Tell me if this plan makes sense please!

[Jared Hauf]

Good morning all, I have found a property that I would like to purchase as a second rental property for me. I'm still new to this so please tell me if this makes sense. My Home: Purchased for 342k in Sept 2016, currently owe 316k on it. Interest rate 3.75% - Not touching this property for this deal. $2054 Mortgage Payment First rental property: Former personal residence. Purchased Jan 2012 for 195k, currently owe 161k. I have rented this property out for about 2.5 years. Home value today is approx. 250k. Loan rate 3.65% $1750 rent. $1294 Mortgage Payment. Still paying PMI on FHA loan. Potential Rental Property: Listed for 115k. Potential Rent in area is $1200-1400. Could safely get $1200. I registered a business with the state of Maryland for real estate rental business which is what I would use to purchase this property. I have approximately 22k in the bank and 45k in the stock market in highly volatile stocks. So the 45k could be way more or way less on a daily / weekly basis. With the business loan they want 25% down on a 5/1 ARM loan. What I was considering doing was doing a $39k cash out refi on my rental property to bring the mortgage back up to $200k similar to where I originally bought it. Get it appraised again for roughly $250k. This would give me the $28,750 I need for a down Payment on the new rental with $10,250 spare as reserves for 6+ months on the property and any light repair work that may be needed. It would also reduce my Loan to value on the 1st rental to 80% and eliminate my PMI on that one which would keep my mortgage payment about the same or maybe even a little less accounting for the higher interest rates now. Does this seem like a logical and proper way to secure the 2nd Mortgage? I'd like to not have to dip into my bank savings or stock market funds to keep them as emergency funds. This was my only solution I could come up with and it seems like a 2 birds 1 stone way to get the 2nd mortgage and eliminate PMI on the first rental. Thanks everyone!

[Andrew Postell]

@Jared Hauf a couple of pointers here:

• There is a real difference in "conventional" loans vs. "commercial" loans.  A "convetional" loan (sometimes called a "conforming" loan) is a loan governed by Fannie Mae and Freddie Mac (if you recognize those names).  Those loans have the best terms and conditions but the paperwork is higher.  For example, conventional/conforming loans are 30 year fixed rate loans.  A "commercial" loan (sometimes called a "portfolio" loan) are governed by the bank itself.  Those loans should be easier to receive but the rates and terms are very different.  Thus the 25% down variable interest rate loan.
• If you were to receive a conventional/conforming cash out loan on an investment property the most you could receive is 75% of the value of the home.  This means you won't get as much money back but....
• If you were to receive a conventional/conforming loan to PURCHASE a property, you could do 20% down (or 15% down if you wanted to) and have a 30 year fixed rate loan.  So even though you won't receive as much money you also don't NEED as much money to buy.

Being that these are your first few properties I would recommend to at least explore the conventional route.  The lower rate and lower payments will help you cash flow AND they will help you qualify for future properties. Tag me if you have any specific questions on these loan types (or others).  Thanks!