heloc for down payment on buy and hold?

[Elisha Mcginley]

hi everybody! so, i'm totally new to this game, but i've been reading, listening to podcasts, and researching in general, and i'm learning about helocs, and i think i would want to buy and hold property. someone at work told me i could take out a home equity line (i'm estimating $15-20k is what i have in my home's equity) to make a down payment on a secondary property, and i told him i didn't want to take that risk. he said that sometimes people take out home equity to buy a secondary property, then take equity out on the secondary property to pay back the first equity loan. does anyone know anything about this? i would assume that if i can get something low enough below market value, the equity will already be available, at least enough to cover the bulk of the original heloc. or, if i can get a small condo close to campus for a little more than double my equity, i may be able to get the loan payments low enough to recoup fairly quickly. a third option would be to spread the heloc out as down payments on more than one property. in any of these options, i think it would be a good idea to hold onto about 5k liquid for anything that might pop up. i have to start somewhere, but is this too risky?

[Gerald Demers]

First rule of investing - don't invest beyond your sleep factor.  If your investing is keeping you up at night, you are investing beyond your risk tolerance.  

You typically cannot strip the equity out of an investment property as easily as you can your own home unless you travel back to 2003.  Even if you could, my advice for rental/income property is to NEVER strip the equity.  If expenses increase or rents soften, that is manageable if you have some breathing room.  If you strip the equity and create a larger monthly payment requirement, WHEN something happens (and it will happen at some point), where does that leave you?  

All that being said, one danger of investing using your Heloc is rising interest rates can hurt you. I would not count on the heloc as long term debt though with interest rates the way they are, they won't rise anytime soon. One suggestion if you do use your heloc is to begin looking for a money partner; someone that wants a good return in their IRA or something like that. If your HELOC becomes unmanageable, you can engage a private lender and close off the HELOC. And if you have not stripped out the equity, this is a viable alternative for you.

Or, you can use the HELOC to purchase, replace it with private funds, then use it again for your second property. You will not get cheaper money that what a HELOC would cost today but the interest rate is adjustable so it's a moving target.

Sleep well and make some money!

Gerald Demers