Is it possible to have Untouchable Equity???

Question

Over the last 3-7 years I have purchased 4 SF homes, currently all are about $310,000. Average remaining mortgages are about $150k. I would love to use the equity but my interest rates (after refinancing) are at 3.25% and I cash flow them all for about $450-500. Seems crazy to give up that rate to use the equity. I am still saving up cash and continuing to buy in this market. Any suggestions?

Thanks

Susan Chagalian · Answer

The home equity lines (HELOC) or home equity loans (HELOAN) may be good options to use provided that the project you are using the funds for has real solid profit margin to justify the expense.  The HELOCs, if on a primary home, may have an average start rate of 9.5%+  as of today.  They're based on Prime which is now at 8.25% plus a margin and life cap.  The life cap may be as high as 18%.  The specifics are determined based on the total combined loan to value, credit, and income.   HELOANs are fixed rate 2nd trust deeds with rates in the 12%+ for a primary home and 13% or higher on investment properties.  They are allowed on investment properties from 1-4 units.  And just like HELOCs they have specific guidelines based on value, credit, income and the number of the units, the investor and state and even county requirements.  Hope this helps.

Regards,

Brittany Minocchi · Answer

Hey @Christopher Kelley!

If you don’t want to lose a low interest rate on your first mortgage by refinancing, a HELOC is  great option. Finding one on an investment property can be a little more tricky than finding one on a primary (especially if it’s a multi family, but it sounds like that doesn’t apply to you) and the rate and terms - like max LTV, annual fees, rate and draw periods - will vary. Some take as little as a week to fund, others might take closer to 3-4 weeks if the timing is a concern. Some require income docs (W2s, paystubs, etc) just like a traditional loan, others use alternate methods to verify income and are a little more lenient. Just depends on what you’re looking for.

Happy to chat if you have any questions!

David M. · Answer

@Christopher Kelley

Pretty much...  Think of it this way, you can't normally get a 100% ltv financing.  Now that we are in a rising rate environment you can' t just "willy nilly" keep cash out refinancing.

However as mentioned, you need to look at your overal numbers and not get tied to your low rate.  Unless you really think rates will go back to ~3% in the near future, you will need to work with the existing rates.  People have made money before in even higher rate environments, you can do it here too.

Good luck.

Erin Church · Answer

Hey Christopher,

Nice equity! I do like the idea Andy mentions of getting a line of credit and some credit unions/banks will do that as a portfolio so it's one transaction.

I totally get not wanting to give up the low interest rate, but it could be worth it if you can make another investment that would make up for the cash flow/appreciate/tax benefits. Here's what I'm thinking.

You have 4 houses that are at about 48% LTV. (Going with $150k/house in debt and $310k value.) You could pretty easily do a cash out refi at 70%, which would give you around $268k (or around $67k/house). If you do this as a portfolio or individually will impact closing costs. I'm going to be conservative and say that you'll have around $57k/house to "spend". So, plan on $228k that you can make liquid. If you have $228k, what can you do with it? If you're doing 25% down, you're looking at around $900k in purchasing power. There are options that would allow 20% down, then you've got about $1.1mil in purchase power. Are there deals that would cash flow?

I'd consider what your properties are doing now (and what that profit looks like this year, next year, etc) versus adding in another $900k - $1MM worth of properties. If you end up with the same cash flow overall, would it still be worth it to own more properties? (I want to mention that I'm assuming you're counting cash flow as rent minus (a percentage of CapEx, maintenance, PM, vacancy, expenses).

Bartosz Rosol · Answer

I’m in the same boat so I’m doing my research now. I’m locked in a 3.15 MFH w built up equity over the last 3 years so I’m looking to pull out and use as a downpayment on the next property.Reach out to your local bank and ask about opening a HELOC. Any equity >20% can be pulled out. HELOC’s are a line of credit open for 10 years It doesn’t take much to open it, maybe $50 annual fee. You’ll need to supply your standard doc’s (W2s, pay stubs, etc). Appraisal costs are usually built into the rate. Takes 4 weeks to get it open, but have direct access to the cash once you find the next property.

You mentioned your already cash flowing +400. Pulling out 50k on 8% would result in $350 monthly payment which is already covered by your excess.

Andy Algreen · Answer

Hey Christopher, here are a couple options that you could explore. Firstly, instead of going for a cash-out refinance, you could consider taking out a Home Equity Line of Credit (HELOC) on your homes. This way, you can tap into the equity without giving up your favorable interest rates. Another option to explore would be selling your properties and doing a 1031 exchange. This would allow you to upgrade to a small or large multi-family property, depending on the amount of cash you'd like to pull out and avoid paying the capital gains taxes on the sale. These options could potentially provide you with more flexibility and opportunities for growth.