Using Equity in Primary Residence to Buy Another Rental

[Ryan Dickinson]

Hi Everyone,

I'm relatively new to the REI world. I have one rental property now, and I'm looking to acquire another. I could use some experienced insight on my plan.

I would like to use the equity in my primary residence as a down payment for my next rental property. According to my bank's online valuation, the conservative market value of my primary is $306K. Our loan balance is $166K. Knowing I can borrow up to 80% LTV on the primary, I should have up to approx $79K to work with ($306K * 80% - $166K). I'm leaning toward a HELOC to access that equity.

I have some questions on this process:

1. Are lenders generally OK with the down payment coming from a HELOC?

2.  If not, would a cash-out refi on the primary be viewed any differently?

3.  What would you suggest if these are both terrible options?

Thank you in advance for your help!

Best,

Ryan

[Amanda Hensley]

As long as your Debt-to-income ratio is under your bank's limits (and that can very, but generally under 44/45% debt-to-income) then I do think some lenders will let you use a secured loan like a HELOC for the down payment, maybe not all of them. I was able to use a HELOC from rental #1 to pay the down payment and closing costs of rental #2.

I would imagine that a cash out refi would be slightly more favorable, but then you have to pay higher closing costs, so you will want to consider that.  

I am not certain I would personally be comfortable with using my primary residence as funds/collateral in this manner.  If somehow the deal goes south and you end up losing, you could lose your house!  While that is an extremely unlikely scenario, it might keep me up at night.  But everyone's level of risk is different.

What's the appraised value of your rental?  Can you access any equity there? That would be my first option to try, before I looked at my primary residence....