Financing My Second Rental Property

[Brandon Fredricks]

Hi all,

First time poster, long time reader. I'm interested in purchasing a second rental property, and looking for input/advice on how to finance it. Here's my situation...

I currently own a single family rental property free & clear with a FMV of approx $115K (zestimate). The property cashflows $1,025/month after insurance and distributed property taxes. I'm looking at purchasing another comparable single family for $90k-$100k. Additionally, I own a home with a FMV of approx $325k (zestimate) with a mortgage of $170K at 3.170 APR.

I've just started to research and compare cash-out Refi's, HELOCs, Home Equity Loans. Ideally, I'd like to leverage the equity in the free & clear rental to purchase the second property. My initial research says that may be difficult as it's deeded to my LLC, and it may be easier/advantageous to instead leverage the equity in my personal home instead.

Any insight would be GREATLY appreciated! Thanks everyone. 

[Kevin Romines]

Hmm, well a few options come to mind. 1st you could do a cash out refinance or a HELOC on your primary residence to get the money needed for the down payment & closing costs. I prefer the HELOC in that case, as the HELOC can go up to 90-100% and you are only making payments on it while you have cash drawn out on it.

Next, you could do either a cash out or HELOC on the rental. However, you would need to revert title to your personal name in order to do either of these loans. The good news is that if you do a Fannie Mae 1st mortgage, Fannie allows you to move title to the property to an LLC after closing, so long as the borrowers on the loan are the majority members of the LLC. They allow this and it doesn't violate their Due on Sale clause of the loan. But only Fannie Mae allows this, no there lender does.

You could also do a cash out refinance with a Non-QM loan. This loan type doesn't necessarily follow the QM or Qualified Mortgage rules, and because they don't, this allows them to do loans to your LLC, most times with a personal guarantee. The rates tend to be about 2% higher than a Fannie Freddie loan, but you are paying for the unique features of the loan type.

Further compounding issues are the fact that the Regulators of Fannie / Freddie who is the FHFA just announced on the 12th of this month, that they will now not let any lenders selling to Fannie and Freddie be able to sell any more than 7% of their portfolio to Fannie and Freddie that are 2nd homes and rental properties. So with that issue, it may be hard to find a lender that can take your cash out refinance of the rental through Fannie Mae and Freddie Mac. Some lenders will have raised the rates on Fannie Mae Freddie Mac loan type by 2% or more?

So again, with that said, My opinion of the best route for you to take is to get the HELOC on your primary for as much as you can. Then use that to cover the down payments & closing costs on the new purchases. Call around to discuss the ability for a particular lender to loan you money as a Fannie Mae Freddie Mac loan at the best interest rates, there will be differences from 1 lender to the next.

You should be able to get the HELOC for about $122,000.00 which will cover as much as 922K in rental purchases + closing costs if you only buy single family residences. If you only buy 2-4 unit properties, you will have enough off the HELOC to buy up to 610,000.00 due to the higher down payment required on 2-4 unit properties.

If you need a referral to a loan officer in your state, PM me, I'd be happy to help with that. 

I hope this helps?