Are my fears rational?

Question

I’m trying to make a decision on how to get started in buying the first investment deal. I have a $130k paid in full personal home and I’m nervous about putting my home at risk by leveraging it if I have a deal go wrong. Are my fears rational? Would it be better to save a down payment and leave my home out of all my future deals?

Bill F. · Answer

I have to respectfully disagree. We have to assume that in both of the following cases everything is equal.

If I have $60k in a savings account and a $2k/month mortgage payment and I lose $60k, I've lost money, but my expenses haven't changes.

If I have a $60k HELOC and a $2k/month mortgage payment I also have a $360ish/month HELOC payment. If I lose my $60k, I still have a total debt service payment of $2.3k, a 15% increase. Not to mention that I have now increased the risk of foreclosure on my personal residence.

The two choices come down to an upside vs downside risk decision, with the downside in the first option capped at $60k.

Bill F. · Answer

@Michael Phillips It is not the same risk to your home to have a mortgage on an investment property as it is to have a mortgage on an investment property and a HELOC on your house. The latter has more risk since more of your equity in both your home and investment property are subject to liens.

But the old adage still rings true: Don't invest money you can't afford to lose.

@David Pere my bad not catching that he owns his house free and clear and thanks for calling me out. However the lack of mortgage doesn't change fact that having a HELOC introduces a liability that didn't exist before and thus is more risky.

I'm not so bold as to assume what OP can and can't afford or what his savings rate could be. I do know that your level of job security is a lot higher than most people's; as long as you don't get tattoos on your elbows/neck or get a DUI you have a high probability of sticking around to hit 20. OP may not have that same employment prospects and could have to manage his expenses more conservatively than someone who has long duration contract employment. Just because your path turned out well doesn't mean it will do the same for everyone.

I get the positive encouraging attitude, but at times it needs to be tempered with a bit of realism. Things don't go up and to the right forever.

George W. · Answer

i know a lot of people will disagree with this but if it were me I'd be cool with having the paid off primary house and saving up for a investment property. Keep your personal risk lower and keep your personal budget lower. Last thing you want to have happen is get over leveraged have problems and lose everything.

Michael Noto · Answer

@Michael Phillips To me this situation starts and ends with the fact that it doesn't sound like you are comfortable with the risk of leveraging your home. So don't do it. Nothing in this business is worth stressing over, nothing. If saving a down payment works better for you and your risk tolerance than go about things that way. Absolutely nothing wrong with that.

Angelo Mart · Answer

Not sure on your strategy but if it is a flip I would personally be nervous if a rental and makes sense I would not be nervous at all

Henry Lazerow · Answer

Heloc can be a great tool. Calculate out the payment of not just interest but with principal pay down in 30 years. If comfortable with that ammount of debt.

If you are just buying 25% down real estate is not very risky (properly underwritten) it's more when doing rehabs or investing in high crime areas you hear of people flopping. Focus on class A/B in markets that cash flow.

Michael Phillips · Answer

Lots of good points to think about. I’m considering setting up the heloc just to have extra if I find a deal I don’t have all the cash for. I can save $30k per year. I’m not totally against risk but if I can come out on a similar trajectory with less risk than another than I’m for that path.

Michael Phillips · Answer

@Bill F.

This is where my fear/ debate is my current annual expenses on my home is slightly under $6k. From a risk management perspective, is it the same risk, to my home, to have a mortgage on an investment property, with a down payment I saved cash for or to pull the same down payment out on a heloc?

Are my fears rational?

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