buying investment property with home equity

[Sheryl Orwel]

Hi All, I know buying investment property with a home equity loan has been discussed before,  but I loved to hear thoughts/ideas/tips for someone starting out. In the process of refinancing my condo of 4 years and discovered I have significant equity.  It seemsto me that investing the equity in real estate may be ffinancially a good decision. I am just not sure how to begin? Any advice appreciated. Thanks

[Mark F.]

@Sheryl Orwel Yes, you can invest proceeds from a cash out refi into a new property as a down payment, but you'll have to do it right so you don't create headaches for yourself. 

Once your cash out loan is done, put the cash in the bank and hold it there for at least 2 to 3 months. Pick an account that gets very little deposit activity because the lender you're financing the purchase with will want to verify that you've had the funds on hand for at least 2 to 3 months. They'll do that with bank statements, and if you have a lot of deposit activity into that particular account, it can create some paperwork headaches. Use an account that is very quiet to minimize these headaches. 

In short, pull out the equity, put it into a very quiet account for at least 2 to 3 months, and then get the ball rolling on the purchase. 

Having said that, take care not to over leverage yourself - that can make it tougher to qualify for an investment property purchase loan. The bank will also want to see that you have at least 6 months worth of principal, interest, taxes, and insurance (and any mortgage insurance) for the new investment property (and any other investment properties you have) on hand in the bank as well. And that's over and above the cash you need to close on the purchase.