Best Down Payment Option

[Anne Christensen]

Hello,

I have several ways to fund a down payment on my first investment property and would like to know the "safest" way to do so...

Cash, borrow against my 401K (and does this method constitue the start of my investments) or HELOC. My cash is in a high yeild savings account only making about 4.5%. I'm assuming this may be the best option. Any advice is greatly appreciated.

[Scott Trench]

I like the cash option. 

If you borrow $60K for the down payment from your HELOC, then even if you could get a 0% loan (it will be more like 7%+), you'd have to pay back $1,000 per month over the next 5 years. Now add interest. No property purchased with a $60K down payment will generate $1,000 per month in cash flow, unless you hit an absolute home run.

So, your portfolio will actually be sucking cash out of your life, if you buy a traditional long-term rental using a HELOC as your down payment, for many years.

The HELOC is a great tool when you are doing a large remodel, flip, or BRRRR, and plan to refinance to repay the HELOC. And, a lot of people got lucky with appreciation over the past 5-10 years. But, I would personally be very uncomfortable using a HELOC as a traditional down payment option.