Using home equity to purchase an investment property

Hello Terry,

My husband and I have about $175k of equity in our home. We would like to purchase an investment property, for $80k or less, for our son to live in while away at college. When he finishes school we would rent out the property. Because the properties available near his school are so cheap, if we needed to, we could carry the mortgage payment. Our problem right now is that we don’t have the cash for a down payment. Is it wise to obtain a home equity loan to get the cash for a down payment? We realize that it is a risk, but we really think purchasing a property in a popular college town can work for us.

Thank you.

Terry Says:  This is a tough call.  I don’t know your entire financial picture, or even what percentage of your home value is equity!  But remember that a home equity loan always carries a variable rate of interest, unless you totally refi and take out cash.  That could leave you vulnerable if rates rise, and your home equity loan becomes more expensive.  And do you really want to be a landlord in a distant location — for college students?!!  Especially after your son graduates?  Bottom line, if your cash picture is so tight that you have to leverage your home to do this, it is probably not a great idea (in my opinion).