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Old 06-19-2015, 04:56 PM
 
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I have a somewhat similar thread elsewhere but I'm going to focus here instead on the negatives of making a rental property purchase using a home equity line of credit drawn from a paid off primary residence. Currently rates on home equity line of credit are very low 2.75% interest only for 10 years.I am in the Northern Virginia area which has enjoyed a very decent real estate market. The property is $350,000 with a rental potential of 2200 to 2300 dollars and monthly cost of about 700 dollars in interest and 500 dollars in property taxes and insurance. This would provide a positive cash flow of about 1000 dollars give or take.

what are some of the negatives that you all can think of when going with this approach?
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Old 06-19-2015, 07:27 PM
 
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I find your reasoning to be quite sound.
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Old 06-19-2015, 08:00 PM
 
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Originally Posted by Thinking-man View Post
what are some of the negatives that you all can think of when going with this approach?
Visit the rental forum. You will have plenty of negatives.

Worst that can happen is you get a professional deadbeat who stays there forever without paying, is judgement proof and trashes the place. And dont say background checks will solve everything. They dont.

Renting is hard work. Very hard.
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Old 06-19-2015, 08:17 PM
 
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Originally Posted by 399083453 View Post
Visit the rental forum. You will have plenty of negatives.

Worst that can happen is you get a professional deadbeat who stays there forever without paying, is judgement proof and trashes the place. And dont say background checks will solve everything. They dont.

Renting is hard work. Very hard.
I'm currently managing 2 rental properties for family and 1 of my own. I'm familiar. I'm more concerned about the negatives of using a heloc for buying a rental.
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Old 06-19-2015, 08:32 PM
 
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So a negative specifically about the heloc would be not being able to afford the heloc because of (insert reason here) and loosing your home your living in and your rental.
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Old 06-19-2015, 08:53 PM
 
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Originally Posted by 399083453 View Post
So a negative specifically about the heloc would be not being able to afford the heloc because of (insert reason here) and loosing your home your living in and your rental.
True. thanks.
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Old 06-19-2015, 09:04 PM
 
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Is the HELOC the only mortgage on the property, or is it a Second? Do you qualify for tax writeoff of primary residence home mortgage interest? If so, that's huge.
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Old 06-19-2015, 09:13 PM
 
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Originally Posted by Pfhtex View Post
Is the HELOC the only mortgage on the property, or is it a Second? Do you qualify for tax writeoff of primary residence home mortgage interest? If so, that's huge.
It's actually a 'second' HELOC. the second bank didn't catch the fact that i have a first HELOC and i found out after the closing that they only do first HELOCS. oh well i guess. (ps. i've had the first HELOC for 4 years already and have never used it...)

Yes, i do qualify for the tax write-off of the mortgage interest.

I do understand that there are risks such as the rate (currently 2.75) shooting up......or me not having renters for more than a couple of months (although that'd be very unlikely given our area's market).....but aside from these two items, i can't think of a negative.....Oh, and of course, i guess the house value could drop significantly and i'd be in trouble like folks in 2007-8.....but as long as the house is renting fine, that shouldn't matter much until there's a bounce back....(and again, the housing market in northern VA is pretty solid)

any other ideas/thoughts are welcome.
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Old 06-19-2015, 09:38 PM
 
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Originally Posted by Thinking-man View Post
I have a somewhat similar thread elsewhere but I'm going to focus here instead on the negatives of making a rental property purchase using a home equity line of credit drawn from a paid off primary residence. Currently rates on home equity line of credit are very low 2.75% interest only for 10 years.I am in the Northern Virginia area which has enjoyed a very decent real estate market. The property is $350,000 with a rental potential of 2200 to 2300 dollars and monthly cost of about 700 dollars in interest and 500 dollars in property taxes and insurance. This would provide a positive cash flow of about 1000 dollars give or take.

what are some of the negatives that you all can think of when going with this approach?

Bold is the problem IMO. You're paying nothing on principal. That's a big problem IMO. How much are you deducting on your taxes at 2.75%? Lots of risk for little gain on that angke. Ok you got some profit income. But sone will have to go back in the rental, some saved, some to oay income taxes. Remember now you got a minimum 12,000 in taxable income. You better have some other deductions besides that MID.

This is more of a what if but its food for thought. What if in two years prices drop, and you have to sell at a loss. Or you keep it in 10 years rates go through the roof, and prices drop and you can't sell it without coming up with cash on your end.

Personally I would never borrow against my properties. I thought about it once. Decided not to. If I were you and you want a Investment property get a loan, buy it rent it and make money. If something happens you can walk away or you decide you want out then sell it.
But never ever put your primarily PAID FOR house on the chopping block. You would have to be out of your mind to do something like that If something takes a crap job or some debilitating something you're not only jeopardizing the investment but the primary.

Worse case you get sick, need money, houses are in the dumpster on prices, and that good tenant lost his job and is squatting. So you got no income. House goes in default because it's collateral, tenant trashes the rental and you're looking at a crapload of problems. Ok you can take him to court and win. He is destitute and can pay you $50 a month. Court agrees.

Last edited by Electrician4you; 06-19-2015 at 09:49 PM..
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Old 06-19-2015, 09:53 PM
 
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Originally Posted by Electrician4you View Post
Bold is the problem IMO. You're paying nothing on principal. That's a big problem IMO. How much are you deducting on your taxes at 2.75%? Lots of risk for little gain on that angke. Ok you got some profit income. But sone will have to go back in the rental, some saved, some to oay income taxes. Remember now you got a minimum 12,000 in taxable income. You better have some other deductions besides that MID.

This is more of a what if but its food for thought. What if in two years prices drop, and you have to sell at a loss. Or you keep it in 10 years rates go through the roof, and prices drop and you can't sell it.

Personally I would never borrow against my properties. If I were you and you want a Investment property get a loan, buy it rent it and make money. If something happens you can walk away or you decide you want out then sell it.
But never ever put your primarily PAID FOR house on the chopping block. You would have to be out if your mind. If something takes a crap job or some debilitating something you're not only jeopardizing the investment but the primary.

Worse case you get sick, need money, houses are in the dumpster on prices, and that good tenant lost his job and is squatting. So you got no income. House goes in default because it's collateral, tenant trashes the rental and you're looking at a crapload of problems.
HAH!
well, that's one gloomy image you just painted! lol but i asked for it! so thank you!
So, here are a couple of points that i'll try to make to perhaps counter some of the great arguments you've made:

- We have about 50k cash reserves in case things go south (ie. no renters, job loss, etc.). Our 'current' annual spending is about 25k so that's about 2 years of reserves.

- We have another 100k-120k in funds we can liquidate if needed. (these are stocks and such. not including about $275k in retirement accounts)

- We are in our early 30s, so plenty of time for 'errors'/'mistakes'?

- The housing market in northern VA is pretty solid. I manage 3 rental properties, and in the past 6 years, only 3 months (in the winter) did i have one of the rentals stay empty. the rest of the time, all three rentals have been rented to professionals in the area with no issues.

- I think this house is a good deal, as in, it's a well kept property with pretty nice curb appeal in case of having to sell.

-The variable rate is my biggest concern too...but the loan allows for 'fixing' the rate at any time and continuing like a regular mortgage. although that rate is about 4.5% right now. so if the rates shoot up, i will fix it (at 5 or 6%) in a worst case scenario.

-i've looked into getting a regular loan. with the rates offered now, and the 20% or 80k or so that i have put down, i would just about break even with the rent at best! (no profits monthly)


Thoughts?
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