Should I use a heloc to add another property?

Question

Need some advice.

Have 2 rentals I've purchased in the last year but my cash is only at 15k and I am going to have to start using hard money or conventional 20% down financing. But also my home has about 60k in equity so I've been thinking of ways to utilize that.

My good friend brings a property close to my others that's in really good shape, brick, one car garage, newer roof for 125k and rents currently at $1300 per month. He won't do seller financing because he needs money for some other family things. Really would like to find a way to make a deal because this is fairly turn key. Would you utilize a heloc for the 20% down and try to purchase a property like this with a conventional 30yr loan?

Appreciate your thoughts and ideas!

Nathan Gesner · Answer

HELOC is another method of borrowing money. If you borrow 20% from the HELOC and 80% from a lender, you are 100% financed, over-leveraged, and at risk.

I only recommend it if you can pay off the HELOC in 6-12 months. I'm even less likely to recommend it right now with an economy that is still at risk of going backwards.

Tony Ngo · Answer

I agreed with @Nathan Gesner.  If you can pay off HELOC within 12 months, it ok to use it as long you understand the risk involve.  All investing have risk.  As investor, you would ask yourself if you can manage that risk.  You indicated that you can pay off 8-10 months.  That's good.  Just make sure you have some good reserve.  Be sure talk to mortgage broker who can help you analyze your qualification.  From lender perspective, using HELOC for down payment would have monthly debt.  Be sure you guys still qualify with 80% loan along with monthly payment from HELOC.  Good luck.

Jordan Alexander · Answer

I would be able to pay off the heloc in less than a year. Wanted to use that money so I could keep some reserves in place. I would still have 10-15k in reserves at that point just in case things don't go without expenses at the new property. Thanks for your knowledge and perspective!

John Morgan · Answer

@Jordan Alexander

I would do it if you have a decent W2. I’ve bought 2 houses from a HELOC. I’ve even bought a few with 401k loans and 0% interest for a year credit card loans. Lol. I use my rental cash flow to pay it all back asap. Then repeat.

JooYung Choi · Answer

I agree with the answers here.

What are the ARV comps of nearby properties? If you can do some value add and ARV's are high, hard money may be an option.

Chris B. · Answer

If you don't already have a HELOC in place, check to see if you can even get one.  When I last looked into one right before the start of the current decline and prices were at their peak, I had properties with 40 - 50% equity.  I was told by the bank  that the HELOC they offered me would allow for up to 80% leverage and I have excellent credit.  Reality is they performed a questionable assessment of the property and when combined with their other secret sauce, they only offered me a single HELOC of $15K out of the 4 properties I had applied for.  I imagine its even harder now.

Jordan Alexander · Answer

I agree. It is a risk but I guess I feel like for a pretty solid property. I would be able to pay the HELOC off in about 8-10 months by my calculations but didn't know if I should wait for another 10-12 months to buy. Just wanting to scaled faster if I can and HELOC was one option I thought of. If there are any other options in my situation please let me know, thanks!

Ray Hage · Answer

@Jordan Alexander It would be a major risk to do it with a HELOC imo. I agree with @Nathan Gesner. If you can pay back the HELOC fast, sure go ahead, but if not, you have to maybe find a partner in the deal or someone really willing to lend that large amount. I guess the question what is your risk tolerance to go at it alone here? You'll also need to have cash on for closing costs and if anything went wrong at the new property.

Should I use a heloc to add another property?

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