Financing options for first rental property: HELOC / 5yr ARM Refi

[Jacob Meyer]

Greetings,

I am working out my financing to begin my investing journey. Currently I have a paid off primary home with ~$400,000 of equity. I would like to begin with a duplex, quad, or the right single family home. I want one that needs cosmetic work and potential for value add in the future, but not looking to BRRRR out of the gate. My target price point would be ~$200,000 for the rental property.

Plan A: 

My initial plan was to get a HELOC on my primary residence at 80% LTV (~$320,000) and utilize that for the down payments of 20-25% down. I would then use a conventional 20-30yr loan for the remaining 75% of the deal. I could then fund the down payments of 2-4 rental properties using my HELOC and secure a mortgage for the remaining 75%. Then I am not tying all my equity up into one rental if I purchased it with cash. (I was able to find 2 local banks that will go (-0.75%) under prime for their margin (6.75 - 0.75 = 6% for HELOC). Everyone else adds 1-2% on top of margin). I have began the HELOC application at the 2 banks with the better rate options.

Plan B:

I then called a bank about a conventional loan for the remaining 75% in plan A. Since the conventional rate is 6.75%, he said a lot of his clients are doing a 5 year ARM Refinance that is at 4.5%. Closing costs are $420. This bank has offered this 5 year ARM REFI for years now and the rate has stayed that way for many years as well. The bank does portfolio loans, so they are not selling this to FANNIE/Freddie. They keep it on their books. There is NO balloon payment. After the 5th year you can refinance it into another 5 year ARM at the current rate (He said the rate has not changed in years, curious to know if there is pressure now or not since they are portfolio lenders).

His recommended plan was to REFI the primary residence for $200,000 on the 4.5% 5yr ARM and pay cash for the rental property and own it out right (transfer my equity to the rental from my primary)

To get a second rental property of $200,000 purchase price: REFI the paid off rental at $160,000 with 4.5% 5 yr ARM (can only do 80% REFI of the value of the rental= $160,000) and HELOC the primary residence for $40,000 for the down payment ($40,000 HELOC + $160,000 REFI = $200,000 purchase price).

I found out that if I did the REFI ARM, that the ARM lien would have to be in 1st position and the HELOC I will have opened would have to be closed (and i'd be out $750 for early closing costs).

Now i'm not sure which  way to go:

PLAN A: HELOC the down payments (6% interest) and use conventional loans 6.75%. Then i am spreading my Equity to more rentals and gaining more for it. Seem easier to gain properties if deals come up.

PLAN B: REFI 5yr ARM 4.5% for the entire purchase price of the rental ($200,000). The 2nd rental would be purchased with a Refi of the 1st rental and HELOC on primary (Unless we save enough cash before then for the down payment)

Thanks for your thoughts.

[Ryan Stuckey]

If you want to scale up to multiple properties, you will need to get a business entity formed to own the properties, for several reasons. From a financing standpoint, non-conventional financing can be used that won't need to validate your personal income/debt/employment info. The loan would report to the business entity and not add to your personal debt (and worsen DTI ratio). These loans are based on asset value, e.g. value of the property and/or cash flow of the property and can thus scale repeatedly.