[USER]

My spouse wants to buy rental properties but thinks we need to generate enough liquid money first to cover for downpayment and other overhead charges (also repairs and stuff) that come along with owning a rental property until it is ready to generate a steady profitable rental income.

My spouse’s idea is to take out about 100-200k using heloc, put it in stocks for a few years to generate extra money and then use that liquid to buy two rental properties (of about 500-600 total).

The argument is that we could sell the stock after keeping the profits; start paying back heloc, and use the profits (some savings) to buy the properties.

Heloc has 10 yr draw period so the stocks should be able to considerably grow at least within these 10 years to be able to cash them out for significant profit.

Does that make sense or is that completely insane???

We currently own a house (valued at $700k); mortgage about $3600; 10 years left on mortgage; annual combined salaries about $300k; two little kids; regularly investing in 401k/hsa/roth/brokerage.

About 50k in HYSA.

[Jonathan]

Before investing in Real Estate, I’d encourage you to do the math. I used to listen to the podcast, and then I ran the numbers.

I personally couldn’t get over the huge amount of risk to cash flow $200 a month, MAYBE.

I opted for REITS in my brokerage.

[Katie]

You have a good income, you should be saving money every month toward buying the rentals, plus the reserve fund to maintain them. That said, have you run the numbers on a $300,000 rental in your market?

I’m in Michigan and I retired early on SFR rentals, but that’s because I can buy a house for close to $100k and make $1,300 in gross rents in that property.

From what I’ve seen in other more expensive markets, it’s a lot harder to make enough income to make it make sense.

Especially if you’re borrowing the funds for your down-payment and reserves.

[Farris]

If you were extremely well versed, I would say go for it. I own close to $200,000,000 of RE, and started from zero seven years ago.

Real estate done right is incredible and cannot be beaten, but like everyone said it’s a business.

I have 40 employees, look at thousands of deals this year just to buy three.

If you do it, do it right and your life will change. If you don’t want to put hours and hours in, studying markets, buying in right area, creating relationships with brokers and lenders.

Don’t bother.

[Bethany]

Buying rental properties isn’t passive, it’s a job. It also ties up your money in an illiquid asset.

What’s your interest on the potential HELOC? Likely to be close to 8.5 percent these days, I’d imagine. So, deduct that number from your anticipated profit.

An SP 500 index fund typically earns a return of 10.7 percent.

So, 10.7 percent minus 8.5 percent is a barely 2 percent return, not even matching inflation.

[Scott]

Your spouse is correct about needing money for the down payment + extra for expenses. It’s even worse, at today’s heloc rates it will be very difficult to have a positive cash flow.

Until rates go down you’re better off saving up cash to buy the rental outright.

Here’s where his idea gets dangerous. What if the stock goes down? His/her entire plan depends on the stock going up over the next year.

That’s a 50/50 guess at best. Now you owe money on a heloc and you’re showing a loss on your stock. Now what?

Now Murphy’s law shows up, people lose jobs, and you have a heloc payment you can’t afford, and stock that’s under water. Lastly, the s&p avgs 10% over a 10 yr time horizon.

What’s your heloc 8.5%? that’s a ton of risk for a very small spread.. Don’t do it..

[They]

I don’t agree with his method. The stocks will likely NOT make enough extra income to benefit after paying the rate on the heloc.

[Emily]

There’s a reason financial advisors recommend for people living off their stock portfolio to keep 2 years worth of living expenses in cash.

The stock market has historically gone up over a 20-30 year time period.

But in the short term it can be all over the place especially as we’ve seen the past few months and no one can predict these short term outcomes.

So, you might lose money just as likely as you are to gain money especially with the margins after you pay the what is probably a fairly high interest rate for the heloc.

Everything else about what you need financially to get started is a good perspective

[Smith]

Let’s see….they are predicting inflation, a recession and ultimately higher interest rates. All those things are bad for stocks and owning rental properties.

It’s an insanely risky proposition.

I think if your husband is that careless with your finances you might seriously consider moving on.

Financial crisis is the chief cause of divorce.

You are ultimately liable for any debt he incurs.

[Danielle]

No. Focus on increasing your earned income to be able to save cash and invest. Investing is preserving multiplying your capital.

You need to save up the capital first. You dont have it.

Yes, you can have passive income from RE, after you set up the system to work for you.

But you don’t borrow against assets to buy assets to have debt

[Jennifer]

Perfect way to lose money. Don’t risk your primary home. There are few deals to be had in this market to generate income without being a cash buyer.

You can’t afford it.

[Holly]

Small-time landlord here. When you buy rental properties you do need extra cash for vacancies, routine maintenance, new systems, and tenant damage.

Given your financial and personal profile, I wouldn’t do the HELOC as you are putting your home at risk.

Save up for a down payment and only buy a property if the math works.

[Anna]

NOT the stock market. Maybe a CD at 5% return, or HYSA… but not the market.

That’s a gamble as to where things could be when you look to pull funds and pay on the gains..

[Bassel]

Historically, stocks do well in the long run, but hard to tell what happens in next 24 months.

You might have less than the starting investment.

[Anber]

I’d advise against investing in the stock market for only a year or two – combine that with borrowed money (and at 6%+ rates no less) is asking to lose money.

Save up over a few years if you don’t have the money now.

I do agree on needing a good sized buffer for repairs, vacancies etc.

Only buy a property if the math works.

[Author]

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