Good Leverage or Bad Leverage?

[?] Subscribe To This Site

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

Good Leverage or Bad Leverage?

Comments for Good Leverage or Bad Leverage?

Comments for
Good Leverage or Bad Leverage?