home equity line to purchase investment property?

Question

I have a home equity line of credit for up to $100,000. The deadline to take out any money is Dec 2012. All the fees have been paid for already. A little info on the line of credit. APR is .25% less than the wall street journal prime rate, which is 3.25% right now. It is adjustable every month. The max change within a year is 4%. The loan term will be 20 years.

My question is:
Should I use this line of credit to purchase a investment property? A house or condo to rent out that would be less than $100,000. Pay for the whole property with the line of credit or pay some with cash, like 20%? The part that bothers me is that I would not know what my interest rate would be in a year or two or whenever down the line. I know I can get a fixed rate mortgage and I wouldn't have to worry about that but I already have this available and want to know if I make use of it.

So should I use the line of credit or just let it expire? Any suggestions to how I can use it to invest in a rental property? Thanks

Bill Gulley · Answer

Does the loan have a floor and ceiling ( a minimum and maximum rate of interest)? If not, even though it's a 20 year amortization I'd still use it and view it as short term financing and financing long term assets with short term financing can be a problem.

Another issue is your ability to pay it off if needed. I'd stay with marketable properties if I used it so that if need be, you could sell off and pay it off, IMO that means no condos!

It is cheap money. Would you be interested in buying SFD and flipping them even within a year or so, build up cash and use that for your rentals with more stable terms? Or, just buy single family dwellings and be prepaired to sell.

If I were in the building stage of my business, I'd use the money, but wisely for short term needs. Take it out and set it aside, invest it very conservatively to off set interest, it's a cost of money having it available and it can always be used to pay the loan down. I would not use it for one property unless it was a selling situation.  Good luck...

Jeff S. · Answer

The best deal is the fixed rate, long-term loans right now. Have a similiar situstion with credit line at prime but remember when it was 8.5% not all that long ago.

Credit lines are best used as a back-up source of funds and not for long-term.

When your credit line expires apply for a new one. The new ones aren't all that bad.

Gordon Wong · Answer

Thank You for all the great responses.

Michael D. · Answer

Take the money out in December and put it in a bank account. It's only going to cost you about $250/mo to let it sit there while you think about it. Then you can look opportunistically for great deals, or if you don't see anything that looks appealing you can always pay it back later.

Ryan M. · Answer

Here go building a deck of cards. Its a good idea till things go bad then you lose your house. If that's OK go for it.

These are the properties we are buying now on short or foreclosure on 40 cents on the dollar.

Mike Jakobczak · Answer

That loan is very low interest and I'm sure in Nevada you would be able to find some great properties to keep that money working for you.  Depending on your situation after it expires you may not be able to get another loan like that.  So take advantage of it while you have it.

I'd use it all and keep your cash on the side to pay down the loan and for any repairs that come up.

Michael Lauther · Answer

Gordon my approach to real estate is  a bit conservative. I could purchase 4 to 5 properties in my market for 100K with some cash left for reserve. Your gross rent would be upwards of $2000 per month and your net income would be in excess of $1000 per month, perhaps somewhat more early on before maintenance catches up (initial investment assumes a good rehab.).

You would have the cash to pay back the loan if you wanted to rather quickly or you could re invest in similar properties as you accumulated more capital.

I am basing my expectations on the 2% 50% guide found on BP and have been exceeding these numbers at least in the short run.

these properties are in C areas which I define as lower income working class areas. They require more attention and management than would be required in more affluent areas but the you are compensated for this in the added return on investment from rental income.

with this approach you would double your money in under 7 years and if things did not work out as anticipated you would have more than enough income to pay borrowing costs.

Appreciation in these markets would be a bonus , you make your money on the rental.

home equity line to purchase investment property?

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