Author Topic: borrowing on equity process?  (Read 1334 times)

Stache In Training

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borrowing on equity process?
« on: August 18, 2014, 12:43:06 PM »
I currently have some really good equity built up in my current house.  And I'd like to get into the real estate/rental market.  I live in a college town, so the rental market is strong here.

I'm simply confused on the borrowing on equity path.  I bought my current house by saving up a big down payment.  However I was talking to basically a rental mogul in town, and he was telling me how you can borrow based on the equity built up in one house, against another house, and therefore don't actually need a down payment (I'd prefer to invest the cash instead, obviously).  Essentially investing with other people's money.

So can someone explain that process to me? Do you really not need a down payment?  If so, I assume you pay the total buying price on your loan, and then the first house is collateral if you stop paying?  This seems like a very anti-mustachian path though (buying essentially what you can't afford), or is this what everyone here is doing?

conpewter

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Re: borrowing on equity process?
« Reply #1 on: August 20, 2014, 11:51:07 AM »
I'd like to learn more about this as well, but I do know someone who used a similar mechanism to get his rentals, he was a millionaire around 2007, he's living in a rental now, doing construction work to get by.  Once one house foreclosed on, the rest toppled like dominoes, so... be careful if you  pursue this.

Cheddar Stacker

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Re: borrowing on equity process?
« Reply #2 on: August 20, 2014, 12:12:48 PM »
Leverage can be great, but overleverage can ruin you and your strategy.

Loans are given based on many factors, and one of them is collateral. If you have a lot of equity built up somewhere and it's not already pledged as collateral elsewhere, many banks will lend against that equity. So if you buy a $100,000 house for investment purposes, most banks would tend to want a $20-25K down payment. If you have no cash but $150K equity in your personal residence you might be able to pledge that equity "cover" the down payment thereby allowing you to finance 100% of the rental property.

I'd rather just take out a home equity loan (or HELOC) to make the down payment on the first rental to keep things separate, but once you build up a few rentals I could see how using equity from one as collateral on another would be tempting. I would just say again what I started with, don't overleverage. I would feel comfortable with 75-80% LTV on the first rental or two, but I would want to reduce that as quickly as possible and utilize a long-term LTV rate of < 65% leaving plenty of margin for error.

johnhenry

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Re: borrowing on equity process?
« Reply #3 on: August 20, 2014, 01:30:52 PM »
Leverage can be great, but overleverage can ruin you and your strategy.

Loans are given based on many factors, and one of them is collateral. If you have a lot of equity built up somewhere and it's not already pledged as collateral elsewhere, many banks will lend against that equity. So if you buy a $100,000 house for investment purposes, most banks would tend to want a $20-25K down payment. If you have no cash but $150K equity in your personal residence you might be able to pledge that equity "cover" the down payment thereby allowing you to finance 100% of the rental property.

I'd rather just take out a home equity loan (or HELOC) to make the down payment on the first rental to keep things separate, but once you build up a few rentals I could see how using equity from one as collateral on another would be tempting. I would just say again what I started with, don't overleverage. I would feel comfortable with 75-80% LTV on the first rental or two, but I would want to reduce that as quickly as possible and utilize a long-term LTV rate of < 65% leaving plenty of margin for error.

+1.  I would also advise against over-leveraging.  But you can likely get a loan or line of credit against the equity in your residence at a lower rate and better terms than you can get if you mortgage the rental property you are buying.  If you are in a situation like mine, your itemized deductions don't come close to exceeding the standard deduction, which means you are not really getting a tax break from the interest paid on a mortgage against your residence.  But if you borrow against your home and use that cash to finance an investment.... the full amount of interest is tax deductible.  You get the full advantage of tax deduction as business/rental expense but the more favorable terms from the bank of borrowing against the home you live in.  While there is some risk in owning less of your residence, don't forget that this can allow you to own the rental free and clear.  So as long as you aren't over-leveraged when considering your whole situation, this can be a good way to do it if you have the equity built up to cover it.