Lien against one to buy another?

Question

Hi Everyone,

I have a question about financing a deal that I'm under contract for.

I'm debating on whether I should bring cash to the table, or let the bank put a 2nd on another property that I have some equity in. If they use a lien, does that work similar to a HELOC in that I will have a monthly interest payment in the amount of the 2nd?

Thanks,

Andrew

Will Fraser · Answer

Hi Account Closed, functionally this seems like a HELOC and I personally would take the lien instead of putting cash in the deal IF the debt terms on the lien were favorable.   If they weren't, then I'd plunk down the cashola, but in general debt that performs trumps burning cash for me :)

Account Closed · Answer

Thanks for the reply @Will Fraser. I totally agree that I would rather use debt as long as the cashflow remains strong.

One thing that complicates using the 2nd is that I'm partnering 50/50 to purchase the one that is undercontract. So the cost of my me "HELOC" would change the cashflow for my partner.

Any tips?

Will Fraser · Answer

I get that . . .however, the truth is that it will cost either way.  It will either cost in terms of paying the bank for the HELOC, or paying "the future you" for the opportunity cost of locking up that capital.

So, while that debt will cut into the cashflow for sure, I'd encourage you to hold your cash to a high standard regardless of the deal.  If you put the cash into a deal that could be funded with a 5.5% interest HELOC, then you've relegated that capital to earning 5.5% annually for the lifespan of the investment (or the payback).  That may or may not be ideal for you (on the positive side, it is a locked in rate of return, instead of a speculative or hypothetical one).

Ultimately, this is up to you and your partner to decide, but I encourage you to consider opportunity costs of capital a real cost.

These are exciting things to consider!  Thanks for letting me consider them alongside you!