Does it make sense to use HELOC to fund downpayment on a property?

In our case it's a new 4-plex near our house located in a neighborhood that has predominantly SFHs - it's an expensive property ($400K) but it's also new and requires no work at all - has long terms tenants. Assuming the numbers make sense and we get positive cash flow each month does it make sense to to use the HELOC (about $130K remaining) for the downpayment on this property?! Want to keep our savings as cash reserves.

James

This is difficult to say since we don't know all the particulars.

If you don't have a rich Uncle Charlie to hit up for the cash then you have to actually take a risk by mortgaging your own home.

But! (and it's a big 'ol but) $400k for any one property is a whole other can of worms. Some parts of the country demand it but I'd still much rather have 5 $80K properties than one at $400K ya know?

My GF Suze would say **DENIED!** (but I still think she's hot)

It is unlikely that anyone here is going to jump on it or anything -- so why not post the actual numbers? You'll get much better advice if you put up the full numbers.

- John...

Still getting the numbers together - when I have them I'll post here for comments - thx,

James

Here are the numbers that we have gathered:

It's a 4-Plex each unit has 2BD/1BA - the monthly rent is $850 for each unit. Purchase price $399,900 (before any negotiations).

INCOME

Gross Scheduled Income = $40,800

Vacancy Allowance (10%) = (4080)

Gross Operating Income = $36,720

EXPENSES:

Insurance = $1,500

Taxes = $2,919

Utilities (Water/Sewer) = $1,800

PM (10%) = $3,672

Total Expenses = $9,891

NET OPERATING INCOME = $26,829

Annual Debt Service (First Mgt) = $23,638 (assuming 6.25% @360mnths with 20% down = $1969.80 monthly)

Cash Flow b/taxes = $3,191

ROI = 4%...

THese numbers do NOT include the finance charges (interest) we'd need to pay for the HELOC - not sure how to compute that into the equation... 2nd mortgage?! Our HELOC rate is around 2.74% and we have $130K available.

I know the 4% don't sound like much... We have another condo and are getting better returns on it...

Comments?! Thx,

James

Running that through my normal stuff, I show that as cashflowing only $150-$200 per month. And that is ignoring the HELOC completely (i.e. just assuming that you actually put 20% cash down that you had).

So, to me, it's a complete loser. But, real estate is always local. I don't know your area and potential for future sales. Some people feel that if it cashflows at all, then it is worth it for future appreciation. But, I'm not one of those people -- at least, not in a building starting at $400k!

- John...

"It's a 4-Plex each unit has 2BD/1BA - the monthly rent is $850 for each unit."

that doesn't even pass the useless 1% rule.

>>.. "Suzie" plays for the other team....<<

I used a HELOC for my commercial property and it turned out very well. Was able to cash out refinance this year and pay off the HELOC so it now stands on its own.

However, make sure the numbers are slam dunk profitable or make sure you have plenty of extra cash in your day job. In other words, don't make a mistake and lose your home.

BTW... I would factor in a monthly repair cost of about 1% of the list price ($400) to cover incidentals. Also, you need to factor in a deferred maintenance reserve in your numbers for HVAC, roof, etc.

Good for you if you can pull this off financially. But have you ascertained it would be a deal? 4 400 k seems kinda high to me. There is a 2004 duplex which initially sold for nearly $ 300 k to be had for $ 110 k. 1,710 ft, 2 car garage, dubious neighborhood but surrounded by 22 other similar duplexes. Rent" $ 750 for each side likely, $ 700 positively.

Just don't fall in love with a property. This one, how would it cash flow? What was the cost to build it?

absolutely not worh it. pass. and move on.

For me to be interested the top price would not exceed $238,000 - $260.000 range.