I'm considering taking out a HELOC on my primary residence to purchase my very first rental property. My house is completely paid off and I have $40,000 set aside for a down payment. My agent highly recommended taking out a HELOC since he believes a cash purchase would make me a much stronger buyer and give me more leverage for negotiating, etc. What are the pros and cons to doing this?
@Daniel Burrows I would life more information before giving input... What type of property are you looking to invest in? What's the condition of the properties you are looing at, total gut or turnkey? What strategy or you shooting for? At the end of the day cash offers tend to have the most power behind them but I am getting offers accepted with financed deals in a very competitive market.
@Daniel Burrows well, if there's nothing additional to what you mentioned, I don't see much difference between that and using a traditional mortgage. I used a HELOC against my primary residence to purchase and rehab my first investment property. You probably wouldn't want to make that permanent and "refi" the investment to pay off the HELOC after the purchase. A big piece of advice from my experience is to always assume an appraisal will come back lower than you'd expect...
We're looking into possibly a duplex if we can find a good one, but we're not ruling out SFH's. We'd like something close to where we live so we can have more control (we'll most likely manage the property ourselves). We'd also prefer something that is ready to rent with a low amount of maintenance. But we also don't shy away from doing some rehab if we can get a good deal.
Thanks for the tips. I didn't think about the purchase and then refi option. As you can tell, I'm really new to this. We just paid off the mortgage on our primary residence and don't like the idea of a HELOC, but from a purely financial standpoint, I think it makes sense since we would be paying a lot less in closing costs and can probably get a much better deal on a property.
Definitely agree with your agent. I paid off my 1st investment property and opened a HELOC on it which is how I have been making the downpayments for my investment properties. Its a great strategy to move with buying properties. Good luck!!
@Daniel Burrows The idea to use a HELOC for a cash purchase makes sense to avoid payments in principle. IN a HELOC you are allowed to only pay interest, so you cost would be low and you can make a cash offer.
I am a turnkey investor, so in my case I am buying from turnkey providers, which is basically like "for sale by owner". You don't have a realtor in the middle that costs money.
The market right now is very hot for great turnkey providers and their properties. Therefore if you can buy cash and have a contract in place based on an inspection DNA appraisal, then calmly work everything to closing and put a mortgage afterwards, you have a clear advantage compared to anybody who first has to get financing in place before they can really buy. Naturally, TK's prefer cash buyers.
In your case, you could buy, get it all done where the TK also puts the tenant in your property and manages it for you and as soon as that's done typically about 6 weeks after closing, you put a mortgage on the property and have the cashback for the next purchase.
I always suggest looking at the performance of the properties you consider. If you can find properties that perform at 1% and you don't need to manage them, I personally think that preferable to having to renovate it and manage it myself.
I don't know about your experience but I admit for my own case that I am not a master "property finder", not a "master-renovator" or a "master-flipper", nor a master "property manager". The turnkey providers I work with have mastered all of that. That's why I focus on performance and not so much on trying to replicate what they already do.
Maybe something to consider