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Refinancing (mortgage plus HELOC) or HELOC only?

Wei12694

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I am trying to pull some cash from my residence home to fund the down payment of my 2nd rental property. I was recommended to refinanicing my residence (due to renew in May 2018 with 2.5% variable rate) and put a fix portion of mortgage (get downpayment from this portion) and a HELOC, then use HELOC to fund my 3rd rental property. While I am doing the research on the type of product available, I am just wondering if I can simply put a HELOC and do not break my current mortgage and use HELOC to fund the downpayment for the 2nd rental property, then I can still enjoy the 2.5% rate until May 2018 (or whatever new rate is) and do not need to pay penalty. After May 2018, I can renew my mortgage with a bigger amount (or should it be called refinancing if add addtional amount to the balance) and fund my 3rd deal? I am a new member here and also new to real estate investing. Any comments are very much appreciated.
 

Thomas Beyer

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HELOC or simply LOC are usually higher rates than mortgages. Usually at least prime ( currently 3.2% ) or often prime plus 1/2 to prime plus 1. A good 2-3 year rate today is about 2.6% ie even an excellent LOC at prime is 20% more expensive money, and a LOC at 3.7% is almost 40% more expensive.

As such, LOCs are good to use short term, to be replaced by cheaper money in short order.

Also on Jan 1 2018 your available mortgage for refi purposes might be 20% lower unless you have a very high income. As such, consider refinancing now, before year end to the max amount. Refinancing will be far FAR tougher next year.

Overall your question is unclear. Yes you can use a LOC to buy 1 or 2 more assets but ensure the cash flow is there to support those payments. Being too levered is stressful and can ruin you in weak markets that happen from time to time, like the last 2.5 years in Alberta.
 

Wei12694

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HELOC or simply LOC are usually higher rates than mortgages. Usually at least prime ( currently 3.2% ) or often prime plus 1/2 to prime plus 1. A good 2-3 year rate today is about 2.6% ie even an excellent LOC at prime is 20% more expensive money, and a LOC at 3.7% is almost 40% more expensive.

As such, LOCs are good to use short term, to be replaced by cheaper money in short order.

Also on Jan 1 2018 your available mortgage for refi purposes might be 20% lower unless you have a very high income. As such, consider refinancing now, before year end to the max amount. Refinancing will be far FAR tougher next year.

Overall your question is unclear. Yes you can use a LOC to buy 1 or 2 more assets but ensure the cash flow is there to support those payments. Being too levered is stressful and can ruin you in weak markets that happen from time to time, like the last 2.5 years in Alberta.

thank you so much especially on your warning of ensuring cash flow. I am from Calgary...weak market. It seems I focused too much on the rate and lost bigger picture a little bit. I will get the refinancing done this year and will stick to the number and not just try to pursue the number of properties. thanks again for your time.
 

Martin1968

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That's seem like a lot of maneuvering around for such a short time frame. May 1 is about 5.5 months away. I would go for security first and foremost and make sure you get your primary residence mortgage renewed this year (or next year with new rules). You can then look into unlocking any extra equity when renewing or if enough equity tag on a Heloc.
However, personally I would be very careful using a Heloc unless you have a strong net worth and like is said before, you have enough cash flow to afford the 100% financing for your next prop.
 

Wei12694

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That's seem like a lot of maneuvering around for such a short time frame. May 1 is about 5.5 months away. I would go for security first and foremost and make sure you get your primary residence mortgage renewed this year (or next year with new rules). You can then look into unlocking any extra equity when renewing or if enough equity tag on a Heloc.
However, personally I would be very careful using a Heloc unless you have a strong net worth and like is said before, you have enough cash flow to afford the 100% financing for your next prop.
thanks Martin, you are right. It will be hard to cash flow on 100% financing. I will get the refinancing now and focus on the current deal first.
 

Matt Crowley

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Good thoughts above.

Make sure when you run your property-level financials you add in the cost of the debt from your HELOC. As stated above LOC is an emergency line, not for purchasing properties.

Also, your balance sheet will be a bit upside down on the new property as even if you have an 80% LTV, you really are 100% LTV because you borrowed the money for a downpayment... you are not going to cash flow at 100% LTV, not going to happen.

Generally, if Yields (NOI/property value) in the market are 5.5% in Calgary, then take off another 1% due to cap ex, and the total return from the property is 4.5%. Take a really hard look at the spread between your debt interest rate and the productive capacity of your asset.
 

Wei12694

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Good thoughts above.

Make sure when you run your property-level financials you add in the cost of the debt from your HELOC. As stated above LOC is an emergency line, not for purchasing properties.

Also, your balance sheet will be a bit upside down on the new property as even if you have an 80% LTV, you really are 100% LTV because you borrowed the money for a downpayment... you are not going to cash flow at 100% LTV, not going to happen.

Generally, if Yields (NOI/property value) in the market are 5.5% in Calgary, then take off another 1% due to cap ex, and the total return from the property is 4.5%. Take a really hard look at the spread between your debt interest rate and the productive capacity of your asset.

thanks Matt. I am refinanincing my current residence (mortgage portion and HELOC portion), get a larger amount of mortgage, payout the current mortgage and get additional $90,000 cash from the mortgage portion as the downpayment for the property I am current buying. this is not 100% financing (I guess for ROI calcuation purpose, I don't need to caculate the interest I will be paying on that $90,000, correct?).

However, for the subsequent property, the advice I recieved is to use HELOC as downpayment. If that's not going to work in Calgary, my own choice is to find a JV?

also, you mentioned NOI/proeprty value usually is 5.5% in Calgary, does it mean if the Yield is equal or greater than 5.5%, it is a ok deal to buy in current Calgary market? I thought NOI is only used for commerical property. so, I should use my projected rental income minus operating cost (property tax and insurance, as renter will pay utilities), then divided by the purchase price? mainteance cost can be calcuated separtely as 1%?
you also use "return" in your answer and I learned cash on cash ROI, cash on cash plus (cash flow plus principal reduction) and projected ROI (cash flow plus principal reduction and appreciation) from REIN property analyzer. what's the gereneral criteria (percentage of return and what type of return) you use for a good deal in Calgary market?

these might be very basica quetions, but I am really confused on what might a good deal to proceed. I am really really new in real estate investing. I bought a pre-sale condo in Victoria last year and just closed last month. that was basically a no brain deal. I did not calcuate return before I bought. It just seems that there will be cash flow nuetual at that time. then it turned out the rental market is really good this year. I rented $200 more than I expected. so I am cash flow on that one. but when I started looking into Calgary market now, I don't have a solid idea as to what constitutes a good deal. what's the benchmark should I use when I assess the deal.
 

Thomas Beyer

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Wait until you understand what you are doing. REIN is a great group to join, learn, get inspired, before you invest. One mistake is worth $10,000 or sometime 50-100,000. Take it slow.


When the student is ready, the teacher will appear.

You made a wise choice to further your education, your family's networth and your mindset to move from "Ready, set, set, set, set ..." to GO.

Here are some initial REIN posts that I have done over the last 6 1/2 years that you may find a good read.

How to get started http://myreinspace.com/threads/how-to-get-started.4363/
5 ways to make money http://myreinspace.com/threads/5-ways-to-make-money.3318/
50/50 JV - How is this fair ? http://myreinspace.com/threads/50-50-is-this-fair.1983/
LOC vs. mortgage: http://myreinspace.com/threads/what-is-better-a-mortgage-or-a-line-of-credit.2271/
Red, green and blue money - what are the three crucial elements of real estate and JVs: http://myreinspace.com/threads/blue...expert-deserves-to-make-some-money-too.29091/
What is better: Cash-Flow or Maximum ROI ? http://myreinspace.com/threads/what-is-better-cash-flow-or-higher-roi.26596/
 

Martin1968

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thanks Matt. I am refinanincing my current residence (mortgage portion and HELOC portion), get a larger amount of mortgage, payout the current mortgage and get additional $90,000 cash from the mortgage portion as the downpayment for the property I am current buying. this is not 100% financing (I guess for ROI calcuation purpose, I don't need to caculate the interest I will be paying on that $90,000, correct?).

However, for the subsequent property, the advice I recieved is to use HELOC as downpayment. If that's not going to work in Calgary, my own choice is to find a JV?

Ultimately, and by the looks of it, what you are doing is 100% financing on your 2nd and 3rd property. It might not appear to be that way in your own mind but it's not unencumbered cash that's freely accessible.

Wether its a wise thing to do depends on your personal finances, for example you own a home with a lot of equity in it and decide to unlock some of that. Or you have a well producing business or excellent employment and a good stream of cash flow or income.
Without us knowing your personal finances, you would want to think that over. If it's stretches you on a personal level you want to be careful. I would think the best advice at this point is to purchase that second prop but wait it out for the third. Save up for DP on that one. Keep Heloc as a reserve fund.

Only other remark would be, Victoria worked well for you? Why switching to Calgary? Stick to what you know has already worked for you and repeat.

I will leave analysis up to the analysts. Good luck on it.
 

Martin1968

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Ultimately, and by the looks of it, what you are doing is 100% financing on your 2nd and 3rd property. It might not appear to be that way in your own mind but it's not unencumbered cash that's freely accessible.

Wether its a wise thing to do depends on your personal finances, for example you own a home with a lot of equity in it and decide to unlock some of that. Or you have a well producing business or excellent employment and a good stream of cash flow or income.
Without us knowing your personal finances, you would want to think that over. If it's stretches you on a personal level you want to be careful. I would think the best advice at this point is to purchase that second prop but wait it out for the third. Save up for DP on that one. Keep Heloc as a reserve fund.

Only other remark would be, Victoria worked well for you? Why switching to Calgary? Stick to what you know has already worked for you and repeat.

I will leave analysis up to the analysts. Good luck on it.
 

Sherilynn

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If you need the credit right away, you could get a HELOC now and then when it comes time to renew you could refinance into a mortgage with a re-advanceable HELOC built in to the mortgage umbrella (and close the other HELOC). This way, as you pay down your principal on your residence, the available HELOC automatically increases.

We did this with our residence (with Scotia's STEP plan). Built in to our mortgage, we opened a $28k personal use HELOC (for personal emergencies or major renovations to our residence) and the rest was a business HELOC that increased its credit limit as we paid our mortgage. Very handy for emergencies and major renovations, and - yes - we used ours for a down payment as well.

We also utilized the Smith Maneuver. We used all the extra cash from our rentals for lump sum payments on our personal mortgage. This increased the available business HELOC. Then we used the HELOC to pay for extra expenses such as renovations. In less than 4 years, our personal mortgage was paid, leaving only tax-deductible HELOC debt.

CAUTIONS!!!
  • Your debt coverage ratio (DCR) MUST support the extra debt. (This is no issue for us because we have mainly up/down duplexes so our DCR is impressive, but with single family homes people may have difficulty.)
  • Although most HELOCs require payments of interest only, some banks use principal plus interest numbers in their DCR calculations when you apply for future mortgages.
  • Having a high level of revolving debt (such as an LOC or HELOC), can decrease your credit score.
  • As previously mentioned, being highly leveraged is never a good thing. (Although we currently have a high balance on one of our lines of credit, our overall loan to value (LTV) is quite conservative.)
In summary, HELOC's can be great tools to build your portfolio, but one must proceed with caution understand all possible consequences.
 

Wei12694

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If you need the credit right away, you could get a HELOC now and then when it comes time to renew you could refinance into a mortgage with a re-advanceable HELOC built in to the mortgage umbrella (and close the other HELOC). This way, as you pay down your principal on your residence, the available HELOC automatically increases.

We did this with our residence (with Scotia's STEP plan). Built in to our mortgage, we opened a $28k personal use HELOC (for personal emergencies or major renovations to our residence) and the rest was a business HELOC that increased its credit limit as we paid our mortgage. Very handy for emergencies and major renovations, and - yes - we used ours for a down payment as well.

We also utilized the Smith Maneuver. We used all the extra cash from our rentals for lump sum payments on our personal mortgage. This increased the available business HELOC. Then we used the HELOC to pay for extra expenses such as renovations. In less than 4 years, our personal mortgage was paid, leaving only tax-deductible HELOC debt.

CAUTIONS!!!
  • Your debt coverage ratio (DCR) MUST support the extra debt. (This is no issue for us because we have mainly up/down duplexes so our DCR is impressive, but with single family homes people may have difficulty.)
  • Although most HELOCs require payments of interest only, some banks use principal plus interest numbers in their DCR calculations when you apply for future mortgages.
  • Having a high level of revolving debt (such as an LOC or HELOC), can decrease your credit score.
  • As previously mentioned, being highly leveraged is never a good thing. (Although we currently have a high balance on one of our lines of credit, our overall loan to value (LTV) is quite conservative.)
In summary, HELOC's can be great tools to build your portfolio, but one must proceed with caution understand all possible consequences.
thanks Sherilynn, and everyone who took the time to read my questions and replied. really appreciated that so many veteran real estate investors took the time and provided comments to new members. I have used up all my cash in my first condo in Victoria, so if I want to continue investing, it seems that my only choice for now is to refinance my residence, and I decided to do so. but after reading a lot of posts in the past few days, my strategy is to get refinancing done first to get some cash sitting maybe in a high interest account, keep looking for properties with the help of my realtor, if there is good opportunity coming, then I will buy it, close it and try either for a later closing to avoid winter renting or provide incentive for winter renting (thanks for all members contributed good strategies in one of the winter renting post). If there is no good deal, I at least have the refinancing done by year end. then I will slow down and be cautious to watch the market, to see if the price will drop and if it will get recovered a little bit soon later 2018. I agreed that if people wants to buy, they will buy, if they can't afford $700,000 any more, then they may go for $500,000. I will also explore the duplex options.

I met with a bank officer this morning and she will help me to set up STEP on my main residence (stole your and others' research and just decided to go with Scotia). However, she did say HELOC portion does not automatically increase if you pay down mortgage. I have to go to the branch to ask for increase. I told her I heard that STEP is auto revolving and she said no. I chose 5 year variable currently at 2.7%.

I am going to focus on this deal first and worry the next one when I am ready to do so. I know you are coming to Calgary for REIN meeting. Look forward to seeing you here and listen to your experience about landlording.

Martin - I did not repeat the Victoria process as the pre-sale price is so high now. I talked to my realtor (by the way, he is excellent, knows the condo market and rents very well. anyone who wants to invest in Victoria can contact me and I can give you his name), he basically said no good deal on pre-sale market in Victoria now. the most recent one he bought in the summer is a two bedroom condo (1200 sqf) in a concrete building in Sannich outside of downtown with beautiful mountain view (price increased since summer). Purchase price was about $580,000 with projected rent of $2,400. I could probably buy a SFH with illegal suite in Calgary for $450,000 and get about $2,400 rent too. I also don't want to travel to Victoria if I only have one or two properties there.
 

Sherilynn

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However, she did say HELOC portion does not automatically increase if you pay down mortgage. I have to go to the branch to ask for increase. I told her I heard that STEP is auto revolving and she said no.

Banks often change their guidelines and policies, so it doesn't surprise me the product is different now. The key is you need not reapply every time you ask for the increase. You should simply need to sign for the increased limit.
 
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