How Much Equity to Pull Out

[Vincent Pelletier]

Hello BP!

I just got the final appraisal done on my first real estate deal. I bought a SFH with unfinished basement, Suited the basement and rented it out. Upgraded services on the property.

I will break it down quick then ask some questions. Looking for some advice. 

Bought SFH for $360,000

Down payment of 72,000(%20)

16,000 of down payment was from my Line of Credit

I put $42,000 (+/-$300) in renovations and made a seperate basement suite in the house

Rented out the basement for $1500/month on a signed lease

Rented out one Bedroom upstairs(where I live as well) for $500 month-month.

Planning on renting entire upstairs out once I purchase my next property. Will get approx. $1900-2200 for the upstairs 

My after repair appraisal came in today @463,000

My Current mortgage is for 280,000

The bank approved me to take out %80 of equity with a new mortgage of 370,400

A cash out of 92,600 leaving me with approx. 12,000 of my own money in the property + holding costs up to date(Approx. 10,000)

New mortgage of 1,754/month

Now my question is should I pull out the full 92,600 or should I take less (60,000-70,000?) in order for my P&I to be lower? I do not have another property in site as of now so if I take less out on the Re-mortgage I can pull the rest of my equity out with a HELOC when I find my next property(although that will be a higher interest rate).

This is my first investment and the Appraisal came in higher than I thought it was going to, so I am just wondering if it is wise to pull out as much as I possibly can here or not. What are other people doing in this situation?

I guess what I am really trying to know is what is a safe limit?

Any and all advice is appreciated! Thanks BP!

Vince Pelletier

[Whitney Hutten]

@Vincent Pelletier Good for you for getting started!!! This is tricky.  Removing as much equity as possible is a sound strategy if you can invest it wisely in assets that will make a higher return.  This means, going forward, you will need to find better deals.  

Now the flip side, if you pull out all of the equity and the property can't cover a DSCR of at least 1.2-1.25 the expenses (including the new HELOC), the additional expense/debt will start hitting your debt-to-income and might affect your ability to get future lending. With one property, this might not be that bad. However, you will want to keep this top of mind to keep getting future lending.

Now let's set, the lending qualifications aside, you want to find deals that cashflow better so you can weather any market corrections.  For example, if rents soften in your area, could you take a 10% hit on rent on this first property and still make everything work without coming out of pocket?

Again, you have a property!!!  You have taken a huge step, congrats!  Now go build your empire.