HELOC/ReFi or new loan for investment property?

Question

My home is paid off and worth about $500k.

I'd like to buy an investment property for about $300k.

Is it better ReFi or get a HELOC and use the money to buy an investment property with the cash? Or is it better to get a loan on the new/investment property? pros/cons?

Dennis Muno · Answer

Well the only way to know what is or would be better would be to run some number on both scenarios. You should talk to a lender/mortgage broker and find out the interest rates, loan terms, would the interest rate float, how much loan amount would you would get for a HELOC vs refi on your home vs an investment property. I believe if you do that you would get a better idea on how to proceed

Aj Parikh · Answer

HELOC rates are too high right now so cash out refi at a reasonable rate is the best option I feel.

It's a very common strategy to take out capital from your primary residence and invest in a cashflow or appreciation heavy market. I am a huge fan of investing out of state in turnkey properties in the mid-west. If that is something you want to explore, feel free to reach out.

Jim Duncan · Answer

@Kerry Baird Yes, we do have a different fixed rate option than Figure. You can pick between terms as well in most cases as well... 5, 10, 20 or 30 to help adjust the payment to whatever you need

Kerry Baird · Answer

@Jim Duncan, thanks for educating me on the fixed rate HELOC.  The only one I've seen that offers that is Figure.

George Despotopoulos · Answer

There are pros & cons of both and a bit depends on certain facts that we don't have (mostly around your profile as a borrower (what's your credit score, liquidity, etc) and the asset (when did you buy it, how many units is it, what's the cash-flow look like, etc). Do you qualify for a HELOC? What do the terms look like? Also the same goes for a cash-out refi against the property. To get a better idea, it's prob best to get a quote for each type of loan.

Alan Asriants · Answer

Likely a home equity loan would be better since you will fix your rate. Consider only taking out $100k or so for a 25-30% down payment on your investment property. If you find a deal that services both debts and leaves some money in your pocket I think you would make a great move.

I think Heloc is a good short term solution, for an emergency fund and repair that you can later pay off quickly.

Talk to your Lender and CPA as well and see what they think.

Jim Duncan · Answer

@Wesley Elliott Just to sort of echo, but expand on some of the things Kerry said...

Your best financing terms are probably going to be getting a mortgage to purchase the new property. As you don't have any other debt, and could potentially even purchase the new property as a new primary residence or second home, if it wasn't located in the immediate vicinity of your current property, you would get the most competitive terms that way.

Down the road, you would still have equity in the first property to get a HELOC if you needed to. And actually, just to clarify, there are HELOCs now that have fixed rates (not always adjustable) at pretty competitive terms, not much higher than if you were getting an investment mortgage, but are often quicker and easier to apply for than a full cash out mortgage. Oftentimes applying for a HELOC, if you're going to the right place, can be more like applying for a credit card, without appraisals and tons of additional closing costs, so they definitely make sense in a lot of scenarios.

Kerry Baird · Answer

@Wesley Elliott, I forgot to tag you.  Short version is get mortgage on your own house, buy one or two rentals.  Get HELOC for emergency fund.  Use debt snowball to pay off houses as fast as possible.  This is based on observing you value having a paid off house.

Kerry Baird · Answer

The word “better” makes this a difficult question for me to answer, because you put it out there in a vacuum.  I’m not paid to be your advisor, so I am not aware of your financial situation and I don’t know your goals or experience.  At a younger age, I wanted as much leverage as possible so that I could buy as many houses as possible.  I observe you have a paid off house, so you probably value that.  There are a couple of scenarios that would work.

Mortgaging your house and using the funds to buy another rental is a reasonable way to get funds for the new property, and the monthly payment would not change since the mortgage is fixed for 30 years. Homeowner are going to get the best down payments and interest rates on an owner occupied property.  So it makes sense to start there, because the cost of money is best, the time horizon allows for flexibility (you can pay off a 30 year loan early, and payments are low vs a 15 year).

HELOCs have variable rates, but can be utilized and paid off repeatedly.  That variable rate results in monthly payments that go up and down, which contributes risk to the use of HELOCs.  They also look like a credit card on our Debt to Income ratio, which can cause issues with getting other mortgages.  So you want to do the long term mortgage first, and perhaps use a HELOCs for an emergency fund.  Or make a draw and let it season in a bank account for several months to use for purchase funds.

We started off using the “Debt Snowball” method, where we bought several starter homes, and used all the excess rents to pay off one rental house.  Then we used the excess rents to pay off the second house, and so forth.  It was slow in the beginning, but got faster as we went.  My original goal was 5 paid for houses.