Author Topic: Using Home Equity (HELOC) to finance down payment?  (Read 3281 times)

FurtherJourneys

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Using Home Equity (HELOC) to finance down payment?
« on: September 11, 2015, 01:20:49 PM »
This is my first time posting in the forum, hello! My husband and I have been researching and considering investing in real estate for about a year. An opportunity has come up that is interesting, and we are looking into financing options and crunching the numbers, etc. Our house is paid off and so we have at least $120,000 in equity. I was wondering if it is common and/or advisable to use a HELOC to put a down payment on a property. We'd rather not pull out money from the stock market right now and while we have a nice cushion of cash to supplement the down payment we don't have enough to cover a 20 - 25% down payment on a multi-unit property. Also, any tips on where to secure this type of loan? My husband's credit union doesn't do loans on investment properties and we are going to be shopping around. I'd appreciate any and all feedback and advice!

maxpower

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Re: Using Home Equity (HELOC) to finance down payment?
« Reply #1 on: September 12, 2015, 08:58:35 AM »
Hey FurtherJourneys,
I asked basically the same question this morning, except in our case the matter is not of an investment property, but of buying our next primary residence. Hopefully some of the pros will pop in here for us, as I really don't have much experience in this realm of things!

Best wishes!

forummm

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Re: Using Home Equity (HELOC) to finance down payment?
« Reply #2 on: September 12, 2015, 10:55:11 AM »
A HELOC is one way to go. Pulling money out of the stock market might be a pretty decent idea as long as you don't have too many capital gains. The market is still pretty overvalued so you would be putting the money to a better return environment in real estate (assuming you did the investment property analysis correctly).

FurtherJourneys

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Re: Using Home Equity (HELOC) to finance down payment?
« Reply #3 on: September 13, 2015, 07:34:50 AM »
Manpower-Good luck with buying your next home! We've been in contact with several banks. So far 5/3 seems to be the most promising. Their best rates come with a 70% or less equity loan (which is more than we need to use) and they have discounts if you have an account with them. I'll post more if we have any good information to share!

Forummm-Thanks for responding! I guess part of my hesitation with pulling out money from the stock market is that we've never done that before...we've always just put it in! Most of the principal that we've invested has been over the past year and so it is down right now. We have about 20,000 that was invested earlier and is up. As I understand it, the options would be to report losses on our tax return and/or pay taxes on our gains if we withdrew. It seems that either way we pay some sort of a penalty, either in lost principal or in taxes. Is the idea that perhaps those penalties would work out to be less than the interest we would be paying on a HELOC? And that even if we "lost" money in pulling it out it will be put to better use as an investment in real estate?

Telecaster

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Re: Using Home Equity (HELOC) to finance down payment?
« Reply #4 on: September 13, 2015, 07:40:56 AM »
I pulled the majority of the downpayment for my rental from my HELOC.   You'll want to fool with the numbers a bit of course, but it makes sense most of the time.  HELOC interest is deductible too.

K-ice

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Re: Using Home Equity (HELOC) to finance down payment?
« Reply #5 on: September 13, 2015, 09:12:52 AM »
Our case is a bit different, but briefly, yes I think using a HELOC is usually a good idea.

If we find the right property we plan to use all of our HELOC to finance it.
We may even need to use the HELOC from 2 properties if the rental property is over $400K.

This can allow for a competitive offer with no subject to financing.

We will then roll the HELOC into a mortgage on our residence (Kind of scary.) to get the best rate.

The income from the multi-plex will be enough to cover all expenses & debt servicing. 

The multi-plex will be mortgage free. The reason for this is because the rate on multi-plex is about 2% higher than a single family home.

From our experience getting a commercial multi-plex mtg is a pain in the ass.
Honestly, we tried & with all the environment inspection hoops to jump through you may loose the deal before you can close. (Obviously not impossible but more challenging than getting a house.)
I can't recommend anywhere to borrow. (BTW I'm in Canada & I think our banks lend with more conservative rules.)

We may need to use some cash for closing costs but do not plan on using a lot. ~5%

On paper, putting zero down gives you an infinite ROI.

But don't get too excited. ;)

Regardless of where you borrow, be sure you have a positive cash flow when considering every expense & maintance & vacancy & debt servicing & a 5% management fee (even if you do it yourself).

By not having cash down, it will just make the positive cash flow requirement that much more challenging.




forummm

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Re: Using Home Equity (HELOC) to finance down payment?
« Reply #6 on: September 13, 2015, 09:51:22 AM »
Forummm-Thanks for responding! I guess part of my hesitation with pulling out money from the stock market is that we've never done that before...we've always just put it in! Most of the principal that we've invested has been over the past year and so it is down right now. We have about 20,000 that was invested earlier and is up. As I understand it, the options would be to report losses on our tax return and/or pay taxes on our gains if we withdrew. It seems that either way we pay some sort of a penalty, either in lost principal or in taxes. Is the idea that perhaps those penalties would work out to be less than the interest we would be paying on a HELOC? And that even if we "lost" money in pulling it out it will be put to better use as an investment in real estate?
The stock market is just one place to invest your money. If you decide to be a real estate investor, you can move the money there. There are many ways of calculating your tax basis for the shares you sell, assuming you don't share all of them. You can use specific identification to sell the shares that have lost money and claim those as a loss on your taxes. If you need to sell more than that to get the down payment, you can still sell shares that have appreciated since purchase, and those gains will count against the losses you've realized by selling shares at a loss. There are many ways to do this.

jtriplett

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Re: Using Home Equity (HELOC) to finance down payment?
« Reply #7 on: September 22, 2015, 02:18:44 PM »
Our case is a bit different, but briefly, yes I think using a HELOC is usually a good idea.

If we find the right property we plan to use all of our HELOC to finance it.
We may even need to use the HELOC from 2 properties if the rental property is over $400K.

This can allow for a competitive offer with no subject to financing.

We will then roll the HELOC into a mortgage on our residence (Kind of scary.) to get the best rate.

The income from the multi-plex will be enough to cover all expenses & debt servicing. 

The multi-plex will be mortgage free. The reason for this is because the rate on multi-plex is about 2% higher than a single family home.

From our experience getting a commercial multi-plex mtg is a pain in the ass.
Honestly, we tried & with all the environment inspection hoops to jump through you may loose the deal before you can close. (Obviously not impossible but more challenging than getting a house.)
I can't recommend anywhere to borrow. (BTW I'm in Canada & I think our banks lend with more conservative rules.)

We may need to use some cash for closing costs but do not plan on using a lot. ~5%

On paper, putting zero down gives you an infinite ROI.

But don't get too excited. ;)

Regardless of where you borrow, be sure you have a positive cash flow when considering every expense & maintance & vacancy & debt servicing & a 5% management fee (even if you do it yourself).

By not having cash down, it will just make the positive cash flow requirement that much more challenging.

Hoops are there to reduce risk.  If the bank will reject a multiplex because of some kind of inspection that you don't want to get. I'd be very wary of getting that property.  Also I don't know how the tax implications of using a HELOC to finance a commercial property work out.  The slightly higher APR may be entirely mitigated by the tax advantages of using a mortgage on the actual commercial property. 

In the states we have commercial mortgage brokers that help find programs for the particular property you are looking at.  Maybe try a broker instead of just one bank?

zinethstache

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Re: Using Home Equity (HELOC) to finance down payment?
« Reply #8 on: September 25, 2015, 12:40:55 PM »
We financed a tri-plex last year using a HELOC from our primary as our down. We are in the US. The rate was only 1/2 point higher. I know it varies some, but the poster that mentions 2 points might not be in the US OR perhaps is talking commercial lending which is a different animal entirely.

We encountered no issues at all. The only concern is that most HELOCs are variable rate and might have a rate hike you don't want. Also, the interest rate charged varies by the loan to value, we did a 30% loan to value ratio which gave us the best rate for the $$ we took out.

Because I believe most HELOCs are interest only payments, be sure you have an exit strategy, or plan extra payments (that will be a hit on your properties cash flow). The Heloc interest is fully deductible in this case. It does depend on what you use it for.

The best of luck to you!