Author Topic: Down payment for rental property  (Read 769 times)

jpdx

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Down payment for rental property
« on: November 27, 2018, 01:10:40 AM »
I would like to purchase a rental property one day in the future, but only if there is a housing market downturn and a good deal can be found. But if such a downturn corresponds with a stock market selloff, which is likely, than where do I come up with the down payment? I maintain an 80/20 asset allocation and wouldn't want to sell in a down market, and I'm not willing to keep large amounts of cash on the sidelines in anticipation of this potentially distant event.

jc4

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Re: Down payment for rental property
« Reply #1 on: November 27, 2018, 08:43:14 AM »
I believe that's the same situation everyone else is in too.

Another Reader

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Re: Down payment for rental property
« Reply #2 on: November 27, 2018, 08:59:03 AM »
That's exactly why property goes on sale at a deep discount when money is in short supply.  If you want to buy real estate or any other asset at a fire sale price, you have to have cash when the sale starts.  That means you are not fully invested.  I hold cash because I have rentals and there are unanticipated expenses and capital improvements to cover.  I hold additional cash for asset purchases.  Is that "efficient?" Most people would say no, because they rely on the paper asset markets and need to be all in because those markets are unpredictable. 

If you plan to diversify into real estate, you generally need to be a market timer to be successful.  Market timing is easy in real estate, where the cycle is slower and you can observe changes as they happen.  The returns are such that if you do things properly, the returns relative to other asset classes justify having idle cash earning a nominal return.


des999

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Re: Down payment for rental property
« Reply #3 on: November 27, 2018, 10:54:09 AM »
I've always thought I'd use a home equity line or credit, as I have over 100k equity in my house.  But, I think I run the same risk that banks won't want to give it to me, or charge a ridiculous rate.

anyone have any experience with this?  Is it better to take it out now (ahead of time) and have it available?  My thought is they can still adjust it if times get bad, but I haven't done much research yet. 


waltworks

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Re: Down payment for rental property
« Reply #4 on: November 27, 2018, 11:57:16 AM »
If you want to market time in RE (which is totally doable and many of us just finished doing it over the last decade long cycle) you have 3 options:
-Stash cash or invest in low yield/low risk stuff (ie, bonds) that can be easily turned into cash without selling low in a crash.
-Run a surplus in your budget such that you can accumulate enough cash to start buying properties pretty quickly.
-Maintain really good credit and a strong relationship with lenders such that you'll be able to get loans even in rough times.

Or you can do all three, of course. But you're right that you can't just go 100% stocks, and then expect the RE crash not to coincide with a stock market crash.

I'd also note that I don't think we'll see another opportunity like 2009/2010 in our lifetimes.

-W

Another Reader

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Re: Down payment for rental property
« Reply #5 on: November 27, 2018, 01:26:59 PM »
In 2008-2012, a lot of banks summarily closed HELOC's.  They are not reliable sources of capital in difficult times.  I have one, but I would not expect to be able to use it if things go south again.

jpdx

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Re: Down payment for rental property
« Reply #6 on: November 28, 2018, 12:50:23 AM »
Thank you for the insight, everybody.

Villanelle

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Re: Down payment for rental property
« Reply #7 on: November 28, 2018, 01:07:12 AM »
I've always thought I'd use a home equity line or credit, as I have over 100k equity in my house.  But, I think I run the same risk that banks won't want to give it to me, or charge a ridiculous rate.

anyone have any experience with this?  Is it better to take it out now (ahead of time) and have it available?  My thought is they can still adjust it if times get bad, but I haven't done much research yet.

We have an open HELOC, and the terms are amazing.  We considered renegotiating to increase the amount (it is well under our actual equity--probably only about 1/3 or 1/4) but that particular "product" is no longer available.  Our bank didn't mess with it, cancel it, or change the terms in any way during the last major downturn, so I figure they are very unlikely to do so in the future, especially given that the equity to HELOC ratio is even better now.  Is it 100% safe?  Of course not, but I have every reason to believe it will pretty much always be available.  If your HELOC is for close to the full amount of equity, then certainly there is a not-small risk of it being adjusted or even canceled in a down market.  The bank isn't going to want to give you $100k secured by your property if they can't confidently get $100k out of the property. 

(We originally got the HELOC as a downpayment on an investment property, but fairly quickly paid it off.  Then we used it to basically re-fi our actual mortgage, but paid that off too, so now it just sits and waits, just in case.)

Megma

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Re: Down payment for rental property
« Reply #8 on: November 28, 2018, 02:14:12 PM »
There is also a down market and then there is down. You might not get a 2009-level, Ah-mazing deal but if you look hard enough, you might get a good deal still. And that deal might look even better 3-4 years later if the market kept going up, or it might become clear you didn't buy at the bottom.

There is also seasonal variability in RE that can be advantageous, prices and inventory are highest in the spring, but I might wait until late summer when people who have been trying to sell all spring are ready to negotiate more because they want to move before their kids start school or winter weather comes or whatever. Or even winter, there are fewer houses but also fewer buyers.

kenmoremmm

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Re: Down payment for rental property
« Reply #9 on: November 29, 2018, 01:08:06 PM »
I believe, but am not sure, that under the new tax law, HELOC's on rentals are no longer deductible on Schedule E for interest paid. Correct?

Fishindude

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Re: Down payment for rental property
« Reply #10 on: November 30, 2018, 08:52:33 AM »
Start setting some cash aside in a separate account strictly for this venture.
When you have accumulated enough, take the plunge.   Leave your retirement money working for retirement.

wbranch

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Re: Down payment for rental property
« Reply #11 on: November 30, 2018, 03:41:47 PM »
I believe, but am not sure, that under the new tax law, HELOC's on rentals are no longer deductible on Schedule E for interest paid. Correct?

No, the change is related to HELOC interest on personal residence deducted on Sch A if used for cash, payoff of other debt, vacation, car, etc. Personal HELOC interest is still deductible on schedule A if used to buy, build, or improve your home. If you get a HELOC on your personal residence to use for down payment/purchasing a rental property that interest should be deducted on Sch E.

tralfamadorian

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Re: Down payment for rental property
« Reply #12 on: November 30, 2018, 04:15:36 PM »
I have criteria that I look for in rental property and I never stop evaluating houses independent of what the market is supposedly doing. I don't wait for someone else to tell me it's a good idea to buy; I let the numbers tell me that.

Right now I keep my down payment funds in VTSAX. Typically local real estate cycles and stock market cycles do not move in tandem with the great recession, of course, being the outlier that is fresh in all our minds. Maybe I'll eat my words and the next time my target markets give me lots of buy results on my spreadsheet, it will correlate with a stock market drop that will eat into my ability to purchase as many as I would like. If so, I would probably wish that I went with laddered no pre-withdrawal penalty CDs.

Personally, I'm not a fan of HELOCs for these situations. HELOCs are callable so if the bank no longer thinks your home has the equity in it to support the additional debt, they can call it back in part or in whole. To me, this is an unpalatable risk. If I wanted to use property equity to make a down payment, I would explore a cash out refi or a second mortgage while the real estate market is strong in the area that property is in.

The only time I would be comfortable with HELOCs would be a situation similar to what sammybiker is doing in his journal- buying distressed assets in cash, improving them to market value, then pulling the cash back out via traditional bank loans in a relatively compressed period of time.