Should I refinance my 2nd rental condo to payoff a Heloc?

Question

I just bought a second rental property in Hilton Head, SC over the summer and could only qualify for an investment loan since this is my 3rd property.  I took out a HELOC to come up with the 20% down payment and it is a 10 year HELOC with the 1st year set at prime interest payments.  I was however able to get a 30 year fixed mortgage for the remaining 80%.

I am new to Bigger Pockets and keep hearing about BRRR.  My goal is to hold this property and use my lengthy experience as a short term vacation rental owner to rent it out, which I am already doing.  I am not planning to sell it or flip it, but would like to be able to pay off my HELOC and also buy another rental at some point.  Does the refinance make sense in this example?  I've only owned since July and the mortgage is at an estimated 70% of the value.  What would the fellow seasoned investors here recommend to knock out the HELOC without using my cash flow to do so?  I just paid $1700 down in principal on the HELOC and am now wondering if there is a better strategy here.

Thanks.  Brandy

Ethan Cooke · Answer

Hi @Brandy Morineau - I think it comes down to a few things:

- the interest rates you are paying on your various loans

- the return you can get on your next investment

- your comfort level with being leveraged and speculating on appreciation vs. paying down some debt before your next investment and being prepared for the next downturn

- where you can get the greatest tax advantages

I have refinanced my primary home in San Francisco twice and used the cash-out as a down payment on two San Fran investment properties. I chose to be fairly highly leveraged across my portfolio (e.g. 60% Loan to Value). Why? 1. I am a long-term buy-and-hold investor and the SF market will do well long-term even if it dips in the next downturn, 2. my primary home loan has the lowest interest rate and mortgage payments are tax-deductible and 3. I am betting that I will get a higher return on the additional money borrowed than the interest I am paying on that money.

Feel free to PM me if you have additional questions or want to talk. Good luck!

Ethan Cooke · Answer

@Alice K. - Thanks for asking. I avoid paying closing costs directly by baking them into the interest rate. Re: your second question, I work with the lender to prepare for the refi when I am looking for a property, so I can pull the trigger quickly if my offer is accepted. Several years ago I refinanced my home twice to take advantage of dropping interest rates. This was before I bought any investment properties. I have done the more recent refis to fund the down payments on the investment properties since most of my capital is in real estate.

I think now is a good time to refinance if:

- you can lower the int rate

- you plan to have the property for several years

- you have a good place to invest the money that you cash out

Based on what I've been hearing, I believe the Fed will raise interest rates 2-3 times in the next year.

I hope that's helpful.

Brent Coombs · Answer

@Brandy Morineau, the QUICKEST way of gaining the equity you always need before you can refinance is: Before you even make an Offer, try to ensure that you're buying at a significant discount off market value!

By "significant", I mean 25-50% off! But who sells at such discounts? MANY motivated/distressed folk, including Banks!

But aren't they usually properties that need a lot of work? Sure, but so what? How do Flippers make money?

If you want to SCALE your investing in a hurry, you need to be buying a lot of instant equity from day one!

Paying market value, and hoping that Lenders will keep lending more than 70% LTV - is fraught with danger.

You seem keen to pay off your HELOC " without using my cash flow to do so". Why?

Use your cash flow, just like you did by paying $1700 off its principal. (Remember, you can re-borrow it!) My 2c...

Jenny Ph · Answer

I would recommend to pay off Heloc if it is variable. Which bank did you borrow HELOC? There is one trick that once you almost pay off, the bank will offer you a very low rate for 12 months or so on if you withdraw. So you can entertain the low interest rate by slowly paying it off. Some Heloc in the past has reached over 10% so if you can pay off, go ahead.

Garry C. · Answer

I'll echo what I've seen above, in that a lot of it depends upon what interest rates you're looking at with each loan, and other terms. What's more favorable to you, and why?

I can tell you that I have done this, it made sense in my case. I paid cash for my first rental, used a HELOC on my primary home as the down payment for my second rental, and then put a mortgage on the first rental when it (more than) doubled in value. That mortgage was then used to pay off the HELOC and put a down payment on my third rental.

I'm now looking at another HELOC, as rates are even lower than they were on my first one. Although because those rates are so low (1/3rd of the last HELOC), I might choose to pay it off over time rather than getting out as soon as I can.

Sam Shueh · Answer

Brandy,

Without knowing the loan amount it is hard to estimate your total obligation. So home has appreciate 10% and you are motivated to refine to get your 10% back? I am not sure what the cash flow will look at as short term vacation.

Having that many mortgages can be a risk.  Do not anticipate homes to appreciate much more we are almost at the peak with increasing chance for a recession in about 18 months per Wall Street.

Suggest you talk to a mortgage broker on refin.

Steve Babiak · Answer

One thing to keep in mind that the HELOC offers both advantages and disadvantages; only you can decide how much risk you are willing to take and how and where.

The HELOC interest rate can be variable; it could go up (disadvantage) or it could go down (advantage but unlikely with rates now being so low).

You pay interest only with some HELOCs, improving cash flow (an advantage); some people are uncomfortable with no principal being paid down (disadvantage to these people).

You can draw on that HELOC during the draw period, a plus if you need more capital for a new purchase it for renovations. The draw period is usually short, 10 or 15 years, after which you have any unpaid balance convert to fully amortizing (principal and interest repaid on a monthly basis from then onward).

By refinancing the property, your HELOC is back to a zero balance so you have it ready for the next project. This is not a bad idea, and the risk with the HELOC collateralized by your home is shifted to a loan collateralized by the investment property (as it probably should be). That means less risk of losing your home with a zero HELOC balance.

Alice K. · Answer

Thanks for the tips! Incredibly helpful. Didn't even dawn on me I could keep in touch with a lender while I dig for properties.

Rolling in closing costs also seems like it could be handy; cash on hand post-purchase was something I didn't really appreciate until after the fact when I did my first transaction.

Alice K. · Answer

@Ethan Cooke - When you do end up re-fi'ing, what is the usual closing cost you end up paying?

E.g.: Do you wait until your home has gone up x amount of value or do you wait until you find a property you like and then do the refi?

Thanks in advance too! I keep hearing about refi's but rarely hear about closing costs / when they feel it's the right time to do it.

Christy Browning · Answer

Hi @Brandy Morineau, thanks so much for posting this question! I am in a similar circumstance and very curious to see other responses come through on this. My SFH has appreciated around 15K since I bought earlier this summer - I had initially planned to keep a close eye on the market and likely wait around a year to refinance and pay off the HELOC if it keeps at this pace. Looking forward to hearing other advice. Congrats on your purchase as well!

Should I refinance my 2nd rental condo to payoff a Heloc?

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