Using Med LOC to invest in a rental property

[norrisfebo]

I know this topic has come up before but I wanted to elaborate on my situation. I am an entering med student this year. I am in a fortunate enough position to have enough saved to cover tuition and have a partner that will help support living expenses. I'll have my LOC just sitting there and wasn't planning on touching it. 

However, I am considering using the LOC to buy a rental property. I'm not in the GTA or GVA. I would pay "cash" (no traditional mortgage) and contribute 50% from my LOC, with my parents contributing the other 50%. We are looking in the range of about 350k, so I'd be looking at leveraging out $175k. The plan would be to rent this out and use the rental income to cover the interest and other costs. We know the area we are looking at well (parents live there and own rentals there already) and from our initial numbers I expect to be able to cash flow about $300/month after interest, taxes, insurance, maintenance, parents taking their half, etc. We plan to hold the property for 10+ years. My parents are offering to handle all the property managing and maintenance in exchange for a higher portion of the rent, so I don't need to deal with any of that.

Is this a good idea? Part of me feels that leveraging this cheap LOC into real estate can help me get ahead, but I recognize a lot could go wrong. The benefits would be the monthly cash flow and the appreciation of the property. I am considering a detached home over a condo for better appreciation. In 8+ years I will be looking to buy a home to live in and could use the gain from this rental to help with that purchase. Should interest rates rise, I am willing to take less cash flow and if it comes to it capitalize my LOC. If rental prices stagnate, I am in no rush to sell. On the other hand, I will probably be very comfortable financially as a physician, regardless of specialty, so part of me wonders if this is a risk I need to be taking at all. What are people's thoughts? Does anyone know anyone who has done something like this?

[bearded frog]

I mean you're basically asking "should I accept 175k from my parents". If you're only getting 50% equity, which makes sense, the question is do you think the property will appreciate in value more than your interest rate on your LOC, and like any investment, you're gambling on there not being any hidden costs, of a depressed rental market, unforeseen renovations required, a housing market crash, etc. Only you can make that call.

[Lavarball]

If you only cash flow 300/month when you’re essentially paying cash with no mortgage payment, it really doesn’t seem like to be a good rental investment. Most real estate deals only really make sense because you can leverage 5x with only 20% down, if you’re looking to invest lump sum, try looking at just investing in an index etf. 175k at average 7% return is already 12k a yr and that is a return that requires no work on your side and is a very liquid compared to real estate.

 

That does not even take into account the opportunity cost for your parents for their 175k that they could use to invest instead. You say you’re paying them half but it doesn’t seem to be clear if they’re paying for half of the costs like insurance etc.