How can I leverage the equity on an investment property I own without a HELOC or refinancing?
I have a question about a duplex investment property I bought in 2005 in a major city. I own solely. I owe about $374,000 which is the combo of a first mortgage ($311,000) which was modified to two percent in 2014 and a HELOC ($63,000) - past draw period. The bank used this HELOC to qualify me with an 80/20 back in 2005. The rate on the HELOC is about five percent. The total monthly payment is about $2,800 per month. The current rents received is about $4,900 per month. The FMV is about $800,000.I want to access the equity in this property to use for other real estate investments. However, the cost to refinance is too great. I do not want to sell this property. Would it be possible to get a first lien HELOC on the property (rolling in both liens described above)? I'm looking to take at least $200,000 in cash. Are there other ways to leverage this equity without HELOC or refinancing?
Joshua Escalante Troesh, CFP | MBA
There are two broad ways to leverage equity in real estate or any investment; selling the investment or borrowing against the investment. Beneath these two broad categories are dozens of specific strategies, with varying advantages and disadvantages . Scheduling a call to discuss your situation and desires would be the best way of determining a specific (possibly creative) strategy to accomplish your goal. Beyond that, here are some ideas to consider.
Sell Part of the Property
Although you don't want to sell the property, if you are interested in selling a portion of the property to another investor, this could free up the $200,000 cash pretty easily for you.
The down side is you would have a partner in the property, which may be more trouble than they are worth. You would want to have an attorney draw up a partnership agreement if you went this route. You would also want your financial advisor and CPA to be in the loop as there will be future tax implications, investment implications, and other financial considerations as well.
Replace the HELOC with a HELOC
Another option is to just get another second mortgage HELOC to replace the current HELOC. With the equity you have, you could likely take a HELOC out that pays off the old HELOC and still gives you plenty of room to invest in a second property. Just be sure to will have a significant amount of equity in the property after the new loan as the interest rates can climb quickly as the equity disappears.
Be Wary of Rolling the First into a HELOC
I would be wary of rolling the first mortgage into a HELOC or touching the first mortgage in any way. I agree with you the cost of refinancing would be too high, and the same is true for rolling the two mortgages into one HELOC. After the tax benefits are factored in, you are paying less than 2% interest on the first mortgage. It is highly unlikely you will ever be able to get such a favorable rate on a new loan. Increasing the interest rate on that loan to 5% would cost you around $10,000 extra annually in interest costs.