Author Topic: Need help, investment property w/ home equity loan  (Read 709 times)

Invester17

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Need help, investment property w/ home equity loan
« on: June 25, 2018, 03:33:17 PM »
Hello,

I purchased a property in Virginia beach for $439,000 in March of 2015 and today it's worth $525,000 (same home builder, floor plan, built down the street sold for this amount). Actually, for a variety of factors mine might be worth more, but I'll keep it simple. The mortgage left o the property is $333,000 +/- @ 4% (30 year fixed, pay off date 2038/roughly 20 years). The property is currently a summer/winter rental that is fully booked.

I'd like to purchase another investment property in the area, but have my concerns.

The new property is from the same builder, same neighborhood, but is larger (2,021 sq ft vs 1700 sq ft) + 2 extra parking spots and a great backyard. All of these are pretty rare for the area.
The property is listed at $535,000, the builder said he would put 15k towards closing. This basically leaves me with the down payment. I don't intend to live in the property so my lender is offering 10% down as a 2nd property as my parents will occupy it / I will visit and stay as well.

This means I have to put roughly $55,000 down on the property and expect mortgage including insurance/taxes to be around $3200 a month. This is a lot for the area as I think I could likely only rent it as a winter rental for $2,500 - $2,700 a month. If it was a summer rental, I could likely break even on the mortgage for the year.

The more concerning part to me is the down payment. I have 10k in savings, 30k in my emergency fund. No other debt and another 340k in investments (401k, vanguard, stocks, HSA etc.). I don't want to use my emergency savings and I don't want to pull it out of my investments so I was considering using a home equity loan. I've never done this before so I wanted to know if someone could share with me the details, risk, value etc.

Thanks!


sailinlight

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Re: Need help, investment property w/ home equity loan
« Reply #1 on: June 25, 2018, 03:36:57 PM »
Why would you buy something as an investment that you expect to lose money on?

Invester17

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Re: Need help, investment property w/ home equity loan
« Reply #2 on: June 25, 2018, 03:40:17 PM »
A few reasons, but a fair question.

1. I like the house and may move back to the area (I live in DC now) and this would be a great house for us.

2. The area is growing fast and the value of the homes continue to rise (almost 100k+ value in 3 years).

3. If I convert it to a summer/winter rental I'd likely break even on the mortgage and then eventually turn a profit.

Cwadda

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Re: Need help, investment property w/ home equity loan
« Reply #3 on: June 26, 2018, 09:14:19 AM »
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1. I like the house and may move back to the area (I live in DC now) and this would be a great house for us.
If you think a $535k house is suitable for your needs, then by all means do it. Just know that having an expensive house will likely delay your retirement, if that's important to you.

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2. The area is growing fast and the value of the homes continue to rise (almost 100k+ value in 3 years).
The same can be said going the opposite way. You could also lose $100k in 3 years if the market takes a turn for the worse. Gambling on appreciation is playing with fire.

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3. If I convert it to a summer/winter rental I'd likely break even on the mortgage and then eventually turn a profit.
Breaking even on the mortgage does not make it a good investment property. If you factor in maintenance, repairs, management (good luck managing a VA beach rental from DC yourself), CapEx, and vacancies, you're taking a loss every month. Last time I checked, investing your money into a negative asset (liability) is not the best idea. It's like putting your money into a bank account with a negative interest rate.

Invester17

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Re: Need help, investment property w/ home equity loan
« Reply #4 on: July 01, 2018, 02:07:42 PM »
These are no doubt, great points.

The house is nothing too spectacular in terms of size or anything. The location is really what drives the price up.

I agree that it could go down, the same could be said for the stock market although we invest heavily into it.

That's also a fair point, it feels like more of a long game on this property. I'm looking for the days where once it's paid off I will have a passive income stream (20 years left on the mortgage, I'll be 47 and it will bring in income or I can sell it).

Cwadda

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Re: Need help, investment property w/ home equity loan
« Reply #5 on: July 01, 2018, 04:11:07 PM »
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That's also a fair point, it feels like more of a long game on this property. I'm looking for the days where once it's paid off I will have a passive income stream (20 years left on the mortgage, I'll be 47 and it will bring in income or I can sell it).

You can get a property with an income stream without it being paid off. They do exist and are superior investment options..compared to waiting 20-30 years for a mortgage to be paid off before you see any sort of return.

Lmoot

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Re: Need help, investment property w/ home equity loan
« Reply #6 on: July 03, 2018, 04:08:15 AM »
Wow those are a high price for investment properties. Well having someone pay the mortgage on a house you might live in in a future, is a good deal alone (provided carrying costs excluding the mortgage, donít override that).

For cash flow you could always plan to raise rents periodically, and even refinance the house for another 30 years, some years down. Do minor improvements between each vacancy which would increase the value of the house and support rent increase.