Start with my home or take out home equity loan/LOC?

Question

I am an aspiring rental property investor; I currently own my home and am stuck on how I should start. I see two options available, either renting my current home and moving into an apartment for myself, or taking out a home equity loan/LOC to buy my first rental property while staying in my home. If anyone has advice on the better option, or even a process to determine which is best for my situation, I greatly appreciate it!

It might be important to mention that I am looking to make rental investing my main form of income. I am a former educator who left the classroom last May and have been doing private academic coaching/consulting for the past year. I am looking to move away from this role and fully into real estate. I have a bit saved up for my own bills, but none extra to invest without the home equity loan/LOC.

Thank you!

Andrew Garcia · Answer

Hi @Ashley Godfrey, welcome to REI!

You have a few options here. Below are my thoughts.

I agree with Scott Trench's post HERE about why a HELOC should not be used as a down payment.

A cash-out refinance would jump your rate up 3-4% so that is likely not the best option.

The home equity loan is an attractive product for using funds towards a down payment. It is essentially the same as the first mortgage but with a higher interest rate and a lower balance.

If you plan to keep your current residence and your low interest rate, I would recommend that option.

Additionally, since you do not have much personal savings, a lower-risk strategy might be best for you.

Possibly house hacking to bolster your personal financial position while continuing to grow your real estate knowledge and wealth.

Hope this helps! Let me know if I can be of any assistance.

Reid Chauvin · Answer

@Ashley Godfrey - I think your best bet, at least to start, is going to be house-hacking your way to a larger portfolio. Buying a home as a primary residence requires considerably less capital. If you can buy a multi-unit property and rent out the other unit(s), even better. The challenge may be qualifying for the financing - it sounds like you recently became self-employed if I understand correctly. Generally, you are required to have 2 years of self-employment history to be able to qualify for a loan with that income, but there are exceptions where at least 1 year would be acceptable, like if you remained in the same industry (which it sounds like you did). The calculated income is going to be based upon your net income from your business.

If you opt to use a HELOC to fund the upfront costs of buying an investment property, you will need to have a strategy for how you pay that borrowed money back on top of your new mortgage. I imagine this will be difficult, unless you find a killer property...

Feel free to reach out if you'd like to discuss further!

Matt Lavinder · Answer

@Ashley Godfrey Adding to the solid advice @Andrew Garcia gave above, you may want to look at shorter term projects since you are using HELOC (a short term loan). I tend to believe you need some savings to properly invest in buy and holds because there's a good possibility you'll leave your cash in them for the long term. One bad tenant or one bad heat pump could require you to invest 5-10k in repairs. Have you considered flipping the first few houses to generate some cash that you can use to acquire and maintain rentals later? In my experience, rentals are better at creating wealth and flips are better at creating cash. In the beginning of a real estate investing career, cash is more important than wealth.

K. Tucker · Answer

@AshelyGodfrey, your post sounds like my current situation. I'm currently an educator seeking to be work optional via real estate. Interestingly enough, I plan to start a coaching/consulting business like you already have and make it and REI my full-time position. Like you, I have a primary residence. My goal is to  transition it to a long term rental by year's end. I've also been trying to purchase my next investment but continue running into lenders asking for 15-20% down or significant fix and flip experience to qualify me for the loan. I have enough equity to do a HE/Loan or Loc but don't want to take on more debt associated with my current property. My plan's steps are below starting with what I did last year to what I'd like to do in the future.  Also sharing some questions regarding your current situation. I welcome your feedback as I love strategizing with other educators.

1. Refinance primary residence to lower rate (This allowed me to shave $300 off my current mortgage payment so that when I rent the property I can get more in cash flow2. Conduct renovations on primary residence to prepare it for rent (Funding used..W2 wages from current job, funding from a low interest credit card with a $5,000 limit, donations from family)

3. Long term rent entire primary residence at $600-$800 over monthly mortgage (The highest rents I've seen in my market comparable to my property are $2500). If can rent at $2500 that would allow me $300 in monthly cash flow

4. Move back in with family to stack W-2 wages for a year to use as a downpayment on another property (possibly a multi-family or fix and flip). If buying a fix and flip, use a hard money loan and BRRRR

5.  Fund next investment with equity of BRRRR property OR find a partner who can supply funding on the deal while I manage the property and we split the profit

Some questions for you:

1. Can you rent rooms or the basement in your current home to get additional income to contribute to your investing goals?

2. If you rent your whole house..can you move in with friends or family and pay them monthly rent to save on the costs of renting an apartment?

3. Do you have funds in a retirement account that you can use for investing?

4. Do you know anyone with funds who doesn't have the time or interest to invest but would be willing to partner with you by providing funding?

Happy to talk ideas. Best wishes on your REI journey!

Ashley Godfrey · Answer

@Andrew Garcia, @Reid Chauvin, and @Matt Lavinder, Thank you all SO much for the quick and thorough advice! This gave me some great options to think about as I decide on the best path forward.

Start with my home or take out home equity loan/LOC?

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