Pulling Equity out for a down payment

[Brett Riemensnider]

Hi everyone. I am looking to buy my first rental property and so far have narrowed it down to a small Multifamily. Unfortunately I only have about $25k as a down payment which isn’t much to put down on a Multifamily. 

I currently own a single family home which I live in and talked to my lender about pulling equity out to help out with my down payment. I was told I could probably pull around $80k out. 

Two questions. 

1. If I pull that $80k out, my monthly mortgage payments will go up around $450 per month. Would it be ideal then to find a Multifamily property that will cash flow OVER $450? Or would that be viewed completely separately? For example, let’s say I find a duplex and after all expenses I’m left with $200 pure cash flow per unit. In my head, that would be a negative cash flow of $50. Is this the right way to think or am I over analyzing? 

2. When I bought the house, I put exactly 20% down to avoid paying mortgage insurance. If I take the 80k out, does that mean I start paying mortgage insurance? Or is 20% only needed for the initial purchase of the property? If so, is that worth it if I’m using the money to invest? 

Thank you. 

[Jonathan Nichols]

@Brett Riemensnider good on you for jumping in to the world of investing! It's also great to you have a grasp on the number not just of the one property but your whole financial situation. 

I'm responding because my wife and I were in the exact same situation as you when we began investing years ago. We ultimately decided to move to a four plex and house hack it so that we could have a low down payment. I would encourage you to consider this option if at all possible (yes it was a huge sacrifice). If you cannot do this for some reason then you will either need the multifamily property you buy to produce a net cash flow of $450 or higher or you will need to be able to float the $450 from your income. It is difficult to find SFH or small multi that cash flows in the market so I am skeptical that you will find something that cash flows enough to cover your HELOC payment but then again I have been wrong many times. Let me know if this helps and all the best to you!