I know the general rul of thumb is to use "other people's money" when
buying real estate.  Is a home equity loan considered other people's
money, or is it mine, just in another form?  I am purchasing a condo
as an investment property.  The lender on my primary property is
encoraging me (strongly) to use my home equity line of credit to
purchase the condo "cash."  I would still have a mnortgage (a second
mortgagte on my primary residence) but, she says, I would be avoiding
the onerous fees associated with a conventional mortgage (including up
to 4 points since it's an investment property). The terms of my home
equity line of credit are good -- for now:  prime minus 1% for the
first six month, then prime plus 0% thereaster.  Prime is currently
4%.

Still, I don't know.  Is that equity really other people's money since
it isn't coming out of my pocket?  Or is it mine, just in a non-liquid
form?  Is it foolish to even consider using a home eqity loan (with a
rate that will go up or down according to the prime rate) to pay the
entire purchase price since fixed mortgage rates are so low?  (I've
been pre-approved for a conventional mortgage).

Thanks.

Dear AWilli,

When they talk about 'other people's money',
they mean buying the entire property without
reaching into your pocket. 

Using equity you've built up in your own home is
using YOUR money.

So that answers the first question. 

Is that cheaper? 

Certainly, in the short run. 

If it saves you PMI (mortgage insurance) costs and the 4 
points on the investment loan, that's certainly a savings.  

Ideally, you're better off getting a fixed rate loan
on the new property, in the long run. (You can get a 
variable now, rent it, and later convert it to fixed.
Watch out for fees and points.)

You didn't say if it was a rental or you're just holding
it for appreciation? Just 'investment property.'

If you're planning to rent it out, see if you can get a
low-interest fixed rate loan, while the rates are still
low. 

Make sure you can get a decent tenant who will pay enough
to cover the loans, association dues, taxes and utilities. 

If you make a profit, then even if you use SOME of the equity 
in your home for the down payment (to avoid PMI), you should 
be able to pay it off quickly.  

Have the patience to screen the tenants really well and you
will have few problems, little turnover, and perhaps a potential
buyer when you're ready to sell. 

Your TaxMama-ga

---

Request for Answer Clarification by awilli2-ga on 15 Jul 2003 13:04 PDT

Thanks.  Yes, I plan on holding on to the property for appreciation. 
The rent will cover the expenses, but if I went the conventional route
the closing costs wipe out the first year's profit.  Because it's an
investment property the points are high and the rates are not as
attractive as rates for a primary residence.

The lawyer we hired to handle the contract and closing said that my
equity is indeed other people's money and that it's the best thing to
do.  I'm surprised to hear such divided opinions, but thanks for your
advice.

(How are you an expert in this area?)

---

Clarification of Answer by taxmama-ga on 15 Jul 2003 14:34 PDT

Dear Awilli,

Thank you so much for asking for clarification,
then rating my reply before I gave it. 

What are my credentials?

Nothing special. 

A couple of degress in business, BA, MBA
About 30 years of tax and accounting experience,

I have been working with large-scale real estate investors
since the early 1970s. I have handled their taxes, trained
their property managers, fielded their IRS audits, assuaged
their investors, and even kept them out of jail in the '80s
when interest rates topped 20% and some of the newly, excessively
leveraged investments failed.

No disrespect to your attorney. 
But drawing your own equity is NOT using other people's
money. That is your own money. When you put together a
balance sheet, showing your assets, your home equity
is often one of your biggest assets. 

But, this isn't about arguing.

You didn't ask about the closing costs.
Regardless.

Let me just remind you about a couple of things.

1) You can get better rates and fees on closing costs
if you negotiate.

2) If you really DO use other people's money
to buy the property, the only thing you can lose
is the new property if there's a problem (like no 
rent or a long eviction). You don't lose your HOME.

Therein lies the difference between using their
money and yours.

Get a home equity line, sure it saves money.
But, too many people lose their homes.

So, please, be careful.
Take all facts into account before you make your decision.
Short and long term.

Best wishes and good luck in your new investments.

Your TaxMama-ga

S/he didn't tell me anything that I didn't already know.

The answer was good; should have rated at least 4 stars. First, if
it's your equity, then it's your money, not other people's money.
Second, the caution about losing your own home is valid. Yes, you
could lose your home (under some circumstances) even with a separate
mortgage on your investment property, but it's pretty risky using not
only your money (versus a lender's) but your primary residence as
collateral. Third, naturally your current lender would encourage you
to take out a home equity loan; it makes money for your current
lender.

Having said all that, you still have to study the numbers (points,
closing fees, interest rates) and answer some questions (holding the
property for cash flow, for appreciation, or to flip?). And it might
be better from a financial standpoint to use a home equity loan.

There may be even less expensive ways. For instance, rather than a
home equity loan, if you have sufficient equity in your property
(which you must), you might consider refinancing your primary
residence. A larger first mortgage may be better for you financially
than having both a first and a second. That still puts your primary
residence at risk, but you may have lower payments and/or a lower
interest rate, thus giving you some additional "cushion" in case
things go bad. Just a thought...