Getting a 2nd mortgage for a third property

[Sarah Lyon]

Hello BP community,

I am a Raleigh, NC resident currently working towards purchasing my first duplex and though I am still far from making my third investment, I am curious - would I be able to get a traditional bank loan off the equity of my (future) duplex plus the equity from the single family home I have paid off or should I find another option for financing? And if I should find another financing option, what are some good options?

I plan to buy a short term rental in the North Carolina mountains next, but it will definitely be a bit down the road.

Thanks everyone!

[Will Kaufmann]

Different lenders will have different requirements. My understanding of conventional mortgages is that they are based on a combination of your debt to income ratio and maybe (usually) your liquidity ratio. 

In short, your "equity" in a rental property is not technically going to impact underwriting, but the positive cash flow (i.e., income) from it will. At the same time, the cash flow is a function of your debt and equity in the property, along with rental rates. Basically if it is positively cash flowing, it is income and not debt with respect to your debt-to-income ratio (DTI).

Some lenders may only look at an income ratio or debt ratio, not necessarily DTI. I think the unfortunate answer is that it really depends on the lender, but I will defer to someone more versed in lending to confirm that!

Other lenders may only look at credit and liquidity - think non-conventional loans (hard money, private mortgages, etc.).

[Shelon Hutchinson]

Hello Sarah,

  Congratulations on on real estate wins.  Having equity in a property is amazing for a number of reason.  The one I'll focused on is directly related to your question of: "would I be able to get a traditional bank loan off the equity of my (future) duplex plus the equity from the single family home I have paid off or should I find another option for financing?"  

It it very natural to associate bank with loans but I have learned in recent years that a Home Equity Line of Credit (HELOC) is more beneficial. One of the things I like most about the HELOC is the flexibility that it provides. Your HELOC provides you fast cash that can be used for any reason. Second think I about the HELOC is that as you pay down the principle, that amount becomes available for use. Take for example, you got approved for a $50,000 HELOC, you withdraw $20,000 to buy a property that you are going to renovate, you use an additional $15,000 for the renovation, total withdraw is $35000. Your After Repair Value (ARV) is $56,000 you refinance 80% of the $56,000=$44800. You then pay off the $35,000 balance on the HELOC and pocket $9800. Your credit line will be back at $50,000 and you just repeat the process.

**Number did not factor in closing cost and other fees.