I am finally back, and I have questions.

5 Replies

Hello everyone,

I bought my first house two years ago free and clear.  I have 100% equity and am finally ready to buy my first rental property.  I got my property slightly under market value because it was an estate sale and the kids just wanted to sell asap.  So I got the place for $102k cash even though market value was around $125k+ and now it is worth $160k. 

I am thinking of taking a home equity line of credit of around $120k, being conservative on what the actual appraisal might turn out to be ($150k?).  

I could also take a loan on my house, but that would limit my options moving forward. The HELOC would allow me to bid at the county online auction, buy property as if I had cash, and jump on any deals as fast as possible on the mls. I could then rent the property, pay interest and principal on the HELOC only for a year and then refinance the property to get my HELOC back to $0. Assuming I do my math, get a deal, and do my due diligence. Which I did on my first deal so I assume everything I learned around here works and I should do as before.

I have read many other posts about HELOC and using equity to invest.  However, it's always a mixed bag.  To be expected I suppose.  

I am curious if I should only buy a property outright with my HELOC and then refi when I can, or if I should try to use my HELOC as a down payment on a more expensive property? I feel like that's an option but that I'm missing something and would lose money doing it that way. I would essentially be paying interest on my down payment AND the loan. But I swear I heard that people do this for profit. Not sure.

Does anyone have experience with HELOC and the various ways to leverage it? 

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Yes. HELOC is a great way to prepare to buy a property. Buy it outright, refinance to get your cash back out, repay the HELOC, repeat when ready.

It doesnt matter if you use the HELOC money to buy an all cash auction property or if you use the heloc money as a downpayment on a more expensive property. If you feel you know what you are doing, and you can find a good deal, paying interest on your downpayment should have little effect on your success. think about it this way... you bought a property that went from $100,000 to $160,000 in two years. If you had borrowed all the money at the begining, you would have paid approx $10,000 in interest. But you would still have made $50,000. If you had bought a more expensive property, you might have made even more. Its all about the deal you can find. if you find a good deal, doesnt matter if you have to pay a bit of interest on the downpayment. or if you find a good all cash deal, then go for that. more expensive can be a bit riskier, due to more money being involved, higher taxes, etc etc .... but something in a better area usually holds its value in down times and goes up more in the long run

@Account Closed I hear you.  I was a little tired as I mentioned above, and I believe I was thinking myself in circles.  Thanks for the input.  Just like my first deal, when everything looks good... I feel like I'm missing something or making a mistake.  I imagine that will pass with experience.  

I got a couple meetings lined up at banks and lenders to see what my options are.  There is a dedicated mortgage portfolio lender in my area and I hope to work with them as it will be easier to scale with them.  We will see.

Depends on your risk tolerance - personally I want to maximize my leverage. I currently have 2 properties (+1 more under contract as of yesterday). My plan for property #4 is to finance it by taking out a HELOC then using that as a down payment on another multi-family property.

Here's how I look at it - for each $30k I spend I can get a 3 unit MFR in the markets I'm investing in (using 75 LTV). If after all expenses that gives me $800/mo in cashflow then I am getting a return north of 30%+/yr.

With $120k I could buy 4 properties, generating $3200/mo in cashflow.

If I did the same thing with all cash ($120k) maybe my cashflow for that property is now $1400/mo instead of $800. It's basically guaranteed to always cashflow but now I'm fully tied to just 1 property (not diversified), only have 1 property gaining appreciation, and my cashflow is less than half of what I'd get using leverage.

OPM is a wonderful thing, at these interest rates if you can find good deals I'd say leverage up to the level you are comfortable with/can qualify for.

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