Unorthodox House Hack?

Question

In this economy the value of my home has skyrocketed. I am eligible for a cash out refi of about 100k. Would it be practical, smart, ridiculous or whatever to cash out and use that money to purchase a rental property? Would it be better to hold on to the cash until the housing prices came back down a bit?

Kenny Smith · Answer

@Michael Voils

I'd agree with Ryan, most likely you have a great interest rate.  Cash out refi would be meaning trading up to what rates are currently at.

A HELOC is great because you're only taking out the money you need, therefore only paying interest on what you need.  Plus, most HELOCs you can pay interest only for the draw period, which could be half of the loan period.  As opposed to a cash out refi, it's one lump sum.

Ryan Thomson · Answer

@Michael Voils amazing answer from @Vicente Terán

I would run the numbers on a cash out refi. I'm guessing that is going to drastically increase your interest rate on the current house. I would imagine a HELOC is a better idea for you.

Vicente Terán · Answer

Hi Michael - From my experience, I only purchase new real estate when the deal works well and I'm in a secure enough position to move forward.... here is my thought process and two factors I use when analyzing if I should move forward with another investment property

Cash Reserves
- do I have adequate cash reserve to cover 6 months of my living (all in) plus 6 months of expenses for each of my properties in event all properties go vacant.... to me this is very important to be extra conservative.

The Deal
- does the deal hit the numbers I want / expect? For me, if the property isn't netting $1000 / month cash flow for $100k cash.. I'm likely walking away.
- is there value add / forced appreciation opportunity.... to gain equity quickly i'm looking for something I can renovate or do permitted additions / bathrooms etc. to be able to secure equity quickly.

I'm not ever super concerned of the market specifically as long as the numbers and these factors check out. My strategy is long term hold (10 yr. +) so the market is expected to be wavy... I just want to have high equity and high cash flow to be able to ride the inevitable waves of the RE market

Rick Albert · Answer

For both of my house hacks I did HELOCs. I used the first HELOC to buy my second, and then used the HELOC on my current house hack to buy an investment property out of state.

If the numbers make sense buy now. You are assuming values will go down, which we frankly don't know. In my market, my last three listings all got multiple offers over asking. Buyers are understanding that the interest rates are what they are and moving on.

If you did want to look at it as if prices will go down, you are still possibly losing to opportunity costs. For example, let's say home values drop by $10,000 but it takes a year to get there. That means that you would only have gotten a deal if between loan buy down, tax benefits, and cash flow was less than the $10,000.

Plus real estate is a long term play. When I bought my house hack it was an okay deal, not spectacular. Fast forward four years, it has appreciated tremendously, we could live for free if we wanted to, and when we move out it will cash flow.

Kenny Smith · Answer

@Michael Voils

So a HELOC is like a line of credit on your home, just like a credit card.  You'll get pre-approved for a max credit limit.  As long as you don't go over that, you can essentially continue to draw as many times as you want.

You'll obviously want to verify this with whatever lender you'll be borrowing from as HELOC's are all set up differently based off the institution you work with.

But yes, there shouldn't be any reason you couldn't draw that $75k at 2 separate times..you'll then only pay interest on whatever you borrow, not your credit limit.

Michael Voils · Answer

@Kenny Smith

interesting prospect. After the initial draw from a HELOC how quickly can I get another draw?

for example, I get a HELOC for 100k, but only draw 50 and use it for a down payment. How quickly could I draw another 25 for remodeling?

Could it be used quickly enough to cover an empty rental for 6 months?

Michael Voils · Answer

Great information both of you and I appreciate your responses!

@Vicente Terán I love the conservative approach you have and would under most circumstances agree. There are a few issues that are specific to me, however.

1. This would be my first rental property. I don't have any capital. I have a full family, and we haven't got the ability to "House Hack" under normal circumstances. The 6 month cash reserves to cover each property and the cost of living would probably take me five years to save up. I could use some of that 100k as the 6 month cash reserves, but that would only increase the amount I would need to rent it for.

2. With home prices and everything else I don't expect the property to be purchased outright -- at least some of it would require a loan. I don't see how it's feasible to get a net $1,000 cashflow unless I got incredibly lucky.

3. Your part on the market makes sense. That was my opinion as well, but I wanted outside input.

@Ryan Thomson I've done math on how it would change my mortgage and a new loan, assuming I doubled my APR, which could still be more, I'm sure. If I'm using the entire amount on a rental property, how would a HELOC benefit me over a cash out?

Looking at rough numbers, I doubled my APR and kept my escrow payment roughly the same on my home and the theoretical rental propety. I would need to rent any property out for at least $2,000 to cover my mortgage increase and the new loan in order to break even every month (Which, I know I can't bank on it being occupied all of the time and would need to find a way to cover that.)

I'm trying to figure out if this is a rabbit hole I should follow, or if I should scrap the idea altogether.

Unorthodox House Hack?

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