Looking into my first rental property (SFH or MFH), but the amount of liquid cash that I have on hand for a down payment is limiting my options. I'm a pretty savvy saver so most of my equity is in numerous investment portfolios, 401K/IRA, or my home. I can sell off some of my portfolio or develop a savings plan for my first property, but thought I would ask my question to this community first.
From my research, a HELOC seems like a viable option to get some cash for a down payment on a rental property. Does anyone have experience doing this? I know everybody's risk tolerance varies, but it seems a little stressful having 2 mortgage payments and a HELOC payment every month. Is it a bad idea?
Any input is appreciated.
@Patrick Hamlin , It really depends on the deal and your risk tolarance. My thought is if the deal has enough cash flow to pay the HELOC loan as well, you should pull the trigger. If you have enough liquid funds to feed the deal until it gets on its feet, that might work too. Just make sure you analyze the deal really well and forecast how long you will need to pay the HELOC.
Patrick, if you use a SDIRA, don’t you have to put any cash flow from the investment back into the SDIRA or face tax consequences?
@Patrick Hamlin this is a great way to utilize your equity in a home and put that money to work for you. The challenge is that payment on the HELOC, you need to make sure that return would be good enough to cover the payment on that HELOC.
The investments that can be good for this is a flip, BRRRR, short term rental, and depending on the returns a long term rental. The long term rental is the lease likely due to the lower returns than the other three options. I would not sell off your portfolios, the biggest reason is that you will get hit with taxes on them this year that could create some bigger tax liability that you may need to save.
Yes, if you use a self-directed IRA to purchase an investment, then the investment returns go back to the IRA. If you wanted to use those funds personally, you would need to take a distribution from your IRA which would generally be subject to income taxes and possibly an early distribution penalty. While an SDIRA can be a great way to increase flexibility and get higher returns with retirement money, it is not a direct substitute for your own investing. Our most successful clients invest both inside as well as outside of their retirement accounts.