Can the down payment come from the house?
Last week I wrote about the second number on a rental: what's left after vacancy, repairs, and management, not just whether the rent covers the payment.
This week, the payment that second number usually misses.
Here's a scenario I walk through with homeowners regularly.
A homeowner has about $600,000 in equity. His first mortgage carries a rate he could not get today. He wants to buy a rental, and the equity in his house is the obvious place to find a down payment.
He has three ways to reach it. Sell, which ends the conversation, because it's the house he lives in. Cash out refinance, which reprices his entire mortgage to reach a slice of the equity and gives up a rate he'll never get back. Or open a line against the house and leave the first mortgage exactly where it is.
He takes the line. He draws $150,000 for the down payment and leaves the rest of the equity alone.
What actually changed
Before the draw: one house, $600,000 in equity, one loan.
After it: two properties. The house carries $150,000 less equity and a second loan. The rental carries its own mortgage. Three loans instead of one, two properties exposed to the market instead of one, and his home now secures the money that bought the rental.
His total equity across both is roughly where it started, less closing costs. His total debt is meaningfully higher. That's leverage, and it works in both directions.
The payment that goes missing
When people run the numbers on a rental, they compare its rent to its own mortgage, taxes, and insurance.
They almost never include the payment on the line that funded the down payment, because that loan sits on the house, not the rental. It feels like a separate thing.
It isn't. The rental exists because of that draw. If the rental covers its own mortgage but not the line, the house is quietly subsidizing it every month. It's entirely possible for the payment on a borrowed down payment to be larger than the monthly cash flow the rental produces.
If the rental is financed on the property's income, the lender won't catch this either. That test compares the rental's rent to the rental's payment. It has no view of the line on your house.
The honest test
Does the rental cover its own full payment and the payment on the line, with room left for vacancy and repairs?
If yes, a line against a low rate first is one of the cleanest ways to fund a purchase. If it only works when you leave the line out of the math, it doesn't work.
--- *Author: Chad Villacorta, mortgage broker at West Capital Lending (NMLS #2636410). Licensed in 34 states. Estimate only, not a loan commitment. Subject to credit approval and underwriting.*
Subject to credit approval and property qualification.
West Capital Lending | NMLS #2636410 | Subject to credit approval and property qualification.