Purchasing rental property using a line of credit

[Tony Wilson]

I am looking at buying a rental property, but I have no down payment. I was thinking of utilizing a line of credit of $25K-35K for down payment and closing cost (6.2% interest). I believe this is a great deal of a duplex, however, the cashflow calculator doesn't pencil out when taking the line of credit into consideration I have to pay back. The duplex is $150,000 asking price and after roughly $15,000 of new paint, carpet and appliances, it'll be worth $200,000. The total rent should be $1,950. Would this still be a good deal?

[Aaron Poling]

I am assuming you are borrowing 80% from a bank at a lower interest rate, and the down payment at the higher interest rate. If you factor in both your loan costs, taxes, insurance, vacancy, management, utilities, etc... I don't see how this will cash flow. You will end up with some equity but don't think it will be enough to do a refinance once the work is complete. Also even if you have equity, if the cash flow is negative they won't let you refinance. I don't think the numbers will work on this. 

An idea could be to make a lower offer, and ask for the seller to hold a note for the down payment. Get with your lender and find out what monthly payment for the down payment could work and offer to pay that much monthly for a 5 year note but amortize it over a longer period to get the monthly payment down the the amount you need. This would leave you with a balloon payment on the down payment but as long as all the numbers work you could refinance at that time to pay that off. 

Just an idea, it is amazing what can work when you think a little creatively. Just remember no matter what happens if you can't get the numbers to work don't do it! 

Good Luck! Aaron