Best way to cash out equity on rentals with conventional mortgages?

Question

Hi All

Backstory. I have 2 rentals. Both were mine and my husband's primary homes prior to marriage. We kept them and rented them out. Both have about $100k notes on them. Comps are currently selling for $220-225k. 30 yr mortgages at 4.25 & 5% interest. They are in our names. Not an LLC. That is a lot of equity sitting there that I don't know how to pull out without complications. Both cashflow at about $2-300 each. If I cash out refi - I lose our conventional mortgages and low interest rates. If I try for a HELOC and the bank requires documentation they will know that they are no longer our primary residences.... I can't even convert them to an llc without having to pay both sides of our transfer tax here in PA. I don't have a deal yet but I am actively looking for another rental or small multi-family and need cash to be ready to act.

Ideas???

Jon Puente · Answer

Hey Maryanne, You have 3 options - 1) Refinance the 1st mortgages and do a DSCR or Regular cash-out refinance to pull equity (you will lose your current interest rates). 2) Add a 2nd mortgage to each property in the form of a HELOC or HELOAN (both will have higher interest rates than refinancing the 1st note).3) Leave them as-is, and save up or raise money for your next deal. All have pro's and cons so it really is up to you on where you want to take a hit in order to free up some money for scaling your portfolio.

Carlos Ptriawan · Answer

thing is if you use equity and go with DSCR, you get a double blow. In high-rate environment, with double digit interest rate and high inflation, you lose money and make the lender cash-flowing (not you, you're literally suffering). Any DSCR lender would accept your house because it's almost like free money for them (low LTV asset residential-low risk investment with double digit return). What's interesting from your description is you have 1 primary and two rentals that are located near each other. Relatively, in a high-interest rate environment, it's better to become a debt holder rather than an equity investment holder.If I were you, I would consolidate the rental with 1031 or sell primary->move to the rental route.

Kerry Baird · Answer

What does it matter that they are no longer your primary residences? We must intend to stay for one year, and then can move on. It is easier by far to get a HELOC in place on a primary residence, but it is far from impossible. If you want a HELOC on these houses, that you must hunt for those HELOC or HELOAN opportunities. They aren't easy to find. I called each of the banks, credit unions, and community banks in my area, before I found a few that would do them. Also there are online lenders, such as Figure, Spring EQ, Navy Federal, Quorum FCU and many more that have continued to offer this product on investment properties. I have posted a long list of these in my profile. I would add that I would have an aggressive plan to pay back HELOC debt, if you go that route. Adjustable rates are horrible! I have been choosing DSCR mortgages for my properties, because I have quite a few houses, and my DTI gets out of whack when I do a renovation.

Carlos Ptriawan · Answer

I would answer this from different perspective.1. do you see the price is still going up within the next 5 year with the same appreciation rate ? If yes, I don't sell2. if no , I would sellNow how to sell:3. Can you sell your primary ? yes or no4. If yes, can you move to the rental after you your primary ? if yes then move to the rental, and convert it to primary, then sell.OR .... sell both with 1031 and find one replacement4. sell both with 1031 that has 40% LTV, and combine the sell to buy a new investment property with 5% rate with 80% LTV, and then move there. Strategy:1. Tap equity smartly by doing a forward-looking analysis that gives an advantage to you, not to the lender (DSCR,etc).2. Try to reduce tax as much as possible.

Carlos Ptriawan · Answer

I did few reward/risk calculation like this before, even during low interest rate where you can get rental rate for 2.99%, the best approach is not doing keep refi or keep cash out, because that only gives an advantage to the lender or IRS lol ; but just try to sell when it hits certain LTV and future price value. If you time it well, you can oversell the market and buy underprice house. I have 600k equity as well in one of the rental, but I would never give that to the tax man or to the lender, in the contrary, I would convert my equity to a note position as lender LOL :)

Ash Hegde · Answer

A HELOC has become more difficult on investment properties. I've seen the question asked here quite a bit and the answer is usually to check with local banks and credit unions.

Devin Peterson · Answer

Hey Maryanne, Great question lots of info! Your best bet would be go through DSCR financing. This is tailored toward easy cash out access for rental properties. No income, no taxes, paystubs, etc. Easy qualifying process! DM me if you want to learn more I’d love to help

Ash Hegde · Answer

If it helps, you won't necessarily lose the ability to use conventional loans just because they are not your primary. If you still have the income to qualify you can use a conventional loan for the refi if you keep them in your personal names. You'll have lower fees and rates with conventional than you would with DSCR, but not as good as your current rate.

Dave Skow · Answer

@Maryanne Kichline- thanks - your best best to access the equity will be to do cash out refinances ....max loan to value will be 75% so it looks like you would have approx 60k-70K you could pull out on each property- best of luck

Jim Duncan · Answer

Hi Maryanne,As some others have mentioned, I'm confident you could still get 2nd mortgages on top of your conventional 1st, but it is just going to be a relatively higher interest rate for investment properties.The great thing is you have those low rates locked in, but the catch is... you have those low rates locked in :), so refinancing in your case should probably be a last resort. I would suggest you want to consider saving more aggressively first, and if that doesn't match up with your purchasing timeline, then get a 2nd mortgage with a higher rate and then still plan on saving to pay it down as quickly as possible.