Investment properties

[chicklets123]

Should this be funded with a house line of credit or mortgage?

Thank you


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[rocketpj]

It's a math and risk question.  If your return from the investment will be more than the cost of interest it's worth it - depending on how risky the investment might be.

I used a HELOC to make a downpayment on a commercial property.  I also had to put a lien on our house.  Once I'd improved the commercial property enough it's value was increased, I had them remove the lien on the house.  It was a risk that worked out, could have gone the other way.

[ChpBstrd]

Not only should investment properties be mortgaged, they should probably also be incorporated into an LLC to firewall your personal home and assets from the liabilities they generate. A HELOC tied to an investment property ties everything together so your entire ship could sink from a single adverse event.

Might you get a slightly lower rate or higher leverage using the HELOC? Yes. But if you're going to add on personal risks and leverage you might as well be playing options games with REITs or attempting no-improvements flips instead of holding rental properties.

[chicklets123]

Wouldn’t the investment property only sink if sold under purchase price? Or if it can’t be rented?


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[Paper Chaser]

Wouldn’t the investment property only sink if sold under purchase price? Or if it can’t be rented?

Pretty sure that the interest rate on a HELOC will float after a certain period of time. So, your monthly payment/cash flow will change as The Fed changes rates. So if you had used a Heloc to buy a high priced home in early 2022 based on super low interest rates, your monthly payment could have gone up several hundred dollars as interest rates have shot up. And usually, if interest rates are increasing, home values and rents are declining, unemployment climbs, etc which leaves you extra vulnerable and reduces the number of opportunities for a safe exit.
I'm already hearing stories about high paid tech workers that recently purchased homes at the top of the market, and can no longer afford them after getting let go. Having more than one property linked and funded in the same way in that scenario just increases your exposure and chance for hardship.

[rothwem]

One of the big advantages of a heloc is that you can close faster, and for some people that's a big thing.  If I bought a house with a HELOC though, I'd try to refi as fast as possible. 

[Finances_With_Purpose]

Not only should investment properties be mortgaged, they should probably also be incorporated into an LLC to firewall your personal home and assets from the liabilities they generate. A HELOC tied to an investment property ties everything together so your entire ship could sink from a single adverse event.

Might you get a slightly lower rate or higher leverage using the HELOC? Yes. But if you're going to add on personal risks and leverage you might as well be playing options games with REITs or attempting no-improvements flips instead of holding rental properties.

Solid wisdom.

People tend to underestimate the tail risks, but man, when they hit, they hit HARD.