Leveraging to purchase our next rental property

[Nhu Vu]

My wife and I currently own two condos. One condo is valued at about $500K and we have about $112K left on the mortgage. We have quite a bit of equity and it should be paid off in about 5 years. For reference, the rental income on that unit is $2400/month.

We're thinking about using a HELOC or cash back refi in the final year of the current mortgage so that we're not fronting any money for the down payment on our next place. We would be certain that the rental income can cover the payments of the HELOC or cash back refi.

Besides the fact that we're putting our condo at risk (if the condo is vacant and we can't make payments then it could be foreclosed upon) is there anything that we're missing?

[Andrew Postell]

@Nhu Vu there are lots of things we would need to cover here and it might take a while to go over all of them but I'll try to summarize the important items.

Renting High Value Properties - Renting a $500,000 property for $2400 per month is a terrible.  Like really bad.  If you were renting a $350,000 property for $2400 I would say that's pretty bad.  This is why real estate investors target lower valued properties - they rent at a higher PERCENTAGE of the property value.  For example, a $100,000 property will usually rent over 1% in most markets in the US - meaning, something like $1100 per month.  But a $300,000 property won't rent for anything near 1% of the value.  So you can be more EFFECTIVE by owning FIVE $100,000 homes than ONE $500,000 home.  Five $100,000 homes would rent for $5,500 per month....or your one property that rents for $2,400 per month.  

Condos - Condos are generally a pretty big deterant in the real estate investing world.  One, you have a pretty hefty monthly expense - your Condo Association Fee, that eats into your profit every month.  But two, what if the board gets together and votes that no more rentals are allowed?  Or what if another owner sues the condo association making your investment unwarrantable?  I'm speaking from an INVESTMENT perspective here.  As a primary home this post would have different pointers but for an investment property there are some pretty big negatives to investing in condos.

Now, I can't tell what state you live in, what your market is like, what your tolerances are, etc.  But I would encourage you to at least think about selling that property and trying to focus on more profitable properties.  At least think about it.

Now, after saying all of that I do like using HELOCs but they are NOT designed to be permanent financing tools. Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate.

So as long as you have a plan to pay it back it can be used effectively.  But if you leave a balance on it you could get caught.

Hope all of this helps in some way.