Using a Heloc for Down Payment?

[Joshua Ostler]

I have 100k in equity in a long term rental (was a previous primary residence). Would it be wise to use a Heloc for a down payment on my first investment property? Doing so would give me two mortgages and the Heloc. Seems a little over leveraged. I do have 30k in cash but that won't get me very far into a decent property. Is there a better way to finance my first investment property? Thanks!

[Jason Wray]

Joshua,

I would offer two pieces of advice the first would be to consider a cash out refinance over a HELOC. Secondly I would tell you to look outside of California to buy a investment property to stretch your cash and increase your ROI. All of my investors who live in CA do not buy in CA instead they buy in places like OH, IN, TN, FL, OR, AZ, TX, GA, LA.

You could pick any of those states and buy a Duplex for example under $250K and it will cash flow right out of the gate. If you want to buy a TLC and do some renovations most of those states hold enough equity to buy, renovate and pull cash out in as little as 6-8 months.

Heloc's are very tough to get on an investment property and you usually will only get a 60-65% Max CLTV. You can go up to 75% cash out and use a DSCR which will off several terms including I/O Interest only which helps keep the payment low while you take out the cash and pay it down or off. Heloc cannot be used as a PITI reserve and or as an asset which is required in underwriting when buying more REI.

More tradelines on credit can also cause a scores to decrease and higher DTI through the bureaus reporting.