Should I go HELOC, hard money, or some other vehicle?

Question

I'm looking to buy a 2nd property which will become my primary residence (SFH or Duplex).  Here's where I'm at with my primary residence:

Appraised value: $1.189M

Loan balance: $574k

My question to BP folks is what are my best financing options to purchase this next property.  The likely purchase range in my area for things we're looking at is between $550k and $800k.  The ARV (rehab cost of ~20k) on them is 700k for the low end ones and about 875k for the high end one.  The deals I'm trying to get into are off market and require all cash offers. This leaves me in a bit of a bind as I only have about $200k in liquid cash right now. From my limited knowledge I understand my options to be as follows:

1. Heloc on PROP1 to pay in full for PROP2.

a) Limits my purchasing power to the low end of my range based on 60% LTV on the equity (Wells Fargo) [(1.189M - 574k)*0.60 = $369k -->  $369k + $200k = $569k of all cash purchasing power].

b) I'm not entirely clear on the restrictions of refinancing PROP1 or PROP2 after everything closes. If anyone could shed light on this I would greatly appreciate it.

2. Hard Money Loan

*a) New to this form of lending, but my understanding is that I use PROP1 as collateral for a hard money loan.  Will a hard money lender take 2nd position to a bank mortgage with that much equity as collateral?  What is "industry standard" for these types of hard money loans?  2-3 points and 10% interest or something along those lines? Will it be difficult to refinance PROP2 to a traditional mortgage and pull enough money out to pay down the HELOC to zero?

3. Financing options that I'm not thinking of or aware of...

There are a lot of questions baked in there, but hopefully that give enough of a sense of my situation to elicit some good discussion/advice.

Lem Diaz · Answer

@Kyle J. Thanks a ton for your response.  The heloc rep I talked to told me based on my numbers the max I can get on loan via a heloc at wells is $369k.  That said, there's a better than zero chance that it was this guy's first day on the job because it took him 45 minutes to finally get to that information for me.  Although I could hear someone coaching him. Definitely need to get some additional data points.  Thanks for the clarification on the LTV calculations.  I had him walk me through his math like 4 times...but sounds like we both were using the wrong formulas here.

Sigh...this puts me in even worse positioning then.  Doh!  Unfortunately I don't have many friends or family that are in a position to loan me ~$200-300k.

Regarding the hard money lender not wanting to loan on an owner occupied property...it won't be owner occupied once I move to PROP2.  2 out of the three rooms are already rented in my current house...if that matters. Will that matter in the lender's mind at all?

Kyle J. · Answer

Hey @Lem Diaz,

A couple points of clarification.  Wells Fargo (or really any lender) will usually do a HELOC on a % of the total LTV (not on the equity).  So it's not likely they'll give you $369k based on the numbers you posted.  It'd be more like $139k.  (60% of 1.189M is $713k and you already have a loan for $574K so if you subtract $574k from $713k then that leaves you of $139k of available equity before you hit 60% LTV.)

Now, from my experience with Wells Fargo, I know they'll do 60% LTV for HELOC's on investment properties, but it sounds like the property you're trying to get a HELOC on is currently your primary residence.  You should be able to find lenders who will go above 60% LTV on an owner-occupied property.

As for a hard money loan, not only would that be really expensive, but the bigger issue is going to be that you will not likely find a hard money lender willing to lend on an owner-occupied property.  They typically only do loans for investment properties.

Is there any chance you could borrow the money from a friend/family member (i.e. private loan) so that you could buy the property with all cash?  Then, once you own it, you could take out a cash-out refi mortgage on the property to pull some of the cash back out and pay back the private loan.  Just a thought.

Should I go HELOC, hard money, or some other vehicle?

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