How to Analyze a Deal Using Home Equity

Question

Hi everyone, I’m very new to all of this and looking to get a basic understanding of deal analysis.  I’m currently using the BP analysis tool and had two questions on the down payment portion.  I’m planning to use home equity to fund my first deal.

1. My first thought was to simply pay for a property in entirety using my equity.  Where I’m confused is I can’t simply select “cash payment” because the analysis looks like I don’t have any mortgage payment (I have a 4.85% interest on my equity loan).  Do I just manipulate the percentage down so it closely matches what my loan payment will be, call it good and move on?

2.  In talking with someone regarding above, they mentioned that instead of tying the money up in one property, I could use it as a down payment on 2 properties (or more in theory).  Again, I’m a bit confused on how I would analyze this.  Let’s assume a 20% down on a $100,000 property.  Now I’ve paid $20,000 at 4.85% and will use a conventional 30 year loan for the remaining $80,000 at 6.5%.  How would I analyze this, and does this even make sense considering I’ll be paying two loans and more than double the interest rate?

Any guidance would be appreciated!

Mario Dones · Answer

@Matthew Spaulding are you doing a cash-out-refi or are you using a HELOC?

If you are using a HELOC keep in mind that it may start with a low interest rate, I think you quoted 4.5%, but the HELOCs are based on the prime rate, which in turn is based on the Federal Reserve's fed funds rate. In short, if the Fed raises its rate, it will increase your HELOC by the same amount. Another risk to keep in mind, is that the lender that provided the HELOC has a second position on your primary residence. Therefore, if you were to default on your payments you could lose your home. I am not arguing against using a HELOC. It has its place, just be mindful of the risk associated with it.

Michael Smythe · Answer

You can use the interest rate on your HELOC and any amount of down payment, including up to 100% cash) to estimate a payment.

Sharon Obiakor · Answer

Analysing a real estate deal using home equity can be a smart strategy, but it's essential to approach it carefully to ensure you make informed decisions. Let's break down your questions and provide adequate answers for real estate investors:

1. Using Home Equity for a Single Property Purchase:

When using home equity to fund a single property purchase, you need to account for the financing costs and calculate your cash flow accurately. Here's how you can do it:

a. Determine the property purchase price: Identify the property you want to buy and its total cost.

b. Calculate the home equity available: Subtract the amount you owe on your current home (the mortgage balance) from its current market value. This will give you the home equity available for investing.

c. Calculate the down payment: Decide on the down payment percentage you want to use for the new property. For example, if the property costs $100,000 and you want to put 20% down, your down payment would be $20,000.

d. Account for financing costs: Since you plan to use an equity loan at 4.85% interest, calculate the monthly payment on this loan and include it in your expenses. Remember to include other expenses like property taxes, insurance, maintenance, and property management fees if applicable.

e. Use BP analysis tool: Input all the relevant information, including property details, expenses, and loan terms, into the BP analysis tool to assess the potential cash flow and return on investment for the property. Make sure to manipulate the percentage down to match the actual loan payment closely.

2. Using Home Equity for Multiple Property Purchases:

Using home equity for multiple property purchases can be a viable option to expand your real estate portfolio. However, it's crucial to analyze the financial implications thoroughly. Here's how to approach it:

a. Determine the available home equity: Calculate the total amount of home equity available to you for investing in multiple properties.

b. Decide on down payment percentage: Determine the down payment percentage you want to use for each property. For example, if you have $40,000 in home equity and want to use it for two $100,000 properties, you can allocate $20,000 (20%) for each property.

c. Consider financing options: Since using a conventional loan for both properties might not be ideal, explore other financing options like private lenders or creative financing techniques.

d. Analyze each property separately: For each property, calculate the total investment required (down payment + financing costs), projected cash flow, and potential return on investment. Consider the cash flow from both properties to assess the overall impact on your financials.

e. Evaluate the risks: Understand the risks associated with leveraging home equity for multiple properties. If one property underperforms, it could affect your ability to repay the home equity loan.

Always perform a thorough analysis before making any real estate investment. Pay attention to cash flow, potential appreciation, local market conditions, and any risks involved. Additionally, consider consulting with a financial advisor or real estate professional to get personalized guidance based on your specific situation.

You can reach out at +1 (840) 465-4214 for further clarity or discussion.