How should I finance my 1st rental

Question

Just starting the process of planning my 1st investment property purchase and I'm not sure how I should handle financing. I have about $75,000 in equity and I'm interested in using a HELOC or Equity loan for my down payment I'm curious who has experience with this.

Logan Padilla · Answer

Apologies, but I misread the original post a bit. You would need to live in the multi-family (at first, anyway) to take advantage of the 5% down option. If the numbers work out and you do end up going with a HELOC or a HELOAN, you can do so with the intention of refinancing your entire first mortgage when rates drop, absorbing that 2nd. The only way this may not make the most sense is if you have a 3%-4% rate on your first.

Konstantin Ginzburg · Answer

@Michael AsheA HELOC is one method to acquire property down payments and many have used this method before but I would proceed with caution with this strategy. You will be adding debt on top of debt with this strategy and increasing your expenses due to needing to pay interest on the HELOC. If the numbers make sense and you are getting a good return on your investment on a specific property than go ahead, but it will likely be difficult to find a property with a high enough return on investment to offset both the high interest paid on a current mortgage and the high interest that would be needed for a HELOC.

Eliott Elias · Answer

The type of financing you use heavily depends on what kind of deal you are pursuing. If the property needs a lot of work, you most likely can’t fund the entire project cash, and will have to go hard or private money. If you are purchasing a turnkey rental, expect to put down at least 20% on the purchase price.

Erik Estrada · Answer

Hey Michael, If you are using a HELOC to finance the DP you might find it difficult to find a deal that can cover both your first mortgage and your HELOC payment. If the goal is to minimize your down payment, have you considered leaving your current primary as a rental and buying another?

Logan Padilla · Answer

It's worth noting that a HELOC rate is always going to be substantially higher than a conventional loan. With an investment property, you can put as little as 5% down. If you are able to handle that + closing costs without the need for a HELOC, you forego the higher rate on a portion of you equity. If you absolutely must use the HELOC to access the needed liquidity, it is still a viable option.

Erik Estrada · Answer

Hey Michael, If you need to tap into your equity to buy more rentals, you may do so with a HELOC. The reason why it may be beneficial to go with a HELOC is because you only pay interest on what you draw. The goal is to pay this balance off quickly so you can fee up your line and continue buying or renovating. With a HELOAN you pay fixed principal and interest on the whole balance. It may work if you find a deal where the rental income can cover both the HELOAN payment and your first mortgage on your rental property. This is tough to achieve with today's higher interest rates. But more debt isn't always the best idea. Make sure you have very solid numbers, since you could risk being over leveraged and having to pay the difference on a refinance.

Michael Ashe · Answer

We've done a lot of work to our current home a few things that are specifically things that we wanted for our house so it would be a hard sell convincing my wife to rent our current house but that would be a good option otherwise.is there any other way that I could utilize the equity in my home that wouldn't carry such a high interest rate? Is there a difference in rate for a home equity line of credit versus a lump sum home equity loan? Thanks for any help in advance

Michael Ashe · Answer

That's a great perspective that I hadn't considered. If the HELOC interest rate is considerably higher than the right on the mortgage like you said it might not be the best idea financially to use that for a down payment. I know generally from what I've seen conventional loans are normally 20% down and that's where my holdup is. I don't have enough liquid to swing that for the kind of property that I would want to purchase. But you mentioned some loans for rentals require as low as 5% down? Do you happen to know if that is a particular kind of loan that I can ask around about?

Brittany Minocchi · Answer

Lots of people do that, but there are also people who don't like the idea of leveraging their primary home to fund an investment. I'd say it's fine to use your HELOC IF you have a plan in place for repaying it and don't use the whole thing since it's your first investment. Make sure to include the HELOC payment in your figures for the rental as well.