Using HELOC to buy next property

[Jose Garcia]

I am looking for advice.

Last December I bought a second home looking for more space for my family. I was able to rent our previous home for $2050/month and It leaves me with $650 after all expenses. Because I just recently bought my second home (December) and have been working on home projects on the new house, I am currently low on cash (~$5000). However, I do have available a 50K HELOC on my first property. I am planning on using the HELOC to buy another investment property and I already have a property in mind. However, my wife is kind of nervous about using our HELOC since we are a little bit short on cash and we have plenty of other projects we still need to get done at home.

However, interest rates are low and I am looking to buy a property for about $100K that I can renovate and rent right away. My question is, how do you know that you are ready to buy the next property? What's the level of margin that you use per property in case of emergencies. I am planning to pay off my HELOC slowly with the cash flow of my first property and the new property but it will take me a while to pay that off. Thank you so much!

[Brent Paul]

Me personally I like to have 4-6 months of reserves for each property in case of repairs or vacancy. My cash flow has to be at least $250 per month for me to even consider it.  Most of the time I am well above that. Everyone will be a little different.

You should be able to deduct the interest off the Heloc since it will be used for an investment property. That might help you out some. I'm not an accountant, but every little bit helps. The property you are buying for 100k is there value add there? Can you renovate it and gain some equity? If so it's possible you could fix it up, rent it out, refinance and cash out. Use that to pay back your HELOC or buy another property. Some people use the cash flow to pay down the HELOC.

[Alexander Knowles]

If you are short on cash and still have other projects to finish, you may want to triple check your reasoning to purchasing your next property. Having reserves stashed away is a good idea with an impending recession on the horizons. Depending on your current LTV and what projects you say need to be finished, a cash-out refinance may be something to look at as interest rates are low, it will give you an injection of cash and you will not have to worry about paying off the HELOC in slow-mo. Most investors use a HELOC to purchase a property that they know will be paid back ASAP when they refinance the property after renovations.