How much equity should i pull out of my house?

10 Replies

I am looking to pull some equity out of my paid off house. would it be wise to pull out enough for 20% down or should I pull out as much as I can to put on the investment property? (my home is worth about 80K)

How much of a mortgage do you want to pay.   

What are you comfortable in regards to risk. 

For some they would go all the way to 70%, some would be more comfortable with 50% and others would only be comfortable taking enough out for the down payment and reserves or repair cost for the new investment. 

It depends on a number of factors. From how much other money you have, what your mortgage rates or HELOC rate will be, to how much are you planning to spend on the rental property, to your tax situation, to your desired cash flow, I could go on. But as @Jonathan Wilks  points out it largely comes down to risk.  

If it were me personally and I didn't have any other investment funds, I'd try to buy something substantially cheaper than my personal residence and ensure it cash flows enough to pay a large chunk of the interest on the mortgage/heloc on my personal property.  

the investment would be about 60k to 80k. I'm not particularly risky. More conservative. But I have 2 stable jobs and my wife does as well. I'm trying to approach this from a good angle. And start off right.

Another question is should I try to pay the heloc off faster than the mortgage?

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Taking a heloc out on your paid for house to invest in RE is probably not a conservative approach to risk.  Saving up for the down payment would be a conservative move or even saving enough to buy the whole rental property in cash would be the conservative move (see Dave Ramsey). 

That said I think taking out $20-30K of equity to put into a rental property would be a smart move. Your risk would basically be your ability to pay the HELOC payments and the rental mortgage payments, when you have long term vacancies and major repairs on the rental. If you have no other funds or access to funds then the HELOC itself can act as your reserves, assuming of course it doesn't get called.

If it was me I'd do something like this, I'd go get approved for a $40-50K HELOC. Then I'd go find a rental in the $60-80K range that cash flows well even after paying the mortgage payment. Then I'd work for a few months getting the rental ready, finding a good tenant, and deciding whether or not landlording is something I want to do. It is definitely not for everybody.

That puts you in the position of either paying down your HELOC or saving up money to put towards another rental purchase, granted you would have enough funds left in your heloc to take out another property, but you have to ensure at all times you have enough reserves, so saving some would be prudent here.

As for which to pay off first, the primary residence HELOC or the rental mortgage, I think that would depend more on your long term goals and your tax situation.

Could he also try to refinance the rental property at some point (let's assume there has been an increase in value) and take out some extra cash to pay back his primary equity loan? Potentially freeing up these funds to make a down payment on another property? Assuming all of the numbers still work in his favor.

@Sean S.  

Yes he can.  What that is going to depend on again are his long range goals and to a lesser extent his tax situation.  As I've said in previous threads leverage which is what we are talking about here is like a power saw, in the right hands it is a great tool, but in the wrong hands it can be bloody.   However, a well thought out strategic plan will go a long way in mitigating the risks.  

Well said. Thanks for the response.

As everyone else said it depends on your comfort. We put as little into them as possible but than we don't pull anything out. So again preference!

The interest on a HELOC is deductible only to the first $100,000 of balance. Good luck.