  Although we're refinancing our house for cash that's the only real debt we have (no cc, car payments, student loans, heloc, etc...) besides our rentals.

Appreciate the insights!

Elise Marquette · Answer

The biggest thing you'd have to be concerned about is your debt to income ratio. The higher the monthly payments on your liabilities are (i.e. your mortgage payment now vs. your increased payment once you take cash out of your house), the tighter is makes your debt to income ratio. This is the ratio of your gross monthly income relative to your monthly liabilities (mortgage payment, credit card payment, student loan payment, auto payment, etc.). It cannot exceed a certain percent to get approval to finance your next home. Of course if you're buying the next one cash, then this is a non-issue

Is a refi or a heloc the way to go?

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