When to pay off home equity loans...?

Question

After spending a ton of time on this site and listening to a bunch of podcasts, I am finally taking action.  I've got a partner with experience in rehab/holding/flipping and today I began the process of getting a home equity loan.

We are putting together a business plan and looking at properties.  We found a nice auction single family that we will be bidding on in the next month or two.

I know that leverage is good, but as part of my plan, I want to know when to pay off loans.  Do I try to do this as I go?  Maybe buy a couple properties, then throw money at the loans?  Let the entire loan run it's coarse?

The terms of the loan I am looking at to get me started are interest only for first 5 years at a variable rate (3.75 to start), and I believe amortization over the following 10 years, for a total of 15.

Keeping in mind that in the next few years, my wife and I will want to buy a more permanent home (currently house hacking a duplex), what should be my plan for payoff?

Michael R. · Answer

I think you should be worried about this - and what if your job goes away tomorrow?  You are funding your business with personal funds - which is kind of the way it works in the beginning.

But to your question.  Your question - and correct me if I am wrong - is more, how leveraged should you be.  My answer to that would be -- run numbers.  What if 2008 shows up tomorrow? What if 2000 shows up tomorrow? Will you have an emergency fund for your personal situation and will have emergency funds for your business?  Investing in anything is about risk tolerance.  Run worst case scenarios - then double the problem and see how your stomach feels when you look at the spreadsheet.

Cash and cash flow give you options but everything comes with a cost -- depending on what options you want will depend on what debt you want to carry.

Disclaimer -- I'm paying debt off right now deferring an emergency fund and relying on a contract job that could go away tomorrow; however, my wife makes enough that we can afford our three properties if I'm not working.

I hope that helps.

Bernie Tobin · Answer

Thanks, Mike!  This does help.  I think I am safe as my job is very stable and I am in very good standing where I work.  My wife will finish school soon and her income should improve significantly.  Thinking about this... I am at least 2-3 years out from buy our "nice house", so I may as well start building my snowball now.  Thanks for the advice!

Skylar Dejesus · Answer

everything I have studied has said use as much OPM as possible just make sure you always have an escape plan. I put as little down on the properties as you can and get as many as you can with your capital IMO.

Bernie Tobin · Answer

That makes sense.  I am just worried about getting a loan for my own home if my debt to income is too high.  I do have a job and make pretty decent money, so I suppose if I do not get "too" leveraged, I should be okay.

Pari Thiagasundaram · Answer

My answer would be "never". (Let your tenants pay the mortgage). Its cheaper to get a loan now, than 30 years from today.