All Forum Posts by: Nathan W.

I appreciate everyone's thoughts on the subject.  Perhaps this can help articulate my position a bit more clearly.

If I wanted to buy an $85,000 house that rents for $1,000/month and expenses around 40% (which is clearly not a decent deal to some people LOL), I have a few options:

1. Paying all cash for the house

2. Financing 75% through a bank and paying 25% down out of pocket

3. Financing 75% through a bank and paying 25% down from the HELOC.

We will just compare the latter two options.

My current saved down payment is $0.  

In the second scenario, I could save until I have a down payment. If I can scratch together $800/month from my day job, it would take around 31 months to save $25k for down payment and closing costs. At which time I can buy the house and start reaping the $220/month cash flow and 11% COC return.

In the third scenario, I could pull $25k from my HELOC at 4.25% and buy the house tomorrow. I still have $800/month from my day job. Adding the $220/month income from the property to the $800 would allow me to put $1020 towards my HELOC payment and have it paid off in 27 months--a full 4 months quicker than what it would take me to save it up.

Not only do I begin cash flowing positive 4 months earlier, but I see the following additional advantages:

-The HELOC was a rental expense, so I can deduct interest payments in full to reduce my taxable income

-I have secured cheap 30 year financing in the property that almost certainly will not be available in 31 months

-Over 2 years worth of principal pay down on the primary bank loan

-Over 2 years worth of potential rent increases, likely allowing the HELOC to be paid off sooner

I am just not seeing the big downside here, when comparing Option 3 vs. Option 2.  I have no need for this immediate cash flow--this is to set me up to own cash flowing properties in 10 years that will allow me to either supplement my current income or choose to walk away from my job altogether.  

What am I missing?

 Thanks James--I like it here.  Good forum with mostly good advice.

I appreciate your advice. You are saying to raise private money at low interest rates. Would that be for the down payment, or for the entirety of the purchase price? Would you consider the HELOC at 4.25%, knowing that it would be paid off in just over 2 years (and thus making the property no different than a conventionally bought 25% down property) to be the equivalent of a low rate private fund? With the added advantage of the money going back to me, with tax advantages?

Can I ask what insurmountable problems you see resulting from at worst a $250/month outlay? I make much more than that at my day job to cover that bad news scenario, plus have other short term financing to cycle that in the extraordinarily rare case I would actually need to. Plus as I mentioned above, the actual rents received each month will remove a month of that outlay every 2 months--after a year, I am 6 months ahead of the HELOC payment.

I just can't see a huge downside from that, given what I presented above, when compared to the standard scenario of saving up the down payment in entirety before buying the property.

I think you are saying that in the months I am vacant, or had CAPEX, I'd have to come out of pocket more than the $30 to cover, correct?

This is a good consideration, however it is not much different than a property where I had put the 25% down out of pocket vice the HELOC--there is always negative cash flow in those months. The only difference would be the higher debt burden of $230 from the HELOC loan, which my day job would easily cover multiples of (plus other short term financing options I would have available in the unlikely event they would be required).

I also believe this concern to be mitigated by the other months that there IS no vacancy, maintenance, etc.  

Most months the actual cash received from the property is going to be $375 or so ($1000 rent - $100 management - 525 PITI on primary loan). Applying all of that towards the HELOC, whose payment is only $250/month, actually puts me one month ahead of payments every 2 months (for instance paying $375 in Jan and again in Feb would make my next $250 payment not actually due until April).

I am not "far" along in this property, since it is a general example to afford discussion on the merits of accepting short term negative cash flow with the benefit of not having to come out of pocket for the down payments. I appreciate your thoughts. 

Agreed (unless you are doing the super deals that some people obviously are lol) 

So what are your thoughts on accepting that and managing it? Is the temporary negative flow worth the eventual gain in this hypothetical scenario? 

With the HELOC at 4.25% you can put the cash flow from the property + extra payments out of pocket (say $750/month) towards the HELOC down payment payback and pay off the HELOC QUICKER than you could save up the down payment amount by just saving $750/month.

This affords you the opportunity to acquire more properties more quickly, with the added benefit of primary loan principal paydown AND tax advantages in the mean time (when compared to just saving up down payments).

This is completely totally absolute unrelated to the question at hand.  I thought I made that clear when I stated this is a GENERALIZED example property leading to a discussion on the merits of temporary negative cash flow due to the 100% financing.  Maybe I needed to make that clearer for some people.

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.

You should pay him $10k (letting him take home $20k for acting as an unlicensed agent)....

You know, if you hate money....

If you are like me and like money, and what you said is accurate (That there was a verbal agreement that the birddog is being taken care of by the investor, which is how birddogs are typically paid) then I would not think twice about completing the deal and letting him be paid his $10k by the investor, as agreed.  He is trying to take advantage of you and work you over for whatever reason.  

I am frankly surprised that someone would think otherwise....

 I got you.  That makes perfect sense at those funding levels.  The OP specifically mentioned a $100k property though, with the only cash out of pocket being the down payment of $20k or so plus closing costs.  I think the two cases are different enough to warrant consideration of a different approach.

I don't really agree that you won't find anything that you cannot force appreciation onto. 

Maybe I got lucky, but that is exactly what my wife and I did with our place.  It isn't a ton, but a good $30k or so based on recent appraisal (bought for 465, put about 70 into it and reappraised at 565).  We did a bunch of landscaping and upgrading, but the biggest increase I think was from finishing the basement the basement to include an in-law suite. 

So not only did we double our living square footage along with an added bathroom and bedroom (with a small hit because it is below grade), we also are able to rent that space out now for $1200/month covering half of our mortgage (or more specifically the rehab loan plus a bunch left over to put towards the mortgage if we want).  

In my opinion, that is the best play available in the DC area for "house hacking".