How to Use a HELOC to Buy Real Estate

by | BiggerPockets.com

Using a home equity line of credit, popularly known as a HELOC, is one of my favorite creative strategies for investing in real estate.

How would you like to purchase property using no money out of your bank account? It might sound like a late-night scam, but I assure you it’s not!

Let’s say you already own property. The difference between what it’s worth now and what you owe on it is called equity. Normally, in order to access that equity, you’d have to sell the property first.

An alternative way to access that equity, however, is a HELOC. This is a loan—usually a second mortgage—added on top of your existing mortgage.

A HELOC kind of acts like a gigantic credit card. It allows you access to a big line of credit, but you only pay when you’re using it. And the interest rate is actually way lower than a credit card—sometimes under 5 percent. (Something to note, however, is that the interest rate is often variable, meaning it goes up and down.)

Here’s an example:

An investor purchases a home for $100,000 with an $80,000 loan. So far, he or she has paid down the loan to $60,000. Meanwhile, the house has appreciated to $120,000.

Now the owner can take out a HELOC to tap into up to 90 percent of the current value of the home. So, 90% of $120,000 is $108,000. Subtract $60,000, representing the amount still owed to the bank. The owner can then use this $48,000 line of credit for a down payment on another property.

Pros and Cons of HELOCs

Pros:

  • Can use this simple lending tool to help you “find money” to do more real estate deals
  • Can tap into the same amount of money you’d have if you sold a property that had appreciated, without actually selling
  • Can avoid paying real estate agent, closing costs, etc., which would be required if you sold the property in order to invest in something else
  • It’s a cheap financing option in terms of interest rates and closing costs

Cons:

  • Will cost you the equity in the original property
  • Comes with an adjustable (read: unpredictable) interest rate

Watch the video above to learn more about the ways in which you can use a HELOC to expand your investment portfolio!

What else would you like to know about HELOCs? Would you ever use this strategy?

Comment below. 

About Author

Brandon Turner

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He began buying rental properties and flipping houses at age 21, discovering he didn’t need to work 40 years at a corporate job to have “the good life.” Today, with nearly 100 rental units and dozens of rehabs under his belt, he continues to invest in real estate while also showing others the power, and impact, of financial freedom. His writings have been featured on Forbes.com, Entrepreneur.com, FoxNews.com, Money Magazine, and numerous other publications across the web and in print media. He is the author of The Book on Investing in Real Estate with No (and Low) Money Down, The Book on Rental Property Investing, and co-author of The Book on Managing Rental Properties, which he wrote alongside his wife, Heather, and How to Invest in Real Estate, which he wrote alongside Joshua Dorkin. A life-long adventurer, Brandon (along with Heather and daughter Rosie) splits his time between his home in Washington State and various destinations around the globe.

57 Comments

  1. George Wengler

    I did exactly this to start my real estate investing. My GF and I bought a foreclosure for $80k. She had all cash, I had only $20k in cash, but access to about $50k in a HELOC on my current home. After repairs to the property and getting a renter in there, I got financing through a local bank, bought out my partner, and paid off the HELOC. So I got a cash-flowing property, and still have access to the HELOC to do it over again.

    It’s a good strategy for those investors that have equity in their current home but are light on cash.

  2. Tom Mitchell

    It would be wise to point out the risks in an article such as this. You mustn’t forget that this is exactly what people did in 2005. Using a HELOC because you have no cash, as your article implies, is a very risky strategy. You’d better be right on a number of variables, because if one or more are wrong, losses can be large. Many were wiped out.

  3. George Wengler

    That 90% would be your total LTV (including the HELOC). My credit union will lend 85% LTV at their best rates. A 90% LTV has a slightly higher interest rate. They don’t require an appraisal, they just go off the county’s assessed value, which is definitely less than market value, but I got enough of a credit line to do what I need.

  4. tom b.

    What do you think about using it for a 16k-25k downpayment on a rental unit and then aggressively paying off the HELOC like a car loan for 2-3 years? If it cashflows $200-300 and I can add another $300-$500 by my income I could have it paid off in 2-3 years.
    I know people say “just brrrr it” but don’t have the team, resources or time for a rehab right now.

  5. Nathan Justus

    I love the timing of this post. I just signed the docs for a HELOC on my primary this week, and also signed for a personal line of credit both with the same bank. Now I have access to over 150K of capital that was stuck in my walls. Just need to make sure I can refi out and pay back the HELOC each time. Rinse and repeat.

  6. Joseph Walsh

    I am looking to do this right now! Question though, I am debating between the following:
    In all cases, I intend to BRRRR the rental property at some point and get my “cash in” back out so I can pay back/off/down the equity borrowed:

    Renew my current HELOC, since my equity is substantially more.
    pros – easiest/most flexible, can pay down/”off” until next one, doesn’t permanently affect mortgage payment on existing house.
    cons – variable rate (eventually), new tax law has restrictions on HELOC interest deductions.

    Just do a cash out refi into a new mortgage and put the money in an account, paying off /eliminating the existing HELOC
    pros – best rate, fixed mortgage, easy to do with existing mortgage company
    cons – permanently adds to monthly payment of existing home, which also complicates debt service calculations, since I’ll be adding a monthly payment for ALL the money, even if I only use SOME of it on property x.

    Refi current mortgage, payoff/remove exisiting HELOC, and take a second cash-out 2nd mortage with the same bank as the primary.
    pros – similar to cash out refi, fixed rate, ability to “eventually” pay it off and house payment remains the same.
    cons – higher rates on second mortgages, increases house payment longer term, since won’t pay it off until I am “done” reusing the cash.

    right now I am leaning toward just doing a cashout refi and have a bundle of money to work with. When not using it, I can put into investment accounts and probably do better than the ~4%-5% rate I’ll be paying on it, even with fees in the current market. but the HELOC re-up is a close second.
    Thoughts?

    90% is pretty high for most. Usually if you have a longer ownership period AND top tier credit. Also, for the risk adverse, 80% is probably more palatable, you could probably sell in a pinch if you had to.

  7. Susan Maneck

    I’ve used HELOCs to buy most of my properties. Some banks like WF will give you first place HELOCs on rentals but you have to have owned it for a year. I paid cash for my first property then got a HELOC to buy my second one, and so on and so forth. To keep the interest rates down I pay them off each year, rotating them like i might do with my credit card balance transfers. Once it is paid off, I call WF and ask for another teaser rate. Financing this way has been cheaper than conventional mortgages.

  8. Matt Kovach

    Has anyone had difficulty getting a mortgage for a new property if you are planning to use an HELOC for a down payment? I do not have enough in my HELOC for an entire purchase, but the banks I have talked to (and even hard money lenders) do not want to see debt being used to purchase more debt (their words).

  9. Venkat Varad

    This is 100% true, My story is same as Susan Maneck stated above. Anything left on rent after mortgage or any singly extra penny, pay down the heloc, then go for next investment. You got to have financial discipline to payoff, If you are in this forum and reading this, then you have that, just plan and execute well. I have been doing this for 15 years for now. U.S. bank and many others offer 90% LTV. Just visit bank websites or call them. There are many.

  10. Pradeepan Venukanthan

    I agree with this strategy even though no strategy is perfect. I just did 95% HELOC for my primary residence with Andrews federal. I am using the funds to as a downpayment to purchase other properties and even a business! I do have funds but this will give me flexibility. This strategy works for those who are responsible and knows what they are doing. In my opinion the right way to do it is to keep paying up the balance faster and once it builds up use the funds again for more deals- rinse and repeat.

    However that said since this is like a credit card whenever u wipe this out your credit card utilization goes for a toss and it impacted by credit score 🙁 As long as you have strong credit scores I think it should be ok.

    I have a question – If I use the funds from HELOC to purchase an investment property can I claim the interest as a business expense( through an LLC?) even though as per new tax laws we cant claim HELOC interest rates as tax deductions if not used for certain specific purpose such as to improve the primary house

    • Navid Aberg

      I’m lost on this whole thing! Let’s say you’re using a $50k HELOC to pay 25% down on a $200k home. Now you have to make payments to your HELOC and to your mortgage? And hope you can pay them both while hopefully paying the HELOC off rapidly?

  11. Mike Hatch

    Thanks, Brandon, for this article. HELOCs are great tools to accomplish so much, as long as you are disciplined. I have been using Harj Gill’s SpeedEquity system to help us utilize our HELOC to pay off our primary mortgage (15 yr) in a little over 2 years! I’m planning to use the same system to utilize that HELOC for future investments. If you haven’t read his book, check out Harj Gill’s, “Own Your Home Years Sooner and Retire Debt Free.” It explains everything.

  12. Reggie Wirjadi

    Great timing on this article as I’m just about to contact lenders to get a HELOC. My question is, if you get a HELOC is there any time limit on when to use it by? At this point I want to get a HELOC to have funds IN CASE I find a good deal. But if I don’t and I never use it, what happens?

    • Kevin Moules

      Reggie, I got a HELOC on my primary residence last year through chase. I have 10 years to use the loan and then the next 20 to pay it back. This is unless I decide to refi the loan in the next 10 years which at that point start the clock again. The money just sits in a account. I don’t make any payments on it. I believe they are charging me $50/yr to hold the line open. Not a bad deal to have money just sitting there. Good luck!

    • Maria Marrero

      I got a HELOC from Bethpage FCU and you must take a minimum of $25k for the first year, interest was set at 2.99% for the first year, then variable after that. I did not find a property I wanted to purchase this year so Here’s what I did to make up some of the interest: I put the $25k in a money market acct that was giving me 1.98% interest, not too bad since it covered some of the the interest I was paying. This HELOC its interest only years 1-10. I do not plan to keep a balance for long. I spoke with my banker yesterday since I found a property and will be taking the whole $100k and she said it’ll be $467.12 per month in interest, give or take based on interests rates & based on amount left since I am going to use most of the rental income to pay off the loan.

  13. heather uhlir

    Brandon Turner please please please can you direct me to (or create one if there isn’t one) instruction on what to do AFTER you use your first Heloc to buy a property. I can only find articles on how to do it the first time but I’ve done that. I need help on what to do next!!! Everything I read says “how to buy a rental with no money out of your pocket” etc..but the only way I can see that happening is if you take the time to use the cash flow to pay off the Heloc (can take 7 or so years) or if you flip the house and make enough to pay the Heloc with your profit. Is that correct???
    What if I want to hold my property? My current plan is to use my own savings to pay off the home equity, then use the home equity to buy another home. At that point, I’m out of savings and can’t pay off the home equity so I’ll just need to wait to use the cash flow to slowly pay it back. Am I totally off track here???

    • Kevin Moules

      Hello Heather, I’m no Brandon but hopefully can help you out as I am just starting. The two ways that you outlined to pay back the HELOC are correct. You could use cashflow or flip the property to pay it off. You could also use a combo of cashflow and job income to repay faster. The third method which you could try to implement is the BRRRR strategy. Use the HELOC to outright purchase the property and possibly fund the rehab. Maybe it only needs light rehab and you pay out of savings. Rent it out and then refinance the property with a new loan. Some banks may make you wait 6 months before refinancing, this is called a Seasoning period. At that time you pull all the money you used from the HELOC and pay off the HELOC loan off. Now your HELOC account is ready to be used again. When you refi you may have to keep money in the deal to make it cash flow and therefore only pull part of the money out to repay your HELOC and pay the rest off with savings.

      Lastly, depending on your HELOC amount and your market you may not be able to completely buy a property straight out. Maybe the HELOC will only cover the down payment on the property and you will need a conventional loan to cover the rest. Some banks may not like this since you basically are using two loans to purchase the place with no money out of pocket. I think this will vary by bank. In this scenario you would again have to refi out later on down the road to get money out and repay your HELOC.

      Hope this helps!

      • Navid Aberg

        That’s what I thought, Kevin. Where are these markets where people have enough equity in their primary residence to pay off a new purchase completely?? I’ve got decent equity in my home but could only pull out for a down payment on homes here in Philly. So yea, looks like I’d be having to pay both the HELOC and the mortgage payments, meaning it could take several years to pay the HELOC off. Ugh!

  14. Kevin Moules

    Brandon, nice simple article and great short and concise video on the subject matter. Truly love what you guys are doing here. Because of BP I took action!

    I am currently using my first HELOC to fund my first flip project. So the only amount out of pocket is the amount I pay for use of the HELOC which is 1% of the loan. Once home sells I will repay the HELOC and try to utilize it again for a future buy and hold project hopefully using the BRRRR method.

    Folks, you have to understand that this is a second mortgage on your home! If you do not make your monthly payments the bank can foreclose on you! So, make sure you have have the funds to make the monthly payments on your HELOC.

  15. Michael Salamonski

    One thing I’d caution is we recently had a lender that counted the HELOC as regular debt – knocking our DTI way out of whack, even though it was going to be paid off on the cash out refi. So you might have to shop around a bit if you have any debt whatsoever and a HELOC. But it can be done, we will eventually close with them and found other lenders that had a better grasp in underwriting on this strategy.

  16. Geoff Chan

    Thanks all for sharing about HELOCs. I, too, am interested in acquiring a HELOC, but don’t fully understand the implications when it comes time to refinancing a deal and paying off the HELOC.

    Scenario:
    HELOC 100K and $50K Cash
    Purchase Price $120K
    Renovation: $30K
    ARV: 200K

    When it comes time to refinance the property to pull all the initial investment out to redeploy the HELOC and Cash, it would seem I could do it since the refinance would be 75% LTV. But, wouldn’t it be difficult to get a loan because of my debt-to-income with the HELOC payments taken into account? It would seem like lenders would be hesitant to refinance the property and lend more money on top of the 100K HELOC debt.

    I see that people keep referring to HELOCs similar to credit cards or 2nd Mortgages. If I only use 50K of the 100K, would lenders typically consider that all 100k has been leveraged regardless of how much was actually used?

  17. Gregory T. Washington

    I’m curious if I should purchase a rental property under an LLC prior to the cash out refinance or wait until the cash out refinance. Example: Should I transfer my HELOC funds into my LLC account and then purchase the rental property through my LLC account or should the cash out refinance be made under the LLC. I’m interested in some guidance with this.

  18. Gregory T. Washington

    I’m curious if I should purchase a rental property under an LLC prior to the cash out refinance or wait until the cash out refinance. Example: Should I transfer my HELOC funds into my LLC account and then purchase the rental property through my LLC account or should the cash out refinance be made under the LLC. I’m interested in some guidance with this.

  19. Navid Aberg

    I’m lost on this whole thing! Let’s say you’re using a $50k HELOC to pay 25% down on a $200k home. Now you have to make payments to your HELOC and to your mortgage? And hope you can pay them both while hopefully paying the HELOC off rapidly?

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