Best Down Payment Source

[Jared Khan]

Hi BP - long story short, my cash is tied up in illiquid assets at the moment. I do however, have full availability on my HELOC, various credit cards that are offering me 0% balance transfer checks for up to 12 months, and various retirement funds (Roth IRA, traditional 401k, etc.)

I'm already a homeowner in SoCal, but I want to buy my first LTR SFR someplace like Cleveland since the price point is attractive. Aiming for conventional and not a DSCR loan due to costs and the higher down payment requirement for the latter.

With that said, I'm curious to hear your take on what the most cost-effective & efficient approach would be to source a down payment. I personally like the credit card balance transfer check route, since it's interest-free for a decent amount of time (aside from an initial 3.00% fee).

[Chris Bounds]

Nearly all of my single-family deals were zero down deals because I got them off-market, direct to owner. 

Otherwise, HELOC is a great resource.

[Kevin Sobilo]

@Jared Khan, a few things:

1. Look carefully at the credit card transfer checks. Sometimes they can ONLY be used to pay down credit card debt on another card. Your bank may not allow you to deposit them.

2. Even if the balance transfer check can be deposited, look at the 3% transfer fee. That is your interest cost basically. So, that money is not free either and the interest rate is MUCH larger if you don't pay it back in 12 months. So, factor that in because cash-flow is unlikely to pay enough to pay off this within 12 months.

3. Part of your consideration is the type of loan you will use. For example if you are planning a house hack using a conventional conforming loan then your down payment will need to be "seasoned" and sitting in an account for some months.

The origins need to be traceable for 2 reasons. One is they want to know your down payment isn't coming from credit that doesn't already show on your credit report. The second is requirements under the patriot act.

4. Retirement accounts could be a good option depending on the situation. If you are able to make an age related withdrawal or a loan from your 401k those could be good options since the stock market is currently at all time highs. 

[Andrew Freed]

I vote for HELOC or retirement funds first. Playing with credit cards is dangerous.

[Nicholas L.]

@Jared Khan

hello - I am just going to be very direct.

it doesn't make sense to use expensive money to buy a random property thousands of miles away.  you will most likely just lose money.

to make this work, you'd have to buy something distressed, rehab it, and then refinance so all the short-term funds - HELOC, c/c transfer, etc. - were paid back. this is exceptionally difficult to do. i BRRRR locally and am having a hard time.

you don't want this answer, but the best down payment source is cash, and then holding the property for 50 years and being prepared to not net anything for 5-10 years as you stabilize it.

if i am missing something, let me know.

[Chris Seveney]

@Jared Khan

How about saving and using cash?

The other options you are playing with fire as using a HELOC that is paying interest is essentially buying with 100% financing.

Having no skin in the game has always been a high risk strategy and people were able to get away with it the past few years due to the money supply and inflation but I would not use that as the measuring stick. I would be very careful with using 100% leverage in a deal.

[Jared Khan]

Thank you all for your responses. The property prices that I'm looking at are all in the sub-$150k range. I do have a zero-leverage option which is taking out retirement funds early and $30k is tolerable for me.

[Jared Khan]

Quote from @Nicholas L.:

@Jared Khan

hello - I am just going to be very direct.

it doesn't make sense to use expensive money to buy a random property thousands of miles away.  you will most likely just lose money.

to make this work, you'd have to buy something distressed, rehab it, and then refinance so all the short-term funds - HELOC, c/c transfer, etc. - were paid back. this is exceptionally difficult to do. i BRRRR locally and am having a hard time.

you don't want this answer, but the best down payment source is cash, and then holding the property for 50 years and being prepared to not net anything for 5-10 years as you stabilize it.

if i am missing something, let me know.

Thanks for the input. I hope the 50-year hold and not netting anything for 5-10 years is satire.

The very reasons that you gave for why BRRRR is difficult, are exactly why that's not my strategy. I've found some turnkey SFRs with market rents that appear to be more than enough to service all expenses, based on the finance amount. My rent data is also based on CoStar and other social media outlets' marketplaces. As I understand it, flipping/rehabbing requires you to have a solid team in place to minimize costs among other things. Not my target. My aim is slow and steady net cash flow.

[Kevin Sobilo]

Quote from @Jared Khan:

Quote from @Nicholas L.:

@Jared Khan

hello - I am just going to be very direct.

it doesn't make sense to use expensive money to buy a random property thousands of miles away.  you will most likely just lose money.

to make this work, you'd have to buy something distressed, rehab it, and then refinance so all the short-term funds - HELOC, c/c transfer, etc. - were paid back. this is exceptionally difficult to do. i BRRRR locally and am having a hard time.

you don't want this answer, but the best down payment source is cash, and then holding the property for 50 years and being prepared to not net anything for 5-10 years as you stabilize it.

if i am missing something, let me know.

Thanks for the input. I hope the 50-year hold and not netting anything for 5-10 years is satire.

The very reasons that you gave for why BRRRR is difficult, are exactly why that's not my strategy. I've found some turnkey SFRs with market rents that appear to be more than enough to service all expenses, based on the finance amount. My rent data is also based on CoStar and other social media outlets' marketplaces. As I understand it, flipping/rehabbing requires you to have a solid team in place to minimize costs among other things. Not my target. My aim is slow and steady net cash flow.

 @Jared Khan, when you look at turnkey properties for cash-flow. Keep in mind you need to account for soft-expenses as well such as Vacancy/Turnover, Maintenance/Repair, and Capital Expenses. Generally people might budget 15% of incoming rent for these items. In addition, if you are buying in a remote market its appropriate to budget another 10% for property management.

You mention slow steady cash-flow. That isn't what you should expect from a single $150k investment in a turnkey single family or duplex. The total opposite. You have so few units at that point that either things are going ok, or badly. When you have a tenant issue there aren't a bunch of other units to cover the shortfall. So, it isn't steady with so few units. You also want to have reserve funds available to weather these hard times.

[Nicholas L.]

@Jared Khan

not satire and genuinely trying to help.  if you run the numbers on a sub 150K property and use realistic expenses as @Kevin Sobilo pointed out you will see what we mean.  

and buying a property is actually very expensive.  it typically takes a few years just to recover the closing costs. 

those are the types of things that get sugarcoated / ignored and they shouldn't be.

[Jay Hurst]

Quote from @Jared Khan:

Thank you all for your responses. The property prices that I'm looking at are all in the sub-$150k range. I do have a zero-leverage option which is taking out retirement funds early and $30k is tolerable for me.

I assume you know but you will pay a 10% early withdrawal AND pay ordinary income tax on that 30k. So, lets say your marginal income tax rate is 25%, then you would be paying 10,500 in taxes for that 30k.  I am also not a fan of 100% leverage with HELOC's etc, but your actual cost would be a lot lower with a HELOC. If you can get a HELOC at prime 7.75% that would be a 2325 in interest cost a year. 

[Drew Sygit]

@Jared Khan are you looking to buy Class B, C or D in Cleveland for under $150k?

The lower in Class you go, the higher the risk!

Does it make sense to use your HELOC or borrow from your retirement funds to purchase a high risk property?

Only you can answer that.

[Dan H.]

Quote from @Nicholas L.:

@Jared Khan

not satire and genuinely trying to help.  if you run the numbers on a sub 150K property and use realistic expenses as @Kevin Sobilo pointed out you will see what we mean.  

and buying a property is actually very expensive.  it typically takes a few years just to recover the closing costs. 

those are the types of things that get sugarcoated / ignored and they shouldn't be.

3 separate recent sources show that it is cheaper to rent than buy at high LTV in virtually every market.  Note being a LL has costs that OO does not have.  In particular, OO does not have vacancy or PM and typically has cheaper maintenance/cap ex than the landlord would experience.

https://www.realtor.com/news/trends/its-now-officially-cheap...

if you use realistic expenses, purchase at retail (off MLS) without a value add, you will have negative cash flow on virtually any purchase.   High rent growth areas are likely to achieve positive cash flow quicker than low rent growth areas.  

5 years for cash flow seems reasonable in many markets.  

I suggest you understand the 50% rule.   If your ponder writing reflect significantly better cash flow than the 50% rule, be sure you can explain the discrepancy.

good luck

[Stuart Udis]

@Jared Khan I sure hope there's more to your investment thesis than buying in Cleveland "since the price point is attractive". More to the point of your post, most lenders will want to see where the down payment sources are coming from and will not look favorably at someone who is using credit card debt to cover the down payment. Most who use this strategy are ultimately lying on their loan apps.

Using debt to cover down payments is always a risk. Most do so believing its only temporary but s*** happens in this business..... timelines get stretched, appraisals come back lower than expected, rates remain high longer than expected etc. etc. and what's intended to be a short term solution often adds quite a bit of strain to the property and your business. This high leverage strategy becomes even riskier when you're investing in low barrier/lower cost markets. 
 

[Corby Goade]

The only answer here is HELOC. Lower rates and more flexibilty. You'll need to consider DTI for any of those options, which is usually the limiting factor for people as they start to scale.

[Tim Delaney]

Quote from @Jared Khan:

Hi BP - long story short, my cash is tied up in illiquid assets at the moment. I do however, have full availability on my HELOC, various credit cards that are offering me 0% balance transfer checks for up to 12 months, and various retirement funds (Roth IRA, traditional 401k, etc.)

I'm already a homeowner in SoCal, but I want to buy my first LTR SFR someplace like Cleveland since the price point is attractive. Aiming for conventional and not a DSCR loan due to costs and the higher down payment requirement for the latter.

With that said, I'm curious to hear your take on what the most cost-effective & efficient approach would be to source a down payment. I personally like the credit card balance transfer check route, since it's interest-free for a decent amount of time (aside from an initial 3.00% fee).

 Are you sure you can pull cash off your CC at 0% - most of those offers are for balance transfers and come with high fees (3-5% one time fee). In general lines of credit and CC are not great tools for long term investments. They are good for flips or BRRRs if you are certain you will be able to pull all that money back out in a short time span.

[V.G Jason]

Quote from @Chris Seveney:

@Jared Khan

How about saving and using cash?

The other options you are playing with fire as using a HELOC that is paying interest is essentially buying with 100% financing.

Having no skin in the game has always been a high risk strategy and people were able to get away with it the past few years due to the money supply and inflation but I would not use that as the measuring stick. I would be very careful with using 100% leverage in a deal.

I had to do a double take.

Thought that was me posting. Please listen to the above. Leverage is fine, if it's utilized appropriately. Don't create a free fall, create an upwards trend.

[John Morgan]

I was broke and bought my first two rentals from a HELOC. Got me in the game. Since then, I've bought 5 houses with 401k loans for up to 50k. I've bought 4 or 5 with 0% interest for a year credit card loans too. And bought one this year from a random line of credit I got at a local bank for up to 50k. I obviously pay all these loans back with the rental cash flow asap. Then I repeat. I can survive off my W2. I've been using all my rental cash flow to scale up while borrowing money short term for free or low interest. I've been doing this for 9 years without using my own money and have 29 SFR now. Dave Ramsey wouldn't be proud of me, but it's worked for me. Lol. And I've bought 14 houses from cash out refis once the equity builds up. Find ways to get the money and dollar cost average real estate over the years no matter what the doomers and crash bros tell you. Good luck!