how to get leverage to buy investment properties

[kk1]

This is probably a basic question but I'm not making a connection as to how this is done.

I have a primary residence(not paid off. Been paying extra on principal. Has some equity but don't know how to calculate it). I want to buy a duplex or investment property how do I go about funding this? Is it equity line of credit? Or is it another mortgage? I'm so confused.

[DoubleDown]

To determine equity in your home subtract liabilities (debts owed on it) from its estimated market value (what you could sell it for). That is the equity you hold in it.

I would not recommend using the equity in your home to finance a down payment on a rental home, either through a home equity line of credit or a second mortgage. If the rental home fails, you could lose both homes.

To buy an investment property, save up your money. That's it. Or, if you have a lot of money already saved in other types of investments (stocks, bonds, CD's, etc.) you could consider using part of that to purchase an investment home (note I said part of that, as you should not sink all of your assets in to real estate investments). Assuming you haven't done so already, I would recommend doing a LOT of reading and research on investing in real estate before deciding if it's right for you. There is a great deal to know before taking on this type of investment. The library has lots of great books available, and you can find great recommendations on this site for reading materials to get you started.

Good luck.

[arebelspy]

Leverage = borrowing other people's money to pay for it.

That means a loan.

That can either be private money, or conventional (i.e. a bank).  Assuming the latter, you can take out a HELCOC (second mortgage) on your primary and use that to buy the second property, or you can buy the second property by taking out a primary (first) mortgage on that property when you buy it.

Either way it will involve a mortgage on a property, most likely.

That is a very basic description, but I wasn't sure how far to go, so feel free to ask any questions you have!

[kk1]

Thank you for explaining, guys.

I see people post in the landlord section of this forum saying that they have paid off 2nd, working on their 3th. That's what I want to do, I would like to be a landlord eventually for mutiple properties. So a HELCOC could do that. I was just not aware of this product... sounds like a little risky to me. As in the primary residece is the colateral to the investment property?

So what I can do is I stop putting extra toward my primary residence, save up that extra $ for the inventment property for down payment. I would apply for a conventional type primary mortgage? Is this correct? I don't want to risk my primary residence. Is there a limit of # of conventional mortgages that can be taken at once(assuming enough $ is coming in as income per the bank's guidelines)-just wondering?

[Another Reader]

If you do not want to use the equity in your primary residence, most likely you will borrow from a bank and buy the property with an investment property loan.  You will pay a higher interest rate than you would for a first loan on your primary residence and likely have to come up with a higher percentage of the purchase price for a down payment.  Some portfolio lenders offer smaller down payments and different terms, but they usually want to work with experienced investors with a solid track record.

Qualifying for investment property loans can present a problem if you do not enough income without the rent to support both mortgages.  Underwriting guidelines vary, but most lenders tend to discount the contribution of the rent to the income available to repay the loan.

Here is a simple example.  Say you wanted to buy a duplex for $200,000.  If this were your house, you would put 20 percent down ($40,000) and get a loan for 80 percent at around 4.5 percent interest.  As an investment property, you would likely have to put 25 percent down ($50,000) and pay 5.5 percent interest.  You would have to qualify for your existing mortgage payment and the investment property payment on the basis of your other income and some portion of the income from the duplex.  The percentage of duplex income used could be from 0 to 75 percent, depending on the underwriting standards of the lender.  Make sense?

You would be well served to attend meetings of your local real estate investors association and read up on investing in real estate and being a landlord.  Also, ask about investment property financing at your bank.  The more you learn, the closer you will be to writing a check with confidence. 

[kyleaaa]

If you don't know how to calculate home equity, you probably aren't prepared for running a real estate business...

[kk1]

Another Reader: thanks for the patient explaination. Local Real Estate Assoc, good idea!

Kylea: I agree I'm not ready now. That's why I'm asking questions :) But I can save for the down payment for the inventment property. I can't dismiss the goal because I'm not prepared for running a real estate business. I'm WORKING towards that with a goal in mind, that's why I said "eventually". There is so much information and is overwhelming.

So how does investment property fit in the investment portfolio? No more REIT since that's real estate too.