HELOC/Cash-Out Refi? Strategy for down payment on investment

[Andrew Jech]

Hello BP community. I am 28 years old and currently putting together my business-plan and strategy for building my investment portfolio. My goal is to acquire my first rental property in the next 6 months, and I'm hoping for a duplex with a gross rental income that will cover the monthly payment on a 15 year mortgage and potentially provide a small upside of positive cash flow I can set aside for maintenance over time. My question is around financing, specifically the down payment on the loan. I have all the basics covered; my wife and I have excellent credit, we make a modest but decent income, and have no debt beyond our mortgage on our own home. 

First, a little background on our situation. Our current home was an investment in itself, though one that we intend to stay living in. We bought the property for $72/ft. in a neighborhood with several recent comps going for 115-122/ft. It is a 2600 sqft. home. The home needed extensive remodeling to bring it up to its perceived ARV of conservatively 110/ft. (probably more). I am about 85% done with the remodel and have saved a lot by doing all of the work myself. Everything that has been completed is fully paid for (again, no debt beyond the mortgage).

Now back to the question. We have a decent amount of money in savings, but not enough for a full 20% down on the investment and, ideally, we would like to keep that liquid as it is our personal savings. I want to take action on acquiring our first doors! I'm confident that we could get approved for a loan on a second property, but what is the best option for us regarding money for our down payment? I've considered HELOC, and have read a bit about a cash-out refinance on our current home, but wanted to ask for advice from BP community members that have been in my shoes. How did you get started building your dream?

[Mindy Jensen]

Have you talked to a lender about the down payment? My lender wants 25% down on investment properties. Make sure your numbers are correct.

Have you heard of house hacking? You could finish up the current property and then buy a duplex, living in one side as an owner-occupant while renting out the other side of the duplex and the single family home you currently own. As an owner occupant, the downpayment is lower, and you could even qualify for an FHA loan with a far lower downpayment, as little as 3.5%. Downpayments of less than 20% usually come with PMI, which cannot be removed unless you refinance out of the loan, so make sure you read all the fine print.

Do you and/or your wife have any opportunities to make extra money on the side? Side gigs can be very helpful in saving up the cash necessary for RE purchases. 

You say you have no debt and that you are doing the work on your primary home yourself. Both of the major box retailers offer store credit cards with no interest for up to 24 months. There are minimum purchase requirements - I think $200 - but it can be a nice way to spread out the payments with no interest. (Note that the entire amount of interest will be charged to you should any balance remain at the end of the promotional period, so make sure you pay it off before it is due, or you will be on the hook for all the interest.)