I am going to look at my first potential rental property on Tuesday and I am currently in the process of trying to think of the most appropriate way to finance my first deal - finance including down payment, renovation costs, closing costs and mortgage.
I have enough between my cash funds and taxable brokerage account that I could pay for the down payment, reno costs and closing costs with cash, but that would basically wipe out my emergency fund. I'm perfectly fine dealing with risk, but wondering how much risk is appropriate to take on.
I have about $50k in equity in my personal home and I always see mixed reactions about using a HELOC or Home Equity Loan for rental properties: some people saying absolutely put your equity to work so you can use 'other people's money' and keep your cash reserves, while others say absolutely not, don't put your personal home at risk of being foreclosed if the unthinkable happened. I'm assuming this wouldn't be much of a concern given I could always wipe out my emergency fund to pay off the HELOC or Home Equity Loan if the unthinkable did happen. I would have had plenty in my 401k to take a loan on it, but just before I got into REI, I rolled over my 401k to a traditional IRA when I changed jobs so my 401k is depleted now. I am currently looking into whether or not my company allows traditional IRAs to be rolled back into a 401k.
Thanks in advance for any feedback!
There are Pro's and Con's when it comes to how to take out the equity of a home. My advice would be with rates still low but on the rise take advantage of a "Cash out Refinance". This option puts cash into your hands to put into savings or any interest bearing account until you need the funds. This gives you an aggressive cash offering upper hand and immediate funds at a low fixed rate. You also have the benefit of having cash in account as liquid reserves which is now becoming a requirement by all banks & lender when purchasing more investment properties. The other great thing about having the cash is no matter what happens using your example that "what if factor." -Your cash in is a protected account and cannot be touched unlike a HELOC!
If you have a HELOC/LOC and you miss a payment or your credit score drops or multiple other scenarios, the bank/lender can reduce or close your line of credit. That can be done with "No warning" and can really hurt an upcoming purchase or project! You also have (1) loan with one payment instead of multiple mortgages/open end HELOC's. That can also hurt FICO scores having to many open and active trade lines or "Excessive tradeline accounts - outgoing debt/DTI.