Buying Property and equity.

6 Replies

I have a question.

While searching for houses to invest in, i found quite a bit. They all totaled to $1million. But I only have $500k.

Is it a good idea to instead of getting a mortgage for $1million, should i buy all i can for $500k and then use the equity to buy the rest and that way I only have the $500K to repay?

Please let me know if i didnt think this out properly.

I think I understand your question, and I would say the answer depends on your situation.  For example if these are buy and hold properties you might be able to get in for 20% down meaning you could buy two properties instead of one with your $500k.  This would be a good option if the properties cash flow.  If you are flipping, it will depend on how comfortable you are with taking on debt and which financing options you have available to you.

these will be buy and hold and its 8 in total. So thats why i wanted to buy four and use the equity from them to buy the other 4. I really dont want to go the mortgage route so i want to use the equity route if i could. I am new to this so please forgive my ignorance. I am guessing heloc is better than a mortgage.

while 20-30% down would save me alot of money to do other things..i want more security than anything. so is heloc better than mortgage in this case?

@Troy R. Why do you think the heloc is better than a mortgage?

If the houses value is 1milion and you have 500k, the mortgage will be 500k.

Do you have any experience in rental properties? 

If all you have is 500k and you put all your money into something new and don't have any reserves you might lose a lot of money.

Good luck!

@Troy R.

Good for being here and asking questions.  Like Aaron, I'm having a little trouble following your questions so I think there may be a little bit of a terminology and communication gap.  Don't worry - it happens as we get into something new.

Sounds like you've got the basics of debt and equity, but I do think there's something missing here.

Let's run two thought experiments, which I think track what you are suggesting:

First Scenario: You buy 500k worth of property, and for simplicity, let's say that is exactly 4 of the 8 you have your eye on. After doing that, you have 500k in equity, and you can go out and get equity financing. However, the moment you get equity financing, you now have debt. Note that banks will typically lend 70-75% LTV (loan to value) ratio so that means you need to keep let's say 125k in equity position, and you would have then roughly $375,000 in debt to work with to purchase your other properties (that you would then own outright). It doesn't sound like that will get you to your 1m dollar amount, but keep in mind that you can rinse and repeat the above (refinances etc) on a property by property basis. So if my math is correct one option for you would be to own say 5 properties using a 25% equity position and 75% debt position on them, and then own the other 3 outright. If you find a good lender they may be able to help you do all of this together, because I see the biggest downside of this method being that you may struggle on the timing to get through all the refinances, etc quickly enough to close if you want to move quickly.

Second Scenario: You buy all 8 properties using a combination of debt and equity from the outset.  To do this, honestly I think you'd probably either have to get a commercial line of credit, and engage with a lender directly.  Advantages of this presumably would be you can go faster once you get everything set up but the disadvantages are I think two fold: #1 - you generally have to put all your eggs in one basket with one lender, you end up taking longer to disclose everything you need to a lender on the front end, and #2 - terms can be in my opinion a little less stellar compared to especially owner occupied long term fixed rates (ie: balloons are common, higher rates, etc)

Different people will have different ideas of using leverage (amount of debt/equity ratio) but it really depends on the situation there.  I happen to value line of credit type financing a lot more than the 'close and pay' because you end up starting to pay on a note from day 1 when you take the latter route.

Hope this helps 

@Ciprian L.

I am looking at heloc over a mortgage because i do not want to have a set payment each month. I had a very horrible experience paying off my first house. So moving forward with starting to invest i want flexibility in paying off the debt.

And yes I am just starting out. I am aware that i will owe $500k either way..but I want flexibility in how the $500k is paid back.

So thats why I am here for other options or for someone to poke holes in my thought process so I can make the best decision.

@Jim Goebel

Thank you for the great advice and scenarios.

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