Is it wise to get cash out of house equity for down payment on investment house?

[Katerina]

Hello,

Need help and any advice will be appreciated!

My husband and I are thinking about buying a house to rent out. However, we don't have 20 percent  for down payment and we were advised to refinance and get the cash out to allow us the funds for that purpose. Will it be a good decision on our part?

Please, help!
Kat

[Socmonkey]

Without the details of the transaction no one will be able to give you are concrete help.

You have run the numbers and the rental property meets the minimum rules of a rental? One of which is that it is easily rented at least 1% (or higher) of the purchase price per month in rent? That means $100,000 house is rented for $1,000 per month minimum. Minimum.

With mortgage rates so low, using the money in your primary house can be a smart way to come up with investment money - so long as you aren't too debt adverse.

This question would probably be better asked in the Real Estate and Landlord sub forum though.

[AZDude]

My initial thought was no, but thinking longer about it, I suppose there could be a scenario where it makes sense. I just do not like the idea of:

A) Buying rental property when your cash savings is so low that you cannot afford a decent down payment.

B) Using your primary residence as an investment source. I mean, would anyone recommend getting a HELOC to then invest in index funds? Theoretically, you will beat most interest rates by investing, but it does not sound too intelligent on the surface.

[Hotstreak]

B) Using your primary residence as an investment source. I mean, would anyone recommend getting a HELOC to then invest in index funds? Theoretically, you will beat most interest rates by investing, but it does not sound too intelligent on the surface.

I wouldn't do it with a HELOC, but with a fixed rate loan it can absolutely make sense (and people here have done it and continue to do it).

OP - two questions to answer.  1) is the rental a good investment, considering rents, purchase price, etc?  2) what's the cheapest way for you to finance the purchase?  Or it might be "what is the ONLY way for you to finance the purchase".  There's nothing inherently wrong about taking cash out on your residence to purchase a rental property.

[LiveLean]

I would say no, but we did something similar. We had paid off our mortgage in 2008 and in 2014 found an undervalued rental/second home in an area I knew very well, had been looking at for some time and, in fact, where my parents owned a second home for most of my childhood.

Getting a mortgage for a second home will not happen when you're self-employed. So we re-mortgaged the primary residence. The second home only rents on a weekly basis (at a premium) from mid-June through September. We use it several weeks a year and look at it as a future FIRE residence, or at least somewhere we'll spend more time.

If we viewed it as only an investment property, as some of the owners of neighboring homes do, I would say no-way-in-hell. Not worth the aggravation.

[Dicey]

In many states, this is actually illegal. It's still done all the time, but it's kind of wink-wink, hush-hush. The bank is going to want to see two statements that show the DP money has been in your account. This means you have to gather the money first, deposit it and let it age before you apply for the next mortgage.

What do the rest of your finances look like? How much of a DP do you have? How much equity in your current property? Any other debt? Stable jobs? What's your tolerance for risk? If the market takes a dive and both properties lose value, can you stomach being potentially upside down twice?

I don't think it's the world's worst idea, but without more background info, I can't give you more specific advice. And neither should the person who suggested it. You need to do a lot more analysis before you decide.

I second moving this to the LL thread.

[rocketpj]

My initial thought was no, but thinking longer about it, I suppose there could be a scenario where it makes sense. I just do not like the idea of:

A) Buying rental property when your cash savings is so low that you cannot afford a decent down payment.

B) Using your primary residence as an investment source. I mean, would anyone recommend getting a HELOC to then invest in index funds? Theoretically, you will beat most interest rates by investing, but it does not sound too intelligent on the surface.

In my case all of my cash savings, outside emergency fund, is in tax advantaged accounts.  Using them would be counterintuitive and counterproductive.

From a business point of view there is nothing wrong with leveraging existing assets to expand revenue, if the (long term) numbers work and the risk is in a comfortable range.  HELOC is usually a lower interest rate than other forms of lending. 

But think about all the risks before putting your home equity on the table.  Bottom line is you have to pay it back, so if the investment goes south you are stuck holding the ball and paying off a bigger mortgage.

Currently I am doing something similar, but looking at a potentially profitable commercial real estate investment, using a portion of my home equity as a down payment.  But it has about 2% rent:purchase price and a few other things that make it a very attractive investment for me.