Best way to get money out of rental?

Question

Hi guys,
I have a property that I previously lived in for many years prior to getting married and buying a bigger home and turning the other into a rental. We have had the rental for a while and now I am ready to purchase another rental home but am having a hard time deciding on the best financing method. I found a property for $150K that I would like to buy. I have $14K in a savings account, I have an income of about $460 a month from my current rental (after paying mortgage and taxes, etc.). I thought about a HELOC for the down payment, but the banks that I have talked to will only allow me to do 65% of value for a HELOC on a rental property. I thought about refinancing (the 3rd "R" in BRRRR) but the rates are higher than what I currently have. Currently, the rental property is worth $285K and has a mortgage of $175K, with a rate of 4.25% and the payment is $1,025. What is the best way to get enough money out of my rental for the down payment?

Justin Beides · Answer

@Vandale Gentry if you don't have one currently, have you considered using an FHA loan? More specifically a 203K loan? The 3.5% down payment total you would put on the house, so long as you live in it AND this is including coverage of a certain amount of rehab costs that can save you big money. If utilized correctly, this could definitely offset the increased interest rate that would come from refinancing your current living situation/future rental to fund your next deal. You can also consider partnering with another investor, or finding a private money lender to help you acquire the funds necessary to purchase this new property should you not want to refinance your current living property. There are plenty of ways you can go about it, you just have to get creative! Going back to the 203k loan, there are definitely pros and cons, but if utilized correctly the 203k loan can be extremely useful as an investment tool and definitely something worth looking into. Definitely do some further research and due diligence on it though before diving headfirst into it. If you'd like/haven't already, I recommend checking out Brandon Turner's book, No and Low Money down to get some good and creative ideas on utilizing cash flow wisely to expand your portfolio with minimal cash used. @Jerry Padilla already said this, but at the end of the day, an increased interest rate on a property can be offset by a property that will be generating more passive income to you and expanding your portfolio that, at the end of the day, will work to increase your net worth overall (so long as the numbers in your new deal work to your benefit and specifications of course.) The choice is yours on how you wish to go about it, I hope that whatever you decide works in your favor.

Laura Williams · Answer

@Vandale Gentry I have a couple friends who got homeowner loans with only 5% down. Is this a house you could live in for a year as your primary before turning it into a rental?

Jerry Padilla · Answer

@Vandale GentryHave you thought of a cash out refinance? You can cash out refinance on the investment property with an LTV of 75% - ($285k @ 75% = $213.75k) ($213.75k - $175k = $38.75k towards the down payment) I was assuming this is a SFR - a MFR would leave you with only a 70% LTV for a cash out refinance.New Purchase of $150k requires a down payment of 15% for a SFR investment purchase and a 25% down payment for a MFR purchase. = $37.5k for the down payment if this is a MFR & a SFR is $22.5k for a down payment.Keep in mind you will minimally need 6 months reserves of PITI for the subject property that you are financing. I understand rates are higher, but you do have to consider that getting the cash out allows you to further your investment purchasing. You should take into consideration what the profit will be with the higher rate and the second investment property versus keeping the original property at its current rate.

Caleb Jordan · Answer

You have make a judgement call on if a higher interest rate will be worth taking money out. Rates have gone up and this not your primary residence anymore so that makes rates higher for in this case. In a cash out you will probably only be able to pull 70% out, maybe 75% if you are lucky. Most lenders do not go any higher than that. If a cash out does not make sense then you'll want to find an alternative way to get funds. Partnerships might be an option.

Paul D Smith · Answer

First of all, I thought you could borrow up to 80% on a HELOC. I've never tried to push it that far, so I am not speaking from experience. Hopefully someone else can chime in, but I would say keep looking at other banks. Secondly, what about a HELOC on your new residence?And would you maybe have money in a 401K to borrow from?