HELOC for down payment

[Areeb Naseer]

Hello, 

I am just starting to invest in real estate. Rather than investing out of pocket, I am planning on getting a HELOC on my primary residence that has significant equity in it. I plan on using this as down payment for multiple properties (multi-family and single family properties). I would really appreciate any advice regarding the model I am adopting. Should I look at numbers somewhat differently than the typical 2% and 50% rules?

[Scott Trench]

I don’t like helocs for down payments.

You are using a short term loan to finance a long term investment. It can, and will create a huge problem for you if prices do not increase quickly like they have in the past.

For your consideration - if you take a $120,000 HELOC at 4% interest, you owe $4,800 per year in interest, or $400 per month.

But wait, you also have to pay back the HELOC! That $400 per month is just the interest. Even if you plan to pay off the HELOC “slowly” over 5 years you can tack on an additional $2,000 per month for a total monthly payment of $2400 per month.

while on average the property may appreciate, and the long term debt used to finance the rest of the property will amortize, there is no way this property will put cash into your life until the heloc is repaid. 

This kind of financing can create a huge amount of stress and only really results in a win if the property appreciates soon after purchase. 

Unfortunately, I think the hard truth is that saving up the cash for the down payment the old fashioned way is likely to be a better risk adjusted option. Sometimes, this business can be a grind.