Use home equity or use bank loan to purchase single family house?

6 Replies

Hi everyone, total newbie first post. I am looking to purchase a single family home in Austin Texas for about $500K and then rent our existing home (also in Austin) - which we can net cash flow about $1,000/month. We have about $900K in equity on our current home and roughly $150K in liquid cash. So, my question is what financing option should we explore to buy the second $500k home? Bank financing with 20% down? Or home equity loan on primary home? We both have excellent credit of 810+.  After we buy the $500k home (which will become our primary residence), we do plan to buy more rental properties in Austin. Appreciate the advice. 

@Chris Schorre

An underwriter will question why are you going from a property valued at over $900k to $500k? 

You don’t have to answer here, just know you will be questioned.

The best strategy I see here is getting a HELOC on your current primary, to have the ability to use later. I would only use this money short term as the rate is adjustable. This money can be used temporarily to purchase property and then use delayed financing to pull your cash back out, hopefully increasing the value with some improvements that allow you to recoup your full investment in each property.

Thanks @Jerry Padilla and  @Jordan Moorhead . We will actually be getting a larger home with the new purchase. The value of our current home is in the land as it has multi-family zoning and is walking distance to downtown Austin. Not sure I fully understand the HELOC play however. If we buy a home for $400K, put $50K into rehab and it is worth $500K post renovation, are you saying that we can then get a loan by putting less money down overall because we would essentially be working the reno costs into the loan?

@Chris Schorre , I'm curious why you seem happy with a 1.3% return on your 900k equity on a house you want to rent out.  Netting 1k a month or 12k a year on an asset that you have 900k in equity equates to 1.3% per year return.  Especially when you state you want to further invest in more rental properties.  

One of the easiest mistakes newbie investors do is rent out a home they were living in as it just might be convenient to do so but maybe not be the best solution to what they are trying to achieve.  I'm not saying you are a newbie at investing as I really don't know.  It does sound like you are very responsible as indicated by your credit score and the assets you have acquired.  So really your investment direction leaves me more curious than anything.  Even though I'm 64 I'm always open to learning more. Enlighten me.