Creative 100% financing creates temporary negative cash flow

[Nathan W.]

I'm encountering a situation right now, which I will attempt to generalize in this post.  Looking to discuss the pros and cons, to ensure I am not overlooking anything on the financing side and understand the risks/benefits.

Essentially, using a HELOC on my primary residence to finance the down payment on a rental property that is otherwise a decent investment (8% or so cap rate) creates a temporary cash flow negative situation.

To generalize:

-$85k purchase

-$1k/month rent

-All expenses around 40%

-75% LTV at 4.75% 30 yr mortgage = $330/month

This situation creates $220 or so a month cashflow, and an 8% cap rate.  Almost 11% cash on cash return assuming coming out of pocket for the 25% down payment.

Not bad.

If I use a HELOC for that 25% down payment though, I am looking at a payment of about $250/month, which puts me $30 in the red each month. This is because my HELOC is not an interest only but is instead an interest + 1% principal. I took what I could get.

My thoughts are:

Pros: own a good investment for no money down, secure cheap financing available in 2016, $30/month is easily affordable for the short term, I can pay the HELOC down quicker with money from my day job and pay off the down payment in < 3 years (with $220/month from the tenant to help), both the HELOC and the Bank loan are deducitble against my day job income

Cons: ??? Curious to see what others propose

Thanks for your reading. Hope we can have a good discussion on this.