2

I purchased home 2015 for 146,500 and have no mortgage currently on property.

Are there equity or cash out loans available? I was told that having property paid in full hurts my chances to find financial institutions willing to loan.

Details regarding the purpose of the loan.

Have opportunity to purchase 3 single family investment properties for 100K that with proforma numbers will bring 22500/yr. but need additional 10% for improvements

  • 3
    Please tell us your country. It can make a difference. – mhoran_psprep Mar 1 at 15:48
  • 8
    Please elborate on who told you: "having property paid in full hurts my chances to find financial institutions willing to loan". That seems like a very silly statement. – Pete B. Mar 1 at 15:53
  • area financial office said they have to have some sort of lean on property that they can pay off with funds from loan to meet their guidelines – Robert Mar 1 at 15:58
  • 1
    Why do you need a loan? It sounds like the bank want to use your house as collateral rather then giving an unsecured loan. You can always get a traditional mortgage but without knowing why you need a loan it's hard to say if it's a good idea or not. – D Stanley Mar 1 at 16:03
  • 2
    1) you're not making yourself very clear. 2) you're saying that in order to get a loan you need a loan. Why not instead of getting the loan now to get the loan later you get a loan later ? (to get a loan you need a mortgage, why not get the mortgage later if/when you need a loan instead of getting a mortgage now so you can get a loan later) – xyious Mar 1 at 16:06
5

"Equity" loans generally refer to Home Equity Lines of Credit (HELOC) which are second mortgages, meaning you already have one mortgage and are borrowing using the equity (value of house minus amount owed) as collateral.

Since you don't have a mortgage, a traditional mortgage is probably a better option. The interest rates will be lower (less risk) and the closing costs will be about the same (the bank will need to get an appraisal, do a title check, etc.).

Have opportunity to purchase 3 single family investment properties for 100K that with proforma numbers will bring 22500/yr. but need additional 10% for improvements.

You should not need to get a mortgage on your current house to buy these properties. You should just be able mortgage them and not put your home at risk. If something goes wrong with these investment properties, you might lose them but (assuming you're not underwater) your home would be safe from foreclosure.

It sounds like either you don't have enough of a down payment on these properties, and the bank wants to use your current home as collateral. If that's the case I would just work hard to save enough for a down payment and not go "all in" on these properties.

That said, there are other risks associated with leveraging (borrowing to buy) investment property, but that's not what you asked about :)

  • " If that's the case I would just work hard to save enough for a down payment and not go "all in" on these properties." Or start out with just one, rather than jumping into doing three. – Acccumulation Mar 1 at 21:03
3

In the US having a paid for property does not hurt your chances on getting a loan on that property. In fact many options are available to you in that case. First you can get a traditional mortgage on the property and should stick to 80% of appraised value to avoid PMI. With a traditional mortgage expect to pay about 5k or so in closing costs.

Second you can get a Home equity line of credit, which was outlined in D Stanley's answer. These typically have a variable interest rate which is not attractive.

Third, some banks offer a fixed rate home equity loan. They can offer no closing costs, and do a fixed rate for a fixed term. Traditionally these are done in 7 or 10 year time periods so the interest rates tend to beat traditional mortgages.

As D Stanely said, it is not a good idea to put your home at risk for a business idea/opportunity. How much experience do you have in the rental market? How much cash do you have, besides this money, do you have to pay for the eventual mistakes you will make? How much do you plan on setting up a proper organization for the business? Are you even properly evaluating these properties?

I feel like you cannot come up with good answers to those questions and it may very well lead to losing your paid for home.

However, if you decide to move forward, please make sure you set up your business properly. Talk to an accountant or lawyer to setup a company to buy these properties. Do this before actually buying the properties.

Hopefully you have the income to support the mortgage if these investments do not pay out as you plan.

1

I did exactly this with a home equity loan using my primary residence as collateral for the loan on an investment property.

Upsides:

  • No closing costs
  • Fast closing.
  • No PMI
  • No 25% down payment that most banks want on investment properties.
  • In my case I was having trouble getting an appraisal on the investment property (It's complicated) and this approach required only an appraisal on my primary residence.

Downsides:
If the deal goes bad, you could lose your house. However, that risk is highly mitigated by the fact that you have equity in the new property that you could liquidate in a crisis. Still there is non-trivial risk involved.

Despite what Pete B. said. I did a 30 year note on this deal with no trouble. I don't think 7-10 years is a hard requirement.

  • Ok, curious now - where/how do you deduct the interest on that loan? HELOC is no longer deductible except for home improvements. And it's not secured by the new property. – JTP - Apologise to Monica Mar 1 at 22:14
  • I deduct it as a business expense from my rental income. – JohnFx Mar 1 at 22:55

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.