Cash buy from heloc on Investment property

[Haley Cisar]

Hello! We are new investors here. Our primary home is paid off. We would like to open a heloc to pay for off market cash only deals for an investment property. The BRRR method but buying outright with cash. Around 210k open line.

I have been told that it's better to take a cash out refinance on our primary residence to purchase a rental. Not sure if this is true. We aim to rehab and do a cash out refinance on the investment property and then pay the heloc off. Ideally within a couple months. So the interest rate here doesn't really matter all that much because we are going to pay it off relatively quickly anyway. 

Here's my questions: 

1) does it matter whether we use the cash out refinance or heloc? It seems like there's more fees involved with cash out because we have closing costs associated.  There is only a fee for the appraisal with the heloc I believe. Pros and cons 

2) if we purchase the property cash, is there a waiting period for how long you have to wait to do a cash out refinance on the rental property? Because we would need to pay back the heloc on the primary quickly. 

TIA! 

[Raymond J. Rodrigues]

@Haley Cisar, me being a lender, I would go with a HELOC. In regard to your second point, if you purchase a property cash, if you are looking to cash out based on the after-repair value, you'll need to wait six months if going for a conventional loan. You are able to cash-out refinance sooner than that with a conventional loan but will not net as much. There are other loans that allow you to cash out sooner but do entail higher interest rates.

[Jon A.]

@Haley Cisar I'm not a loan officer, and you should talk to a loan officer. But here is my understanding:

1) There are pros and cons to either strategy, cash out or heloc. The benefit of doing a cash out refi on your primary as opposed to an investment property is that you'll get a better rate. The con is that you'll pay interest on that loan every month, regardless of whether or not you're doing a deal.

The benefit of a heloc is you only pay interest when you use it. Downside of a heloc is they're often variable rate, meaning you can be mid-deal and suddenly your carrying costs increase. In my region, at least, there are lenders who pay all costs including appraisal on a heloc.

2) Again, talk to a mortgage officer. But my understanding is that you have two options - delayed financing i.e. immediate cash out refi based on the PURCHASE price, or wait 12 months and cash out based on the APPRAISED value of the property, which would presumably be higher. You can probably find a lender to give you a cash out based on appraised value without the 12 month seasoning period. But you'll pay for the right. You need to make sure the rent can support those higher costs.

[Haley Cisar]

Thank you so much for all of that info! I plan on reaching out to a loan officer soon. 

My next question then would be this: 

if we cash out refi on the purchase price of the investment property to pay off the primary home refi, then how do you go about getting another property quickly? Can you cash out refi again and again on your primary? That sounds like alot of time and $$$. This is where I thought the heloc would be beneficial. Because you can pay it off and keep using it as you please. Is there another strategy here that I'm missing? 

[Phil Moore]

There are seasoning requirements for cash out refinances. What I mean is: yes, you can refinance your loan as many times you want as long as it fits your budget and your investment goals, but there is typically a requirement of time in between refinances. 

A HELOC is a revolving line of credit. As long as you pay it off, you can keep going back and using the money unlike a refinance that is a one-time situation. I don't know your personal financial situation, so it would make sense to discuss with a loan officer or financial advisor about your most important next steps.

[Jon A.]

Quote from @Haley Cisar:

Thank you so much for all of that info! I plan on reaching out to a loan officer soon. 

My next question then would be this: 

if we cash out refi on the purchase price of the investment property to pay off the primary home refi, then how do you go about getting another property quickly? Can you cash out refi again and again on your primary? That sounds like alot of time and $$$. This is where I thought the heloc would be beneficial. Because you can pay it off and keep using it as you please. Is there another strategy here that I'm missing? 

Either way you'll be cash out refinancing over and over if you want to keep doing deals. The question is whether you cash out your primary or get a heloc on it. You can a) get a heloc on your primary, use it to acquire an investment property, cash out refi the investment property to pay back the heloc, then use the heloc to buy another property. Or you can b) cash out refi your primary, use the proceeds to acquire an investment property, cash out refi the investment property, and use the proceeds to buy another property and so on. In the latter scenario, you don't cash out the investment property to repay the primary cash out; rather, you cash out the investment property to buy another investment property.

One more thing to keep in mind - when a heloc and the market turns, the bank can reduce the balance of the line, reducing your purchasing power. Whereas, the bank cannot come back and reclaim cash out proceeds.

[Raymond J. Rodrigues]

@Haley Cisar, me being a lender, I would go with a HELOC. In regard to your second point, if you purchase a property cash, if you are looking to cash out based on the after-repair value, you'll need to wait six months if going for a conventional loan. You are able to cash-out refinance sooner than that with a conventional loan but will not net as much. There are other loans that allow you to cash out sooner but do entail higher interest rates.