Best way to leverage a paid off house to acquire more properties?

Question

Relatively new to the game. Currently own 3 STVRS in good vacation markets. 2 Gross over 50k and 60k each annually and 3rd just went on the market and that one is paid off entirely and we anticipate it should do the same in annual rentals. Market value is around $380k on the paid off house. We now have an opportunity to purchase another STVR down the road for $245k (turn key- fully furnished) with 2019 annual rents of $40k+.

My question is - does it make sense to take out a HELOC on the paid off house and just purchase the new property outright using $245k of the HELOC money. Based on current advertised rates I am estimating that during my 10 year draw period my interest only payments will be around $816/mo. So essentially I would have 2 income generating properties for $816/mo. I am 100% confident that between the 2 I could easily cover the HELOC payments even if the rates adjust. And still use some of the cash flow to pay down the heloc as I go.

Theoretically- could I continue to acquire more properties this way by taking out a HELOC on the most recently purchase property assuming of course that I meet the requisite LTV?

Other than the adjustable feature of the HELOC- is there any downside that I am missing or is a cash out refi a better way to go and if so why? I like the idea of the $0 closing costs on the HELOC.

Advice or suggestions appreciated.

Glen Friedman · Answer

JR,Congrats on the success. I own 9 Airbnbs in the Jacksonville, FL market.I have had great success with non QM cash-out refis on my properties. Usually, I purchase properties either with cash or a short-term hard money loan and then turn them into 30 year fixed mortgages in the 5 1/2 - 7 % interest rate range.The loans are NOT based on tax returns. They are based on your assets, credit score and potential revenue from the property.Give a call to my mortgage broker, Alaina Johanson at Resource Financial (google her name and company in the 904 area code. BP doesn't allow you to post phone numbers). Or PM for details.Tell her I sent you. She's awesome to deal with.Hope this helps,Glen

Michael Baum · Answer

@JR Woolf, you need to shop around. If you have verifiable income via tax returns, schedule E forms etc they should consider that income.Try other places. Smaller local banks, maybe credit union? You really should be able to qualify for a mortgage based on the income coming in on the other rentals.

JR Woolf · Answer

@Michael Baum. Thanks guys for the info. Homes are in Highlands, NC and Tybee Island, Ga. Only reason I am shying away from the conventional route is because I have a commissioned based job and even though I have over 10 years in the industry I recently switched firms a year ago so only have a 1 year history. Plus I have some concerns about qualifying for a 4th mortgage based on my DTI ratio. Last time I asked the bank they would not consider my cash flow from the rental properties.

Michael Baum · Answer

Hey @JR Woolf, I agree with @John Underwood (I usually do!) with his plan. A small HELOC to get your downpayment and then just purchase the property outright.No worries about the whole nut going crazy APR later with a fixed. Then just drop all the cash on the HELOC, finish it off then hit the primary.Sounds like you have a sweet thing going. Where are all the VR's located? Very cool!

Mark Miles · Answer

Another proud member of the “invest in the South” club, I love it!

Anand S. · Answer

Keep looking for other lenders. Some are willing to look at projected income of the home to factor into the DTI. They will do an appraisal that takes into consideration the income as well as the value. Rates are going to be a bit higher but you can cash-out refi later to a better rate.

Marcello Di Gerlando · Answer

@JR Woolf I will have to agree with both@Michael Baum and @John Underwood on this. HELOC seems like a risky approach and personally don't know that I could stomach giving that much equity away over the long term. It does look like you have a good thing going on so kudos to you. When anyone projects this level of success I hesitate to suggest alternative approaches.I can only speak from personal experience; when I use HELOCS it is strictly in a limited way and always with a plan to close it out in short order typically 12 months or less. Your line of reasoning seems sound and your road block with DTI is obviously frustrating. You may want to consider your HELOC approach in the short run, season your STR for a year or so and then seek out a portfolio lender to cash-out REFI based on rental income.Good luck

John Underwood · Answer

Why not use a version of BRRR and do a cash out finance to purchase the new property or why not just get a conventional loan on the new property? You could use a heloq to help with the dow payment and pay that off first.