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Updated 29 days ago, 11/18/2024
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Down Payment on Next Property Advice
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!!
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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.
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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!
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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!
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I am not familiar with that option, but I will do a little research. Thanks!
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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.
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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.
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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.
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@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.
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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
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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.
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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!
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@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
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