Personal Line of Credit

17 Replies

Is it a bad idea to use a personal line of credit to fund a down payment on a rental property ?

I have very little cash on hand and I’m eager to get started on my first deal. I know not to rush into this thing or I might end up with a bad deal but I just been trying to figure out strategies that could work for someone like me

@Deforrest Ferguson if you’re going to go this route be sure that your exit strategy allows for repaying the credit line in full rather quickly. Many credit lenders frown upon lending long term and the interest can add up quickly.

@Deforrest Ferguson I'm not a huge fan of it for the following reasons. If you take your average deal where you put 20% down you will have to finance 80%. Then the 20% where most people would bring cash you are also financing that. So you'll be 100% financed on the deal and you'll have to pay back a personal loan or HELOC, whichever you are using. Considering it's hard to cash flow deals that are 100% financed that means you'll have very little money left over after paying back both loans each month. So you are buying a property and taking on a fair amount of risk that isn't really going to cash flow. This can be a long couple years of really no return whatsoever.

It's not a bad idea for someone with a bunch of experience who understands the risk, has reserves and is growing their portfolio.  I'm not sure it's the smartest idea for your first purchase.  I would encourage you to save more money and get in a better position financially.  Good luck.

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It’s fine and can be an advantage *if you you know what your doing and you have other income streams or lines of funding . What’s risky for some is not for others . I’ve bought apartments with personal credit lines , yes it’s shorter term and yes it’s higher interest but I hold the note , not the banks and it’s liquid and can be borrowed against 

Wayne, you "hold the Note" when the money used to finance a deal is your money you are lending under a private mortgage, promissory note of other document you personally have issued to secure your personal funds you are lending.

Personally, I recently got two PLOCs to fund deals. However, these deals that I'm using the lines for are NOT buy and hold. They're quick fix and flips. I want to be in and out rather quickly. 6-9 weeks max. I then pay off the PLOCs and pocket the profits. This is my strategy for building more personal capital for future deals.. I do have other sources of funding. But if I need to act fast on a property for cash, PLOC is definitely a good option. It depends on your goals and strategy really. If it's strictly for buy and holds.. I would advise against it.. But that's just me. Unless you can BRRRR it and pay off the line fast.. But then again, a lot of bank require seasoning periods (6+ months).

I do have a lender that offers a program where they will fund 90% of the total loan amount (PP & Rehab), you only put down 10%.. This is good for the BRRRR strategy. Lets say you get a house for 50k, it needs 20k in work and the ARV is 100k.. You would only put down 7k (10% of 70k needed for the job) + closing & origination fee. WHAT I LOVE about this lender, is they DO NOT REQUIRE A SEASONING PERIOD and the fix and flip loan gets converted to a 30 year fixed right after appraisal is complete, after rehab.. So in other words, when you roll it into the 30 year fixed, you remortgage the house and pull the money back out.. pay off your Line and cash flow..

@Nick Monge what you described in your 2nd paragraph is what I'm looking for as far as the amount of funding and no seasoning requirement for funding a purchase/rehab + hold.  If you wouldn't mind suggesting the lender that could accomplish this?  I'm a Pittsburgh investor, hoping that they would service that area, as I'm not sure if we are talking about a local or national lender.

@Deforrest Ferguson , you may want to consider taking a loan against your 401K plan or other retirement plan if you have one.  You can typically borrow up to 50% of the balance in a 401K with a maximum loan amount of $50,000.  The interest rate would be reasonable.

Originally posted by @Craig Lessler :

@Deforrest Ferguson , you may want to consider taking a loan against your 401K plan or other retirement plan if you have one.  You can typically borrow up to 50% of the balance in a 401K with a maximum loan amount of $50,000.  The interest rate would be reasonable.

Here are the general considerations regarding 401k loans.

401k Participant Loans

  • If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
  • Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
  • Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

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