Investor · Locust Grove, GA · Member since 2011 · 40 posts · 4 votes
Hi all! I currently have a SFR Rental Property that I paid off late last year. I am very interested in doing more real estate investing, but this time, using the BRRRR Technique.
So, instead of using private/hard money to fully fund any deal, I was thinking of doing a cash out refi on the paid off rental and using those funds to help purchase another property.
I am at a crossroad. Go with private/hard money to fully fund the deal, or do a refi? What would you do? My property is worth approximate $90K.
Set up a HELOC and pull out enough to do the minimum DP. At the same time use more of the HELOC to purchase more non BRRRR investments with minimum down on each.
Lender · Rockville, MD · Member since 2008 · 498 posts · 199 votes
8y
@Kelvin Washington, get a HELOC instead. No payment UNTIL you use it. Plus, with the new tax bill, I believe that you can expense and write-off the interests on the HELOC if used to purchase Rental Properties. Check with your CPA, and I think there is a thread on here started by @Brandon Hall that may be helpful to you as well. Happy Holidays!
Honolulu, HI · Member since 2017 · 231 posts · 191 votes
8y
@Kelvin Washington with BRRRR you will be looking to refi for the last R anyway. This first property could be looked upon as the ending of your first BRRRR whether it's a HELOC or a cash-out refi. Or both! Sounds like a good problem to have.
Set up a HELOC and pull out enough to do the minimum DP. At the same time use more of the HELOC to purchase more non BRRRR investments with minimum down on each.
Set up a HELOC and pull out enough to do the minimum DP. At the same time use more of the HELOC to purchase more non BRRRR investments with minimum down on each.
I second this. In Brandon's book he runs the numbers on one house owned outright vs. several with debt payments. If you can find deals, you come out way ahead.
Lets say you can find $90K houses for $75K. At 20% down you can buy 5 more. Now you have:
6 x $90K houses earning $6000 / month minus:
$1200 capex $360 vacancy $360 Repairs $1200 tax & insurance $600 management $700 HELOC (this is about what I'm paying on mine)
$1580 / month NET
In the leveraged option, your are more diversified - very low odds that 100% of your houses will be vacant at the same time. You're getting killer tax benefits and (people on this board tell you to not count on this but ignore them) you get appreciation on 6 houses instead of one. Under option 2, you're a millionaire in 30 years. In Option 1, you have a house worth $200K. Make other people's money work for you!
Professional · Lowell, MA · Member since 2014 · 232 posts · 223 votes
8y
Agree with all of the above-- there's no 'real' advantage to a free and clear rental property-- it's akin to borrowing $3K from a friend at 10%, when you have $10K in the bank doing nothing. some leverage is good-- especially if you can write off anything as a business expense.
Having no mortgage is great, but having a Mortgage payment (INCLUDING calculated tax & insurance amounts) up to about 50% of your anticipated rental income gives you a very safe cushion and yet gads of cash to do your other deals with.
Don't forget to calculate those tax & insurance figures--- in your situation the lender won't likely require escrows, and the last thing you want is to be blindsided by these outlays once a year or quarterly. You may even be able to negotiate a better rate by ALLOWING the lender to Escrow T&I itself, because when they control these, it reduces their risk further... and it's only one payment to think about for you.
YMMV-- Just food for thought there and I guaranty others will have strong opinions on the other side of the coin there.... perhaps they'll even start with "That's a horrible idea!" At the end of the day, it's about what you want to control vs. what you want to defer to others, and just how much it's worth (to you & the lender) to decide one way or the other.
Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
8y
I'd go with a cash out refi or a HELOC. I've used both on a paid off property to buy other properties. Both have their pros and cons, but either would be cheaper than hard money. If you knew you had a specific use for the money, I'd go with the cash out refi for the fixed rate, longer term money. If you just want the money to be accessible in case you need it but you're not sure if you will, I'd go with the HELOC because you won't have to pay interest on it unless and until you actually use it.
Investor · Locust Grove, GA · Member since 2011 · 40 posts · 4 votes
8y
Wow! You guys gave me some solid advice that I didn't think of, especially in regards to a HELOC. Tomorrow, I will be contacting a few lenders to inquire about their rates for a refi as well as a HELOC. Thanks for the quick and positive replies. You guys are awesome!!
Laguna Niguel, CA · Member since 2012 · 122 posts · 58 votes
8y
I think the difficulty will be finding a lender that will give you a HELOC on an investment property. You will probably have to look at local CUs. Anyway, let us know what you find.
Investor · Arcata, CA · Member since 2015 · 76 posts · 34 votes
8y
I second the HELOC. Low interest rates and only paying on the money when you use it. May have to shop around a bit as some banks aren't as willing or have different terms when using a investment property instead of a primary residence.
Bergen County NJ · Member since 2013 · 20 posts · 1 vote
8y
Hey Kelvin congrats on your free and clear property. I personally like using Helocs for the simple reason that you only pay for what you use. I used one on my primary residence to purchase a duplex.
For a PR most banks don't charge closing costs. On an investment or rental property they will.
TD Bank does Helocs on investment properties. If I remember correctly they offer about 65% of the home's value. They give full details on their website. At one point they were offering 89.99% Helocs on a primary. "SICK"
I can't stress enough how important it is that you do your due diligence when calculating the numbers. Don't leave anything out. Insurance, taxes, cap ex, vacancies, repairs etc.
I would also recommend buying a multifamily. It adds another layer of protection. With a SFR you have to cover all expenses if the tenant stops paying. With a multifamily you will have other tenants contributing.
As a final note you should make sure you can cover all expenses should all tenants stop paying, or interest rates skyrocket in the near future. It's better to be safe then sorry.
Investor · Milwaukee, WI · Member since 2014 · 69 posts · 13 votes
8y
I have done Heloc and Cashout Refi. The heloc was nice but if you max it out it is hard to pay it down and it hurts your credit if its maxed out . A heloc is basically a credit card on your personal home ... the same utilization rules apply. I purchased my second and 3rd property (both free and clear) refinancing ..
I second the HELOC. Low interest rates and only paying on the money when you use it. May have to shop around a bit as some banks aren't as willing or have different terms when using a investment property instead of a primary residence.
Good Luck!
When you say low interest rates, how low? And what is considered a good deal on HELOC?
Hey Kelvin congrats on your free and clear property. I personally like using Helocs for the simple reason that you only pay for what you use. I used one on my primary residence to purchase a duplex.
For a PR most banks don't charge closing costs. On an investment or rental property they will.
TD Bank does Helocs on investment properties. If I remember correctly they offer about 65% of the home's value. They give full details on their website. At one point they were offering 89.99% Helocs on a primary. "SICK"
I can't stress enough how important it is that you do your due diligence when calculating the numbers. Don't leave anything out. Insurance, taxes, cap ex, vacancies, repairs etc.
I would also recommend buying a multifamily. It adds another layer of protection. With a SFR you have to cover all expenses if the tenant stops paying. With a multifamily you will have other tenants contributing.
As a final note you should make sure you can cover all expenses should all tenants stop paying, or interest rates skyrocket in the near future. It's better to be safe then sorry.
Bergen County NJ · Member since 2013 · 20 posts · 1 vote
8y
Right now my rate is 4.25%. It changes to what ever the prime rate is. My rate includes a .25% discount because I have a checking account with them.
If you opt for the regular 80% heloc your rate can be as low as 3.74%. I just checked their website.
For investment properties I believe its 1.75% plus prime.
I forgot to mention another layer of protection a HELOC offers that traditional cash out refi's dont. For the first 10 years you have the option of only paying the interest on the amount you borrowed.
Right now my rate is 4.25%. It changes to what ever the prime rate is. My rate includes a .25% discount because I have a checking account with them.
If you opt for the regular 80% heloc your rate can be as low as 3.74%. I just checked their website.
For investment properties I believe its 1.75% plus prime.
I forgot to mention another layer of protection a HELOC offers that traditional cash out refi's dont. For the first 10 years you have the option of only paying the interest on the amount you borrowed.
I believe you won't get 3.74% on the amount less then 200k borrowed. At least that's what we have been quoted. How big is your line?
I second the HELOC. Low interest rates and only paying on the money when you use it. May have to shop around a bit as some banks aren't as willing or have different terms when using a investment property instead of a primary residence.
Good Luck!
When you say low interest rates, how low? And what is considered a good deal on HELOC?
It is at 5% now but was 4% when I opened it about 3 years ago. That is with the .25% discount for having auto payments. 100K line.
I second the HELOC. Low interest rates and only paying on the money when you use it. May have to shop around a bit as some banks aren't as willing or have different terms when using a investment property instead of a primary residence.
Good Luck!
When you say low interest rates, how low? And what is considered a good deal on HELOC?
It is at 5% now but was 4% when I opened it about 3 years ago. That is with the .25% discount for having auto payments. 100K line.
We just opened the HELOC of k60 with fixed rate of 3.99% , $0 closing costs. The only downside of this I guess that it's only 3 years draw period with 10 years Amortization.
But we figure that going to find a good deal or maybe a few deals within 3 years. I am just not comfortable with floating rates.
Set up a HELOC and pull out enough to do the minimum DP. At the same time use more of the HELOC to purchase more non BRRRR investments with minimum down on each.
I second this. In Brandon's book he runs the numbers on one house owned outright vs. several with debt payments. If you can find deals, you come out way ahead.
Lets say you can find $90K houses for $75K. At 20% down you can buy 5 more. Now you have:
6 x $90K houses earning $6000 / month minus:
$1200 capex $360 vacancy $360 Repairs $1200 tax & insurance $600 management $700 HELOC (this is about what I'm paying on mine)
$1580 / month NET
In the leveraged option, your are more diversified - very low odds that 100% of your houses will be vacant at the same time. You're getting killer tax benefits and (people on this board tell you to not count on this but ignore them) you get appreciation on 6 houses instead of one. Under option 2, you're a millionaire in 30 years. In Option 1, you have a house worth $200K. Make other people's money work for you!
Is this actually in the book? If you are paying cash, you should be able to get a better deal than if you leverage, not the other way around! The right way is to take 4 $90K houses (no closing costs because of HELOC) and you would have a $90K prop for $75K that nets $380/month, VS 4 $90K houses (that is $75K * 4 roughly). Also the HELOC is JUST for the down payment! What about the mortgages?that would net:
$4000 rents, $800 CAPEXX, $180 Vacancy, $240 Repairs, $800 tax and insurance , $400 management, $700 HELOC (maybe dollars or lower but not much) And then the mortgage payments on $72K in Debt * 4 = $288K in mortgage debt at 4.5% would be a total of $1459/month all of that added up nets you - NEGATIVE $579/month.
I just wanted to make sure newbies weren't following bad advice here. If we purchased everything equal I bet thenets would come out similar (cash will always get you a better deal) and then you have to factor in the RISK associated. It's not that cut and dry.
Investor · Chicago, IL · Member since 2015 · 40 posts · 24 votes
8y
Hi Kelvin! You have to run the numbers first to find which most fits your end goal. The two biggest factors would be time and money. If you’re going for the cheapest route, a HELOC may be good. The fastest and least lenient route would be a hard money loan. From experience, I wouldn’t tie up too much of my own resources. Leverage!! Good luck!
Investor · Locust Grove, GA · Member since 2011 · 40 posts · 4 votes
8y
I appreciate all of the advice and options that I hadn't considered. I will definitely take my time, do my due diligence and run the numbers before I commit myself to anything. As for TD Bank, I have their website saved and will refer to them when once I have all of my questions put together.
A HELOC seems like a great idea, especially if I just use it for the 20% down payment for investment properties. Or, I could use it as seed money to BRRRR if that would be feasible when the time arises.
Bottom line, I gotta run the numbers and make sure I run them properly and accurately. I'm glad that I asked this question, because it had been on my mind for a while. Thanks everyone!!
Professional · Lowell, MA · Member since 2014 · 232 posts · 223 votes
8y
HELOCS-- Cash when you need it; pay yourself back over time, rinse, repeat. All good-- ESPECIALLY for major capital expenses like a furnace going or new windows.
My only warning on the HELOCS for funding a new property: Most are variable rates. Just keep that in mind in the current economic environment. Cash-out fixed MIGHT be a better way to go at this moment in history when you're seeking a longer-term loan to fund a down payment.
Again, many ways to skin this cat-- think it through completely. In your situation, with no Mortgage at all... maybe doing BOTH makes sense.