Making down payment-- cash v. HELOC

[Doug Marsh]

Hi all,

Last year we bought a vacation home near our primary residence in the Denver area. We've been doing short-term rentals with that home, more with the mindset that renting was a means to owning a vacation home than to generate income. But that venture has exceeded expectations, and now we are looking to start picking up properties specifically for the purpose of investing.

Our first question is how to approach the down payment. We could probably save up enough for a 20% down payment, especially on some less expensive properties, within the next year or so. But we also have a HELOC that is totally unused, which we could tap for up to $150k. As much as I don't want to lose more time waiting out the market (losing rent payment and appreciation in the process), using the HELOC will mean we are effectively borrowing for the entire purchase price, increasing interest payments and making it that much harder to stay cash flow positive.

What say you-- wait to build up down reserves for a down payment, or use the HELOC?

[David Mackin]

Hello Doug,

I would spend some time working out the numbers for both options. Obviously you can't perfectly predict what the market will look like by the time you save up a down payment, but you can certainly work out the numbers that include interest and payback on your HELOC. I think if you can comfortably afford to use your HELOC for down payment and find a deal that cashflows anyways, then go for it. Consider that in the time it takes to save for a down payment, you will lose out on rent payments that build your equity (which you already mentioned of course). I think that's a very important variable in this decision.

Maybe another option to consider is to save for a shorter amount of time and use some cash, and less from your HELOC than if you bought right now. That way you're not waiting AS long, and your HELOC payments aren't as drastic. 

I have a HELOC on my property and definitely consider using it to parlay into the next deal all the time.

I wish you the best of luck! I hope this helped!