Financing rental property

for rent, sign, rental-148891.jpg
>Financing rental property
Posted by: Guest_Martin Sep 25 2003, 04:04 PM
A friend and I are looking into purchasing an apartment in a university area for rental purposes only. He and I both have primary residences. Is it possible and wise to use a HELOC for the down payment of 20-25% required by most banks.

The property is selling for $84,000. It currently rents for $800.00 a month. Would we still be able take advantage of tax breaks. Would incorporating be a good idea financially. We are not necessarily looking for income but are more interested with testing the “rental” waters. This area is known for real estate appreciation. We plan to make a small profit after the sale of the property in five years.

Thanks for any advice you may have. Great we site!
Posted by: loanuniverse Sep 25 2003, 06:18 PM

Lets try to address your questions one by one:

Is it possible and wise to use a HELOC as a funding source for the down payment?

Yes it is as long as you understand that a HELOC usually has a variable rate, which leaves you open to interest rate risk. Granted that the risk is limited since you might only be borrowing $10,000 each. You also need to account for the debt service coverage for both HELOCs in your analysis of the investment. You do not want to end up paying more for the commercial loan and the sum of both HELOCs’ payments than the rental income you will be getting.

Tax implications

I am not a tax advisor, but the interest on a Home Equity Line of Credit is usually tax deductible if you are borrowing up to the value of your house. I think I have read somewhere that some of the loans that lend over the value of the house are only partially tax deductible, but frankly I am a little fuzzy on the deductibility and there might be some other reasons why the interest might not be tax deductible.

Would incorporating be a good idea financially?

From the liability standpoint incorporating or better yet forming a limited liability company is the way to go.

Hope this helps.
Author: Commercial Loan Underwriter