Down Payment on Next Property Advice

[Kevin Hilton]

I am looking to acquire my 4th rental property, but I would like some advice from all of the seasoned investors in this forum. 

Property to purchase would be a STR at $240,000 - so we would need the 20% down payment and we are looking at different options as the source of the funds. I would use money from a HELOC that I have open to fund the down payment, but as @Scott Trench stated recently on the podcast, that is a short term solution, and I don't want to hold that $48k debt for more than a few months.  Our current portfolio looks like this:

LTR that is worth 150k with 65k of debt left on it at 3.65% on a 20 year loan - PITI = $785 per month - long term tenants paying $1650 per month

LTR that is valued at 110k with 45k of debt left on a 4%, 20 year loan - PITI = $583 per month - long term tenants paying $1550 per month

STR that is valued at $275k with 155k of debt left on a 3.5%, 30 year loan - PITI = 1080 per month - brings in over 35k per year gross for the last three years.

Would you do a cash out refinance on one of the properties to pull out some of the equity to pay off the $48k HELOC or would you sell one of the LTR properties to pay off the HELOC?

Or would you not try to do this deal at all and wait to build up the cash position to fund the down payment, which could take 2-3 years?

Thanks for any and all advice!!

[Scott Trench]

Quote from @Kevin Hilton:

I am looking to acquire my 4th rental property, but I would like some advice from all of the seasoned investors in this forum. 

Property to purchase would be a STR at $240,000 - so we would need the 20% down payment and we are looking at different options as the source of the funds. I would use money from a HELOC that I have open to fund the down payment, but as @Scott Trench stated recently on the podcast, that is a short term solution, and I don't want to hold that $48k debt for more than a few months.  Our current portfolio looks like this:

LTR that is worth 150k with 65k of debt left on it at 3.65% on a 20 year loan - PITI = $785 per month - long term tenants paying $1650 per month

LTR that is valued at 110k with 45k of debt left on a 4%, 20 year loan - PITI = $583 per month - long term tenants paying $1550 per month

STR that is valued at $275k with 155k of debt left on a 3.5%, 30 year loan - PITI = 1080 per month - brings in over 35k per year gross for the last three years.

Would you do a cash out refinance on one of the properties to pull out some of the equity to pay off the $48k HELOC or would you sell one of the LTR properties to pay off the HELOC?

Or would you not try to do this deal at all and wait to build up the cash position to fund the down payment, which could take 2-3 years?

Thanks for any and all advice!!

I know that a ton of people will win with the approach you are contemplating taking - in taking a HELOC out for the down payment on an investment property.

I think that the HELOC is a short-term tool, as you note. I'd encourage using it to fund a fix and flip or BRRRR. If you are going to be active, and have high conviction in a project with a clearly defined entry/exit strategy then using a HELOC is one of the better sources of capital.

But, I continue to have my stance that, on average, folks who use a HELOC to fund the down payment for long-term investments will eventually find themselves in a situation where their portfolios drain their personal financial situations, rather than fueling them.

I'd encourage you personally to either consider a strategy that allows you to add value quickly and get out quickly (a Flip or BRRRR) if the HELOC is your current only/best option for cash, and/or to simply save up. With a portfolio like this, and a good job, you could be able to save up $48K reasonably quickly - perhaps faster than the 2-3 year time horizon you post here!