Should I use savings or a HELOC for my first property?

Question

Hey everyone. I literally just wrote my introduction post, but I have a question and want to jump right in. I still need to establish an LLC to buy my first property, but I'm thinking about how I should finance the purchase. My wife and I are in a great financial position. Our only debt is a used car loan, we have $30K in savings, and we own our house free and clear. We are both 27 years old. My wife does not like the idea of using any of our savings as a down payment on a investment property. I thought about getting a HELOC depending on the property I find worth investing in. I live in a very inexpensive college town area (you can buy a move-in-ready 2/2 apartment for $40-$60K). My goal is to find a decent duplex or triplex that doesn't need a ton of work. I've been reading that traditional mortgage lenders require at least 20% down for investment properties, so if I bout a property for $50,000- I'm not sure I can convince my wife to let me invest $10K of our savings. But, what if a found a great deal for $100,000? There's no way my wife would agree to use $20,000 of our liquid cash, and I can't say I blame her. I suppose I'm getting ahead of myself, but I was hoping you great people would chime in on how you would finance your first property if you were in my shoes. Thanks!

Bob Okenwa · Answer

@Jon Summers

I would try to leverage the money through the HELOC if there were no other alternatives. But you better be extremely confident in the property and your exit strategy as your primary residence is on the line if things go awry. Also, traditional mortgage lenders will not lend conventional mortgages directly to LLC's. It would have to be a commercial mortgage and those usually require at least 25% down. If you use the HELOC, you can try following the BRRRR method to get your money out so you're not all tied up in one property.

Jon Summers · Answer

Thank you Jonathan, I appreciate the kind words and information! I totally agree with you. The fact that my money is just sitting in a savings account doing nothing makes me upset. Now time to talk some sense into my wife! (wish me luck).

Jonathon Garcia · Answer

@Jon Summers

Hello Jon, first off great job to you and your wife for working to get yourselves into a good financial standing to where you at least have options. Now the question to ask yourself or more so your wife is what is that money doing in your savings account, what is your annual percentage yield for savings, and factor in your APY for your rental investment. Now with a HELOC you have to keep in mind that a lot of those are not fixed rates but variable. So you may be approved for lets say hypothetically $50K loan at a 3.99% APR but in just 5yrs depending how frequently the fed raises rates you could be looking at 6% or more by that time. In my opinion I would use the savings, I mean if your not investing it and it is just sitting in a basic savings account earning a couple bucks of interest annually then at that point your money isn't really working for you. Happy hunting for your first investment property!

Christopher Blanco · Answer

I would definitely get that money working for you. Here are some things you can do with your savings:

• Become a Gap lender. As a flipper I am always looking for 25-30K for a few months to bridge deals, or if a home takes longer to sell than I hoped, or just because cash is getting low. I pay around 9% flat for 3 months for the privilege.
• Become a transactional lender for small deals. Find wholesalers who are dealing in 10-30K properties. You lend them money to double close on a property. Normally for 1-2days of money you can 3-5% flat. Not bad for a wire in and wire out
• Partner with someone.

All of that gets your money working. I keep no more than 1-2 months worth of living expense savings in my account liquid. Everything else is working to make more capital.

Jon Summers · Answer

Thanks for the feedback Bob!

Should I use savings or a HELOC for my first property?

Should I use savings or a HELOC for my first property?

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