Is it best to use personal savings or property equity?

6 Replies

Hello everyone,

My husband and I are new to both BP and real estate investments. As we navigate the road to our first investment property we've come into a bit of a dilemma.  We're unsure of the best way to finance our first investment.  My hope is someone here can enlighten us on which option makes sense financially. 

We have about $250,000 in equity in our primary home and a little more than $100,000 in savings. Initially we were just going to use some of our savings as the downpayment and take out a mortgage on the investment property and not touch the equity in our home. Recently a friend/mortgage broker told us it's best we use our equity to buy the investment property and not touch our savings. He further explained that if we purchased the investment property with cash we'd have no problem putting the property under our LLC refinancing it and paying our primary mortgage off.

I think it's best to use the equity. However, my husband has reservations about taking equity out of our primary home as he has worked hard doubling payments to make sure it's paid off before we retire he's very wary about taking any risks with our primary home.

I would really appreciate sound opinions and advice.

Thanks Crystal &

Hi Sean,

It depends on what your current debt load will be cashing out on the owner-occupied house. I think the incorrect way of doing it is cashing out on the OO house then financing the investment. I think the correct way is cashing out the OO and then buying the investment cash.

You can do both.  Cash out and use your savings. The cash out is essentially the new loan on your investment.  Where people go wrong and get into trouble is cashing out too much and also getting a new loan on their investment.  Essentially its a 100% finance purchase.  It's fine if the debt load is low but usually, it's not and now the investor just took on a ton of debt.

You have to understand risk and leverage and how to properly do it. 

Personally, my wife and I buy with cash.  We have a Heloc, but it is for reserves or just in case.  There's been a couple times we thought we were going to use the Heloc, but after taking a cold shower and making some small adjustments, we have not tapped it yet. 

Funny thing is, by the time another opportunity arises, our opportunity fund has grown again from not having debt service to pay.  The snowball grows.

Not using equity keeps us more honest and fighting for better deals.  When you use personal savings, it's more real and triggers the pain centers in the brain IMO. Like buying things with cash does. You feel it.

It also keeps us from feeling rich and spending frivolously on lifestyle.  When our reserves drop below a certain level, we get more focused and prioritize to build it up again. Just the way we do it.

@Sean Moore what's the current value of your primary home? Equity in a property is useless information alone without knowing the LTV and current market value.

With the information presented I agree with your husband and that you should use savings. People on BP are way to free swinging with their primary home equity for my liking. If you lose a rental to foreclosure that’s one thing but to lose your home can be devastating. I think that’s what a lot of people are risking when they have a mortgage and then get a heloc on their primary.

If you want the extra cash to buy rentals just stop paying down your mortgage ahead of schedule.

Personally I follow a very similar approach to Steve. Once it’s paid off, leave it paid off.

What your thoughts on still securing a line of HELOC but for cash reserves? We currently have enough personal savings to act as cash reserves as well but wanted to know if it's still worth getting a line of credit. Having a Heloc can be a very convenient way of accessing money. However, if I already have the cash reserves is the closing costs associated with securing a line of credit worth it?

Right now I feel like securing a Heloc for "just in case" is acceptable. We could use the cash flow to reimburse the Heloc.

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