Need financing advice

[Cwadda]

Hey all,

Could anyone offer any advice for this scenario?

Primary residence: Owed $6k @ 3.85% worth $515k
HELOC against primary: $277k @ 4.0% variable, interest only. Repayment period starts August 2018.
Rental 1 (purchased with HELOC): Worth $210k
Rental 2 (purchased with HELOC): Worth $100k
Rental 3 (purchased with HELOC): Worth $100k

We want to buy another property worth $135k. What would be the best course of action? Does it make sense to refinance? How about lumping together the 3 rentals into a commercial loan situation?

Thank you!

[turtlefire]

You owed $6k on your primary, and then took out a HELOC of $277k. What were the down-payments for the 3 rentals? What is the down payment for the 4th? What is the cash on cash return for those?

If the rental income more than covers the extra mortgage payment from the HELOC. And the ROI is better than the interest rate, then you didn't make a terrible choice.


Sent from my SM-G930V using Tapatalk

[Cwadda]

You owed $6k on your primary, and then took out a HELOC of $277k. What were the down-payments for the 3 rentals? What is the down payment for the 4th? What is the cash on cash return for those?

If the rental income more than covers the extra mortgage payment from the HELOC. And the ROI is better than the interest rate, then you didn't make a terrible choice.


Sent from my SM-G930V using Tapatalk

There we no down payments with the 3 rentals, they were paid completely using the HELOC. The down payment on the 4th property will be 20%, however there isn't enough left on the HELOC to completely cover it. The rental income more than covers the interest payments on the HELOC. All of the rentals are cashflowing.

[SwordGuy]

"interest payments' or 'principal AND interest payments'.

If you actually meant the former you may be in a world of hurt.

[Another Reader]

"interest payments' or 'principal AND interest payments'.

If you actually meant the former you may be in a world of hurt.

Yep.  What's your exit strategy when the interest rate floats up to market and principal payments with a relatively short term are added to the total payment?  Lumping the rentals in a commercial loan means higher interest and a shorter repayment period.  You could refinance your primary to extract a little more equity, but there is some risk to that.  Without seeing the entire picture with all the numbers, I would not recommend  buying more properties or refinancing to extract equity.

[tralfamadorian]

Rental 1 (purchased with HELOC): Worth $210k
Rental 2 (purchased with HELOC): Worth $100k
Rental 3 (purchased with HELOC): Worth $100k

If your worth numbers lined up with bank assessments, you should be able to get bank loans of all three to pay off the HELOC plus some since your HELOC debt to rental value is 67.6%.  The rates and terms on residential loans will be better than a commercial loan and should be your first preference. 

Fannie allows up to 75% LTV on cash out refis on SFH investment properties (https://www.fanniemae.com/content/eligibility_information/eligibility-matrix-063015.pdf).  So, in theory you will be able to cash out an additional $30K on 75% LTV individual mortgage loans on each property.  Given your price range, this may be sufficient for a down payment on a fourth property and meet Fannie reserve minimums (6 or 12 months depending on your credit score and DTI) presuming you have been already setting aside 20% rent on each property for CapEx and maintenance.  This is also presuming that your day job(s) plus 75% of the gross rental income would give an acceptable DTI for the underwriter.

However, I am concerned about the ability of the properties to support full mortgages given your sole comment about them supporting the interest payments.  What are the rents like?

[waltworks]

Why didn't (and don't) you just get a normal investment property mortgage (normal 15/30 year from any random lender you want)? A HELOC with a variable rate seems like a very risky way to buy investment properties since you've basically put your own home into play if things go south with the rentals for any reason.

-W

[tralfamadorian]

Why didn't (and don't) you just get a normal investment property mortgage (normal 15/30 year from any random lender you want)?

To get cash discount pricing on the property?  But I agree that the way that they did it is very risky. I think delayed financing mortgages would have been much better in this situation (to the seller, the interaction is cash then the buyer can immediately start the mortgage process after closing so they only have that HELOC hanging out there for 60 days at most.)

[Cwadda]

"interest payments' or 'principal AND interest payments'.

If you actually meant the former you may be in a world of hurt.

No worries there, they are definitely enough to cover the principal and interest payments, plus cashflow.

Yep.  What's your exit strategy when the interest rate floats up to market and principal payments with a relatively short term are added to the total payment?  Lumping the rentals in a commercial loan means higher interest and a shorter repayment period.  You could refinance your primary to extract a little more equity, but there is some risk to that.  Without seeing the entire picture with all the numbers, I would not recommend  buying more properties or refinancing to extract equity.

Exactly. There is currently no exit strategy if interest rates shoot up. The primary would be refinanced into a 30 year, which would pay off the HELOC variable rate. This would then mean we own the rentals free and clear. Those would be eligible for a cash out refinance, rather than borrowing against the primary.

[Cwadda]

Why didn't (and don't) you just get a normal investment property mortgage (normal 15/30 year from any random lender you want)?

To get cash discount pricing on the property?  But I agree that the way that they did it is very risky. I think delayed financing mortgages would have been much better in this situation (to the seller, the interaction is cash then the buyer can immediately start the mortgage process after closing so they only have that HELOC hanging out there for 60 days at most.)

I wasn't aware of delayed financing mortgages but it sounds great on paper.