Need advice HELOC / HELOAN or don't do either?

Question

Hello! Newbie here, wife and I would love to purchase our first rental.  We thought it would be best to see what we'd qualify for first, and we've gone pretty far down that path and have submitted all the paperwork for a HELOAN and now we're getting cold feet.  We had planned on taking $100K equity out of our primary to purchase the rental, went with a HELOAN.   Knowing that it's a HELOAN we'd have to start paying on the loan immediately and we haven't identified a property yet.   Is $100K enough to get started in rental properties today, and is a HELOAN a recommended pathway to getting the first property?

Christopher Harris · Answer

Hey Sam,

My clients are mostly benefiting from the HELOC's for this purpose. If you are comparing rates / terms and such, I'd be happy to chat.

Sam Kovatovich · Answer

@Greg Parker - Thank you, Greg!  Validation of utilization of HELOC, and, that's a great point about DSCR after tenant, I didn't even think about that!  Thank you!!

Sam Kovatovich · Answer

@Randall Alan - thank you, tremendously for the excellent detail here.  This helps a lot!  Thank you so much for taking the time out, to share your knowledge and help, very grateful for you.

Bryce Jamison · Answer

I'm very conservative when it comes to personal finance, so I'd prefer to save money up to start investing instead of using equity out of my primary residence. Yes this may take longer, maybe much longer, but you won't have the additional loan payment and it will give you more time to learn more about REI and to go to meetups to meet other like minded individuals and build the team of contractors, lenders, real estate agents, and lawyers you'll need.

You can also look into ways to increase your W-2 income to speed up this process. This is something I don't think many people consider. You'll get a much higher ROI getting a 10K annual raise at work than you would putting 50k into a deal that cash flows $300 a month for example.

Julio Burgos · Answer

Sam,

Taking a HELOC to get an investment property is a good idea, just have to make sure the cost of the money borrowed is covered by the return on the investment.

I am actually helping an investor in getting his first HELOC to do exactly that, once he gets the investment property we are looking into a DSCR loan to hold it long term.

I am a mortgage broker, let me know if you want to connect and talk!

Tchaka Owen · Answer

Randy,

Agree with everything you wrote; I'm pointing one thing out though: while HELOC rates are in the 8-10% range, it's not because they're new loans. HELOCs are usually attached to Prime (ie, Prime plus or minus a certain percentage). So the HELOCs obtained 3 years ago will be higher today too.

Tchaka

Sam Kovatovich · Answer

@Josh Young  Thank you, SO much, Josh, this is really great information about Mesa, Coolidge, Casa Grande, or Maricopa, and considering builder finance as well - more great information that I did not know.  Thank you!!!

Sam Kovatovich · Answer

@Abbey Humphreys - Thank you, Abby!  Yes, agreed, awesome advice on this forum.  I feel so dumb not asking questions earlier.   Thank you for your response, I really appreciate it.

Josh Young · Answer

@Sam Kovatovich

I would do a HELOC as it is interest only during the draw period and designed to be more of a short term bridge debt, this gives you time to stabilize the property/rehab/raise rents and then cash out refi to a lower rate in a few years and pay back the HELOC.  If you qualify for a conventional loan the rate should be lower than a DSCR loan.  You can find cash flow and your numbers will work if you do 30% down on a $300k purchase in Mesa, or if you look farther out you can find a deal on a new build and a lower interest rate if you use the builders lender on a new build in Florence, Coolidge, Casa Grande or Maricopa.

Abbey Humphreys · Answer

Hey Sam- there's some great advice in this forum. Once you do decide on a property (or even multiple properties with that equity), a DSCR loan could be a great fit for you. Focus on finding something, preferably in your home-base market, that can cash flow immediately. The journey starts with the first purchase, so if this is something that you are looking to pursue, take the leap.

Need advice HELOC / HELOAN or don't do either?

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