Line of credit for downpayment?

Question

I'm in the process of buying my first duplex, and the downpayment will be around 100k and I do have the cash.

However, I don't want to lose liquidity because I plan on keep buying real estate. I've been considering opening a line of credit and use that for a portion of the downpayment. Is this a smart move? What other financing options should I consider?

Peter M. · Answer

@Ray Adams If you say no to that question it is technically lying because you are using borrowed money for the down payment. An argument could be made that it's your equity and therefore your money. The real issue isnt fraud but is that you now are 100% leveraged. If something goes wrong like say, tenants stop paying due to a global pandemic, you have not only risked the property you bought but also the property the LOC is based off of.

Steve Morris · Answer

"I've been considering opening a line of credit and use that for a portion of the downpayment."

I'd open a LOC, however, for emergency or "buy-of-the-century" deals.

Rates on LOCs are higher than cash-out re-fis.  However, if this is your first investment, you're going to make mistakes which cost.  So I'd try to keep my debt service down and leave some rainy-day money around.

You also need to add that in as debt to get your CFBT.  High LTV means you'll prob have little room for return.

Then the question becomes how much you can earn vs. how much the money costs you.

Ray Adams · Answer

@Ray Adams

He**

Ray Adams · Answer

@Peter M.

Just want to pick your brain a bit, but I’m not understanding how we could commit fraud?

Peter M. · Answer

@Luis Arellano I dont think it is a bad idea to have a LOC as long as you use it responsibly. There is a question when you apply for a loan that says, "is any of the down payment borrowed" so you either have to discuss that strategy with the lender or use actual cash you have for the DP then replenish as needed from the LOC. You dont want to commit fraud so just be careful.