Help on structuring/financing

I am looking for some help and thoughts on structuring/ financing on my two properties. I have 2 condos, one I rent and one is my residence. They are worth $70,000 each. I owe $24,000 on the rental and $35,000 on mine. The rental is on a 15 year, 7.75% home equity loan, and the other is a 30 yr. 5.5%.

I am looking to buy a sfh that needs work and rent out the unit that I am living in, once it is ready. I was also looking at another rental property I was going to buy from someone who got it at an auction which was $45,000, but I did not have the cash for it.

I want to be open to any possibilities and was going to open up a HELOC so I could move quickly on something if it came up, but the equity is spread over 2 different properties. I might never use it but it would be there.

With all that said, is it better, easier, if I had refinanced and had one property paid for, and all the financing on one? Is there a rule of thumb that anyone uses for rental properties? Do you treat each separate and keep a certain ltv on each property? Just looking for thoughts, not sure if I left out any info. thanks.

I would assume that the home equity loan has a lot higher of a payment than your personal residence based on the terms you provided (assuming the loan amounts are similar). Based on that thought, I would refinance the rental and get a thirty year product that will keep your payments low. The money that you cash out can then be used to fix up the sfh you are looking to buy. A home equity loan will not affect your credit as much as a HELOC. The available funds on the HELOC may affect your credit and hurt you when you go to purchase another property ( the money, even if it is not being used, shows as revolving debt; whereas when you have a home equity loan, the money is shown on an installment basis). You can also take a home equity loan or HELOC out on your personal residence, just do it before you move! I don’t see why there would be any issue using equity from multiple properties unless the proeprties were under seperate legal entities. As far as your LTV goes, I don’t see an issue with going as high as the banks let you! Just make sure that you can make the payments, and if you are planning on selling anytime soon, make sure you give yourself a cushion for a possible decrease in FMV and for agent/closing fees. Hope this helps!

You have a lot of options but I agree with music city. The 5.5% rate on your primary residence is well below market so I wouldn’t touch that loan. The heloc on your rental is likely variable and thus exposes you to future rate hikes. A cash-out refi on the rental, converting to a fixed rate, will payoff the heloc and leave you with liquidity to do future deals. As a second step a heloc on your primary residence will give you the option of accessing your equity should the need arise.

Some lenders offer what is called HELOAN that allows you to lock in the interest rate for a set amount of time. I know Wells Fargo is one of those companies because I just did one for a customer of mine in Florida.

Thanks for the replies.

The rental is on a HE loan at 7.75% fixed. Both payments are about the same. $290 rental, $277 residence, both incl. taxes. Different loan amounts.

I wonder how much a HELOC would hurt my scores, 790. If it is not much I would rather have that, than a HE Loan that I would not really need immediately.

Is it more advantageous to have the rental paid off and the financing on my current residence, or vice versa, or doesn’t matter?

Good information from several posters but here are a few thoughts.

  1. My investor clients are taking low/no cost helocs on ALL of their properties with no initial balance to protect themselves from future value reductions and to position them to take advantage of opportunities that may come up (i.e. write a check off a HELOC rather than applying for financing and losing the deal b/c of time)

  2. While the 5.5% rate on your primary “feels good” and is certainly quite low don’t focus solely on the rate. Refinancing that to take additional cash out might result in a higher rate (maybe 6.25 - 6.5) but if you’re not currently maximizing your mortgage interest deduction then a higher rate means more deductions and less taken by the IRS at the end of the year.

My 2c

Equity Lender makes some good points. The 5.5 rate is nice on your primary but the equity you have locked up in your home is earning you ZERO% interest. You would be better off having that money buried in your back yard. At least you would have access to it. By cashing out that equity and using to earn you profit on real estate transactions you would more than offset the difference in interest rate on the new loan.

The problem with using HELOCS to buy homes is that the terms are not as favorable on a HELOC as they are on a fixed loan. Especially if the HELOC is on a NOO property. So what happens when you want to refinance the properties to clear the HELOC? It is a cash-out which means unless you are using a good broker who knows how to take advantage of a no-seasoning cash-out you will have to wait 6-12 months to get the true value of the property as well as pay cash-out rates because technically the loan is a cash-out because there is no lien on the property. Lastly, once you hit the 10 financed property limit you could be stuck with multiple maxed out HELOC’s that you can close out.