use my home equity, cash, or mortgage loan or all of the above
Question: I recently sold my principal residence and purchased a new principal. Due to the sale of my first home, I now have about $35k equity in my new principal and about $10k to $15k cash ready to be invested. I’m planning to invest in my first rental property and I want some feedback on my financing plans. I was considering taking a home equity loan on my principal, and combining it with my available cash to purchase a home outright. My perceived advantages to financing this way would be the following: 1) The interest on the home equity loan would be tax deductible, right? 2) I think the closing costs on the home equity loan would be much lower than the closing costs of another type of loan.
Is this a good strategy? What is the down-side?
Part 2: If I own the rental property outright, can I use the equity of that rental to buy another rental? I’m sure there is a catch because that would mean that I could just keep buying properties over and over with the equity from the last property I purchased. That seems too good to be true.
Answer: Home equity loans are not quite the same as first or second mortgages. Deductability may have lower limits. Check with your accountant. The mortgage on your principle residence is not the same as a mortgage on your rental. It should still be deductible, though. HELOC has an adjustable rate and is an interest only loan with a balloon payment. At least mine is. Most homes need years to build up equity. You will generally need 10% to 20% down payment. The equity in you home serves as collateral if you default on the loan. You then lose your home. My HELOC can demand payment in full if I am 15 days late. Ouch! You need cash flow (rental income or employee income) to satisfy the debt service (payments). Most rentals don’t cash flow well right off the bat if they are highly leveraged. There are no hard and fast rules on that, some could.
Keep working at it and you’ll get there!
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Filed under: Home Equity Loan
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