Using LOANS as down payment

7 Replies

I found a seven Plex apartment building I want. I am going to get a HELOC for the down payment but will still be short $20,000-$30,000. I may be able to get a financial partner for this balance but if I cannot what are your thoughts on using an additional loan? We all get those mailers from loan companies. The interest rates are not that high from these companies and actually lower than what I would pay a financial partner to join me. I have not spoke to our lender yet to see how they feel. Has anyone done this or have any comments for me?

My personal opinion is that you're taking a big risk.

Your HELOC isn't enough, which tells me you maxed out the equity on Property A in order to purchase Property B. You are still short, however, and want to borrow even more.

If you default on one loan you could end up losing the whole enchilada. That's not a wise choice.

Here is a little more detail. The Roi is 17% including the HELOC and I have included every expense that I can imagine.
So without the HELOC the ROI would be even higher. I figured the additional monthly payment would be paid from the 17% and still have about half remaining.

Without the loan my expenses would be about $700 a month. If nothing serious happens most of that would accumulate.

I would not take any money for me but put all against the loans each month.

I guess we all are open to using a financial partner, what is the difference?

I have another $600 a month that I will also use toward the loans. I figure that I would have at least $900 monthly toward the loans.

I appreciate your input.

@Chuck Rhodus I am someone who appreciates leverage and uses loans to buy properties over and above HELOCs. Although I probably have a higher than average risk tolerance level, I do agree with @Nathan G. on not wanting to be over leveraged. If you are buying properties that need rehab or that may need repairs from unseen deferred maintenance and you don’t have a reserve you could get into trouble quickly. 

When you partner with someone, the money they put into the property isn’t counted against you as debt on your credit score which can have a negative effect on your ability to get loans etc. that is one of the benefits of partnering with others.

As far as repairs, there are none that I’m aware of. It is a eight plex fully occupied. There is plenty of room to increase rents and it has two newly renovated units.

You have to admit, it has a great ROI including the HELOC. 17%!

@Chuck Rhodus would this be your first property in Indiana? The reason I’m asking is because the numbers in the midwest pencil out on paper really nicely, however, when it comes to the actual management of the properties the actual returns may be quite lower. I have gotten weird fees that I had no idea to budget for such as a high grass fee of close to $400 because the grass was too high. The tenant didn’t want to pay it and felt overwhelmed by the costs so they stopped paying rent and I had to evict them, etc. 

The property taxes on one of my duplexes I have out there is about $1200 a year and the appraisal of the property was only 25k. I wanted to dispute the taxes so I filled out the forms and after 6 months of not hearing back from them I called them and they told me that if they didn’t get to it this year that I could dispute it again with them next year if I wanted to.

So what I'm saying is it may be a great deal and if you are local you will probably have a much better experience, but there will likely be more costs associated with the property that you have not planned for that may bring down the ROI or you might also need to bring in more money than expected in the first year to address things you are currently not aware of yet. So it is good to have an operations account there to take care of things that come up. We try to keep 100k available among our accounts to cover anything that comes up so we can weather the storms (but we also are nearing 50 properties). I would suggest keeping 3-5k per property in reserves just in case and then when you get more properties, 10-20 or more, you can lower it to 2-3k per property.

Your primary lender will require your secondary lender to sign a document saying they get paid first in case of default. 

"So without the HELOC the ROI would be even higher."

ROI should be higher WITH the HELOC...you have less "I"...the HELOC should be treated like the 1st mortgage debt and not included in your invested amount.

"I guess we all are open to using a financial partner, what is the difference?"

There is a difference between a debt financial partner and an equity financial partner...the debt partners have to be paid back or they foreclose.

What the posters above are saying is that you are one sneeze away from pneumonia.  HVAC unit or two goes out, multiple units become vacant at once, economic downturn, etc.

100% financing is not problematic, with reserves...

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