How should I fund for an investment property

Question

Hello Everyone

I currently own my primary residence in Chicago in which I got the house for 175k and I currently owe a little under 120k. I have been in my home for eight years and I want to invest in another property to bring in cash flow. My plan in my head is to buy and hold and pass down these properties to my children when I'm gone. Should I look into the getting a HELOC on my current residence for a down payment on another house and rent out the one I'm living in now ( My Father and brother plan on renting out my original home)? Or should I put money in a saving account and use the money I get from my W2 to put down on another property? Any advice will help.

Thanks in advance !

Jonathan Klemm · Answer

@David Walker - Sounds like an exciting path ahead. The quickest and probably most cost-effective to keep moving forward (assuming you can get good rent) is to move out of your current house and into a multi-unit. And before you move out I would also get a Home Equity Line of Credit as you mentioned. That way if you wanted you could use the HELOC for the down payment on the house/MF you move into. For sure connect with @Michael Barbari at First Midwest Bank, they can go up to 90 LTV on the HELOC loan for a primary residence.

Brendan Harrison · Answer

@Crystal Smith Agreed here. Make sure your current home will cash flow as a rental with your father and brother renting. That can either help or hinder getting a new property. Because you are turning your home into a “new rental” property, most lenders will only credit you with 70% of your expected rental income as you look to buy your next house. So, if your father agrees to pay you $1000/mo in rent, the lender will only “credit” you with $700/mo as “income” when factoring into your Debt to Income ratio (DTI). Re: HELOC. These are variable rate, typically interest only type loans. Basically like a large credit card but lower interest rate. If you’re going to use the $ to buy a new home and hold that new home, then look into a Cash Out Refinance on your current residence. That will give you the lowest fixed interest rate, amortized over 30 years. If it’s valued at 175K, you could get a 90% LTV loan, so 157K max loan, minus closing costs… call it 150K max loan. If you owe 125K currently, then you could take 25K cash out of your current residence to use as a down payment on your next house. However, If you already have $ for a down payment on the next property, and you plan to buy a prop you can fix / add value, and then cash out ReFi… then perhaps a HELOC on your current primary residence would be better.You could buy your new residence with 10% down of your current cash, use 25K from your HELOC to fix it up. Cash Out ReFi to get your 25K back, and pay your HELOC back so you aren’t paying interest until the next deal comes along. I am currently using a HELOC to remodel a house. Upon completion I will ReFi & pay my HELOC back so I am ready to strike quickly again. But basically HELOC’s may not be the best Avenue for a long term hold (down payment) because HELOC’s are variable rate loans.

Crystal Smith · Answer

Based on the value of your home and what you owe you'll probably need to combine A HELOC with whatever you can save from your W2 to make your plan work. If you owe $120K and the value is $175K you may get $20K out of the home. $20K may not be enough to execute your plan. You also have to evaluate how much your father and brother are willing to pay to rent your home. Make sure it's enough to cover your expenses on the home so you have positive cashflow. If they aren't willing to pay enough for you to have a positive cash flow then your plan won't work. You'll need to get some rental comparables to see if the market around your home will support a high enough rent for you to cash flow the property.

Paul De Luca · Answer

@David Walker It sounds like you favor keeping the property, but it may make better financial sense to sell the property and trade up to buy a 4-unit to house hack. Depends on what you'd be able to afford and where you'd be interested in living though. Like John said above, the proceeds will be tax free. This way you'd still have a primary residence and also be able to get started investing.

Michael Barbari · Answer

Thanks @Jonathan Klemm. Here to help @David Walker.

Corby Goade · Answer

@David Walker- I love using a HELOC on a primary as a down payment on your next property. Even better if you plan to live there for a couple years and continue repeating that process to leave a trail of rentals behind you. That's exactly how I started my own portfolio. A couple things to consider:-Does your HELOC allow for locking in a portion of your balance and amortizing the debt?-Does the new property you are buying have some sort of value add that will allow you to BRRRR and get rid of your HELOC balance in a reasonable time frame?-Will your current property pay for itself when you move out (I assume it will if you've been there for eight years...)How else can I help? Ask away!

Michael Ablan · Answer

@David Walker - Tapping into your equity will be the fastest way to get back into the game. Whether or not thats a smart move for you is a question I can't answer though.I've always been a massive action type of guy though. I'd be tapping into every fund source I have and looking for off-market value add deals

John Warren · Answer

@David Walker I think the first thing to consider is whether your current home actually makes sense as a buy and hold forever type of property. I also plan to leave real estate to the family, but my primary residence would be a terrible property to leave since it wouldn't cash flow very well. I would think through how many houses you want to own, what your personal income and net worth goals would be, etc. You may find that it makes more sense to sell your current home since you can take the proceeds tax free with it being your primary residence. I personally have built most of my portfolio off the sale of my first house. My wife and I sacrificed quite a bit and flipped the home to get the capital we needed to grow. That one move resulted in multiple apartment buildings here in the Berwyn area.

Isaac Hayes · Answer

Hi Walker. This one is tough to answer without fully understanding your personal and financial situation and how much risk and leverage you're willing to take on. At the end of the day, if you have enough reserve cash on hand and/or W-2 income to where you can pay to hold on to the investment property for an extended period of time (at least 6 months I'd say) with no rental income, it may make sense to use a HELOC to purchase the investment property. If you do not have the reserve cash on hand (or access to something you can liquidate), I would start saving for a down payment with a saving account (or Roth IRA/standard brokerage account is even better).