Skip to content
×
PRO
Pro Members Get Full Access!
Get off the sidelines and take action in real estate investing with BiggerPockets Pro. Our comprehensive suite of tools and resources minimize mistakes, support informed decisions, and propel you to success.
Advanced networking features
Market and Deal Finder tools
Property analysis calculators
Landlord Command Center
$0
TODAY
$69.00/month when billed monthly.
$32.50/month when billed annually.
7 day free trial. Cancel anytime
Already a Pro Member? Sign in here

Join Over 3 Million Real Estate Investors

Create a free BiggerPockets account to comment, participate, and connect with over 3 million real estate investors.
Use your real name
By signing up, you indicate that you agree to the BiggerPockets Terms & Conditions.
The community here is like my own little personal real estate army that I can depend upon to help me through ANY problems I come across.
Buying & Selling Real Estate
All Forum Categories
Followed Discussions
Followed Categories
Followed People
Followed Locations
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Reviews & Feedback

Updated 29 days ago, 11/18/2024

User Stats

14
Posts
3
Votes
Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
3
Votes |
14
Posts

Down Payment on Next Property Advice

Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
Posted

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!!

User Stats

84
Posts
71
Votes
Richard Schubert
  • Akron, OH
71
Votes |
84
Posts
Richard Schubert
  • Akron, OH
Replied

Hello, personally, if it was me in your situation, I would not trade the low interest rates you currently have by cashing out the relatively smaller equity you have in your current properties for a much higher interest rate. You have to factor in the increase in the cost of your money. The slight decrease in NOI for me would alter my outlook on if leverage on my portfolio makes sense to buy a STR. I also would not take out a loan to get a loan. For me, I would, put together a prospectus for the STR and approach my friends and family to see if they would be interested in a partnership on it. Keep your portfolio cash flow.

User Stats

14
Posts
3
Votes
Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
3
Votes |
14
Posts
Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
Replied

Thanks for the response Richard. That is a concern I share, giving up the low interest rate and some cash flow on the LTR's. That is a reason I would consider selling one, because the STR is in a market that is likely to have more appreciation. It is hard to give up the strong cash flow though. Appreciate your thoughts!

BiggerPockets logo
BiggerPockets
|
Sponsored
Find an investor-friendly agent in your market TODAY Get matched with our network of trusted, local, investor friendly agents in under 2 minutes

User Stats

1,216
Posts
943
Votes
Replied
Quote from @Kevin Hilton:

Thanks for the response Richard. That is a concern I share, giving up the low interest rate and some cash flow on the LTR's. That is a reason I would consider selling one, because the STR is in a market that is likely to have more appreciation. It is hard to give up the strong cash flow though. Appreciate your thoughts!

What about a portfolio mortgage with the lender keeping the proceeds in trust for your purchases?

User Stats

14
Posts
3
Votes
Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
3
Votes |
14
Posts
Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
Replied

I am not familiar with that option, but I will do a little research. Thanks!

User Stats

84
Posts
71
Votes
Richard Schubert
  • Akron, OH
71
Votes |
84
Posts
Richard Schubert
  • Akron, OH
Replied
Quote from @Kevin Hilton:

Thanks for the response Richard. That is a concern I share, giving up the low interest rate and some cash flow on the LTR's. That is a reason I would consider selling one, because the STR is in a market that is likely to have more appreciation. It is hard to give up the strong cash flow though. Appreciate your thoughts!


Myself, I would stay with the numbers in front of me that have proven to be profitable. The STR, if purely an appreciation play, is speculation to me.

User Stats

14
Posts
3
Votes
Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
3
Votes |
14
Posts
Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
Replied
Quote from @Richard Schubert:
Quote from @Kevin Hilton:

Thanks for the response Richard. That is a concern I share, giving up the low interest rate and some cash flow on the LTR's. That is a reason I would consider selling one, because the STR is in a market that is likely to have more appreciation. It is hard to give up the strong cash flow though. Appreciate your thoughts!


Myself, I would stay with the numbers in front of me that have proven to be profitable. The STR, if purely an appreciation play, is speculation to me.

The STR is in the same neighborhood but is in a slightly better location, beach block vs 2nd block. I would anticipate about 40k gross per year based on what we get from the other STR, so I don’t think it will be strictly an appreciation play. It should cash flow as well, not quite as well as the LTR’s though.

User Stats

84
Posts
71
Votes
Richard Schubert
  • Akron, OH
71
Votes |
84
Posts
Richard Schubert
  • Akron, OH
Replied
Quote from @Kevin Hilton:
Quote from @Richard Schubert:
Quote from @Kevin Hilton:

Thanks for the response Richard. That is a concern I share, giving up the low interest rate and some cash flow on the LTR's. That is a reason I would consider selling one, because the STR is in a market that is likely to have more appreciation. It is hard to give up the strong cash flow though. Appreciate your thoughts!


Myself, I would stay with the numbers in front of me that have proven to be profitable. The STR, if purely an appreciation play, is speculation to me.

The STR is in the same neighborhood but is in a slightly better location, beach block vs 2nd block. I would anticipate about 40k gross per year based on what we get from the other STR, so I don’t think it will be strictly an appreciation play. It should cash flow as well, not quite as well as the LTR’s though.
Curious if your near Virginia Beach? I have a home in OBX but I don’t rent it out. I would say 90 percent of all homes in the outer banks are in a str program of some sort. Many are private owners just subsidizing their mortgage or they would not be able to afford the house without renting it out much of the season. Problem with many of them I see this far north is November thru March they kinda sit or you have to discount the daily rate so much that you only might break even. Of course OBX is 100% vacation destination only being no industry or jobs outside hospitality. Just curious how Virginia does during the Winter.

User Stats

14
Posts
3
Votes
Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
3
Votes |
14
Posts
Kevin Hilton
  • Rental Property Investor
  • Haymarket, VA
Replied

@Richard Schubert no we don't own in VA Beach, we wanted a longer season so we are a bit further south in North Myrtle Beach. The season is pretty much from March - November, but you can get snow birds from Dec-Feb.

User Stats

2,705
Posts
1,686
Votes
Crystal Smith
Pro Member
  • Real Estate Broker
  • Chicago, IL
1,686
Votes |
2,705
Posts
Crystal Smith
Pro Member
  • Real Estate Broker
  • Chicago, IL
ModeratorReplied
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!!


 There is a variable missing in your post that is the key to answering the question of which asset to leverage to purchase the asset you have in mind. That variable- How much cash do you project the $240K asset will throw off per month after the 20% down?  The bottom line assumes that your overall cash flow will go up from acquiring this new asset, which existing property, when you leverage will have the smallest negative impact on your overall cash flow.  It's a math problem that you can easily figure out  

  • Crystal Smith
  • 3126817487
  • User Stats

    14
    Posts
    3
    Votes
    Kevin Hilton
    • Rental Property Investor
    • Haymarket, VA
    3
    Votes |
    14
    Posts
    Kevin Hilton
    • Rental Property Investor
    • Haymarket, VA
    Replied

    Hi Crystal, thanks for your response. The unit we have, one block further back from the beach we have been getting a little over 35k gross per year. This new unit should be able to do about 40k in gross. The cash out refinance would decrease cash flow by about 300 per month. 

    User Stats

    2,620
    Posts
    5,710
    Votes
    Scott Trench
    Pro Member
    • President of BiggerPockets
    • Denver, CO
    5,710
    Votes |
    2,620
    Posts
    Scott Trench
    Pro Member
    • President of BiggerPockets
    • Denver, CO
    Replied
    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!

    User Stats

    267
    Posts
    176
    Votes
    Myrtle Mike Thompson
    Agent
    • Realtor
    • Myrtle Beach, SC
    176
    Votes |
    267
    Posts
    Myrtle Mike Thompson
    Agent
    • Realtor
    • Myrtle Beach, SC
    Replied

    @Kevin Hilton not sure which market you're looking at for your next purchase, but I have a lending partner who can do investment deals (including non-warrantable condotels) with just 15% down if it helps.  We've closed on a handful together in the Myrtle Beach / North Myrtle Beach market.  Feel free to shoot me a message and I'd be happy to pass along his contact info.

    • Myrtle Mike Thompson
    BiggerPockets logo
    Join Our Private Community for Passive Investors
    |
    BiggerPockets
    Get first-hand insights and real sponsor reviews from other investors

    User Stats

    14
    Posts
    3
    Votes
    Kevin Hilton
    • Rental Property Investor
    • Haymarket, VA
    3
    Votes |
    14
    Posts
    Kevin Hilton
    • Rental Property Investor
    • Haymarket, VA
    Replied
    Quote from @Scott Trench:
    Does the math change on using a HELOC if you use the HELOC for a short term period, until completing a cash out refinance on one of the LTR's that I own? I do not plan on paying interest on the HELOC for more than 2-3 months, so I guess the better question is will my portfolio benefit from acquiring a 4th property by leveraging a cash flowing LTR and therefore increasing the interest rate and lowering the cash flow on that property? That is the question I am having a difficult time answering. My goal has been to own 5 rental properties within ten years and we are at 3 in six years. Thanks for taking the time out to respond!!!