The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: Sherry on February 01, 2015, 10:22:49 PM
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By springtime, our mortgage on our Chicago 2-Flat will be annihilated.(!) For a variety of reasons, we plan to purchase a tiny studio condo in a swankier neighborhood. The units we are considering cost between $100k-$150K and we calculate a positive cashflow from rental income. We plan to contribute an additional $2k/month towards the principle to pay off the debt within 5 years. It seems we are fortunate enough to have several different financing options:
--Traditional 30 or 15 year mortgage,
--5/1 ARM loan,
--Home equity loan, and
--Home equity line of credit (no matter what, I plan to apply for this when our mortgage is paid off),
-- ???
Is there a preferred way to finance a second property? What are the elements to consider? I also expect that we will continue to purchase rental properties and want to have as much flexibility to do so when we find good opportunities. Thanks in advance for any helpful advice.
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Is there a preferred way to finance a second property?
Whatever costs you the least overall. If your plan is to pay it off within 5 years, get whatever the cheapest interest rate is, whether that's the HELOC, 5/1 ARM, etc., taking into account any appraisal, closing costs, prepayment penalties, etc.
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But also try to reduce points and fees as much as possible; since you're planning to pay off very soon, those matter more than interest rate.
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What is your goal? When do you want the houses to be paid off? Rates are following again. They are very low for 30 and 15 year loans. So that can be great if you want "Cheap" long term leverage. If you want even less than look for the "cheapest" rate for the amount of time you want. Just make sure that you give yourself some leverage if you cannot meet the "constraints" for some reason.
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Remember that some banks will offer different financing for 2nd home or investment property.
Look at it in $$ terms as mentioned above, terms and cost including fees, taxes, maintenance, upgrades , etc.
Where is your money working hardest for you?
Remember that your increased income may change your tax situation.
5/1 arm or 10 yr or 15yr are all very very cheap right now.
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HELOC is in my opinion the way to go, aim for one with 0 closing costs, intro rate for 6-12 mths, under or at prime rate, and perhaps most important, a fixed rate lock option!
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Sounds like you're already on top of things, but just in case, make sure you could carry the rental property even if it went unrented or unsellable for long, long stretches of time. Since you're leveraging your other property to buy the new one, you don't want it all to come crashing down like a house of cards if some kind of calamity strikes.