Good Leverage or Bad Leverage?

by Peter
(Toronto)

Hi Tom/Nick,

I am looking at purchasing a duplex.

I will be using my a HELOC to cover the downpayment. This will be paid back on a schedule from part of the rent on a mortgage free property.

The remaining mortgage will be from the bank.

My question to you both is, when I calculate my cash flow, should I do so with only the bank mortgage figures? If I incorporate the HELOC payments I would most likely be in a negative cash flow, but not really as it is being paid back from the rental, not truly out of pocket.

I understand this does effect my overall cash flow, but would you precieve this as a good form or leverage?

Thanks,

Peter.

Comments for Good Leverage or Bad Leverage?

Click here to add your own comments

Apr 08, 2010
RE: Home Equity Line of Credit (HELOC) and Good versus Bad Debt
by: Tom Karadza

Hi Peter,

Thanks for your question!!

We know many investors who use home equity lines of credit for investment purposes. You'll have to ensure the bank allows you to use that money as your down payment though.

We always include the interest and any principal pay back of the HELOC in our total cash flow numbers. Ideally it's still positive cash flow, however, if it is negative you will have to decide if buying a property with technically no cash out of pocket is worth a slightly negative cash flow. We prefer positive cash flow of course and try to find properties that will be positive after all interest payments and loan repayments are included.

So is it good or bad leverage? That's debatable based on your situation. Just try not to over extend yourself. It's tough to hand onto "negative cash flowing properties" in tough times. Don't spread yourself too thin.

Hope that helps a bit!

Tom.

Click here to add your own comments

Join in and write your own page! It's easy to do. How? Simply click here to return to Submit A Question.

                  

  Some Cool Free Stuff...

  Step 1:

Grab a free digital copy of our real estate investing book, Income  For Life For Canadians, right here. This book has been downloaded over 22,597 times and has helped hundreds of investors kick-start their investing with simple and straight forward strategies that you can implement right here in Canada.

You'll also receive our weekly [Your Life. Your Terms.] email newsletter with the latest investing updates and videos.


  Step 2:

Free Weekly Investing Videos & Articles: Get the latest updates and join the over 10,000 other Canadians enjoying the weekly [Your Life. Your Terms.] email newsletter. The email is sent out each Thursday. And as a little bonus we'll give a FREE digital copy of the book, Income For Life For Canadians, too!

Your Life. Your Terms.



  Step 3:

Free LIVE Investing Class: Do you live in the Greater Toronto or Golden Horseshoe Area? Come out to our next introductory "Investing in Nice Homes in Nice Areas" Real Estate Class.

Get all the details by clicking here.

It's 90-minutes and you'll learn a ton - promise!Thousands of investors have now joined us for this class and the feedback has always been amazing.


This book has been downloaded over 22,597 times and has helped hundreds of investors kick-start their investing with simple and straight forward strategies that you can implement right here in Canada.