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.

[David Nolan]

@Nathan W.It appears that you are looking at the financial viability of an investment to accelerate your savings. That is to say, you would be forcing yourself to save the money each month by having to pay off the HELOC, if you want to get it paid off in 27 months, and the additional $220.00 per month is a bonus. But here's the thing, or the advice.

In your imaginary scenario you are looking to use your borrowing capacity to get into a deal. That has a cost, because it has a risk attached to it that you would do well to understand.

Secondly, you are only going to make $2,640.00 per annum when you take this risk. Is that worth it? If you answer yes then you should choose option 3. If you answer no, then don't choose option 3.

Third thing. When you have cash of your own to invest you will treat the risk differently than when it is all borrowed money. This is a fact and would be acknowledged by every successful investor in this business.

Finally, I don't know how much experience you have in this business but I would suggest that when a veteran of the business such as @Account Closedoffers there EXPERIENCED opinion you might want to be a little more gracious in accepting it instead of challenging the man. You don't get over 1,000 votes on this site by talking through your derriere, so to speak. If you know what you are doing, which judging by your post I doubt, then perhaps paying attention to others rather than trying to push an opinion that may or may not be correct is a little foolish. This site helps lots of people learn the ropes and it is people like Bob and many others than make it a success.

Good luck with your imaginary deal. I hope you have received the advice you are looking for.